Sovereign debt is a term used for the central government’s debt. The purpose of this debt by the national government in a foreign currency is to finance the issuing country’s growth and development. The stability of the issuing government can be determined from the country’s sovereign credit ratings which is a way through which investors consider risks when assessing sovereign debt investments.
WHAT IS SOVEREIGN DEBT
Other terms used for Sovereign debt are government debt, public debt, and national debt.
Sovereign debt is usually the borrowing of government bonds and bills. It also includes the issuing of securities. Countries that are less creditworthy and also the countries which are categorized as developing countries compared to others directly borrow from world organizations like The World Bank and other international financial institutions like the International monetary fund.
It is not just the issuing of sovereign debt but the governments can finance their projects by creating more money in order to remove the need to pay for interest. However, this method only reduces government interest costs and is one of the greatest causes of hyperinflation. Thus, governments still need to fund their projects through the aid that is given by rich governments to poor ones and the cycle is going on increasing the global debt.