Sovereign Debt

What is Sovereign Debt?

Sovereign debt is the government debt of a country, a sovereign nation. It is also referred to as government debt, national debt, public debt, or country debt. The sovereign debt of a country consists of all its debt liabilities to both domestic and foreign creditors.

Technically, the sovereign debt of a country is a liability of the government rather than a direct liability of the citizens of the country. However, in more practical terms, since the debt can only be paid off with revenues the government collects – such as taxes – the debt is a liability of all the country’s citizens.

Governments are rated on their sovereign debt. A country’s sovereign credit ratings indicate to investors how financially sound the country is considered to be and, to a large extent, determine how easy or difficult it is for the country’s government to borrow money to fund its operations.

Stock and Flow Debt Obligations

Sovereign debt is characterized as a “stock variable” – a specific quantity (of money) as measured at a specific point in time. It is in contrast to a “flow variable,” which is a quantity measured over a designated period of time, such as one year or one accounting period.

The flow variable of government debt is the deficit, the shortfall between government spending and revenues collected for a single year. The sovereign debt of a government is the sum of all the deficit flow variables.

For example, assume that over the past decade, a government incurred an annual deficit of $1 million each year. Further assume that before the start of that 10-year period, the government reported no debt liability at all. In such a case, the sovereign debt of the country’s government measured at the given point in time would be $10 million.

Components of Sovereign Debt – Examples

As stated, sovereign debt represents a national government’s debt liabilities to both domestic creditors and foreign creditors. Foreign creditors of a country’s government consist primarily of foreign governments whose central bank previously purchased government bonds issued by the nation in question. Countries with relatively lower sovereign credit ratings, which may face difficulty attracting investors, must offer higher interest rates. If they are still unable to attract a sufficient number of investors, they may incur sovereign debt by borrowing money from entities like the World Bank.

Domestic creditors are typically a more diverse group made up of a country’s own central bank, other banks and financial institutions, state and local governments, large institutional investors (such as pension funds, mutual funds, and insurance companies), and individual investors.

In its official calculation of government debt, the United States excludes debt liabilities owed to the Federal Reserve, its central bank, as it views that money as being money the government essentially owes to itself. It is significant because the Federal Reserve is a major purchaser of US government securities.

Sovereign debt exists in the form of loans and, primarily, government securities of varying maturities. It is sometimes classified into short-term sovereign debt – the debt obligations of a government that are scheduled to be paid off within a year or less – and long-term sovereign debt – debt liabilities that are not due until more than one year into the future.

For example, the U.S. government issues Treasury bills with maturities that range anywhere from within a few days to a maximum of 52 weeks (one year), Treasury notes with maturity dates of between two years and 10 years, and Treasury bonds whose maturity dates are 20 to 30 years in the future.

Sovereign Debt Ratings of Countries

In addition to credit ratings on their sovereign debt that are made by agencies, such as Standard & Poor’s, the outstanding sovereign debt of countries is often evaluated in terms of a country’s gross domestic product (GDP). For example, as of 2018, the U.S. sovereign debt was approximately 78% of its GDP. The sovereign debts of Canada and the United Kingdom equal approximately 89% of their respective GDP levels.

Among the countries with the relatively highest amount of sovereign debt are Japan (236% of GDP, as of 2018) and Greece (181% of GDP).

The countries with the lowest amount of sovereign debt obligations include Macau and Hong Kong, both of which hold sovereign debt totaling less than 1% of GDP.

Learn More

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

• Budget Deficit
• Credit Rating
• Standard & Poor’s
• World Bank Group
• See all fixed income resources