Wednesday, April 17, 2024

Sovereign debt

Sovereign debt is the debt of the central government.

It is simply money or credit owed by a government to its creditors.

It is debt issued in a foreign currency by a national government to finance the growth and development of the issuing country.

These debts typically include securities, bonds or notes with maturities ranging from less than one year to more than ten years

The stability of the issuing government can be provided by the country’s sovereign credit rating, which helps investors weigh risks when evaluating sovereign debt investments.

Sovereign debt is also known as Government Debt, Public Debtt, and Treasury Debt.

How to measure sovereign debt

Sovereign debt can be measured using a variety of different indicators. Typically, these indicators are used to determine whether a country’s sovereign debt is too high (given its gross domestic product (GDP) or its ability to tax its citizens).

But these factors should also take into account a country’s GDP growth rate, which can greatly affect its ability to repay its debt in the future.

The three most popular indicators are:

  1. Gross Public Debt – Gross Public Debt is the total amount of debt outstanding. But without context, this number is not very informative and can be misleading. Therefore, most experts use the debt-to-GDP ratio and debt per capita as common measures.
  2. Debt as a % of GDP – Debt as a % of GDP is total public debt divided by GDP. Countries with debt above GDP (or a ratio above 100%) are generally considered over-indebted.
  3. Debt per capita – Debt per capita is total debt divided by the number of citizens. Per capita debt exceeding per capita income reduces the likelihood that governments will make up the shortfall through traditional taxes.

International investors can learn about public sector debt levels through the World Bank, CIA World Factbook or individual central bank websites.

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