Investor Sentiment, Sovereign Debt Mispricing, and Economic Outcomes (2024)

FAQs

What is an example of a sovereign debt crisis? ›

Well-known examples include Russia (1998), Argentina (2005), Greece (2012), and Ukraine (2015). Costs are normally much smaller when an agreement can be reached before a sovereign defaults, by missing a payment on its debt.

A simpler alternative is to buy U.S. mutual funds or exchange-traded funds (ETFs) that hold foreign sovereign bonds. These funds also provide diversification with exposure to a variety of foreign bond issues, which reduces risk. Popular foreign sovereign bond ETFs include: iShares International Treasury Bond ETF (IGOV)

Sovereign debt is debt issued by the government of an independent political entity, usually in the form of securities. Several private agencies often rate the creditworthiness of sovereign borrowers and the securities they issue.

There have been 14 separate default events since 2020, across nine different sovereigns (Argentina, Ecuador, Suriname and Ukraine as well as those currently in default) compared with 19 defaults across 13 different countries between 2000 and 2019.

Managing sovereign debt risk is crucial to maintain economic stability. High levels of debt can lead to reduced investor confidence, higher borrowing costs, and potential default.

High sovereign debt levels are associated with slower economic growth and rising default risk.

The world is looking at a debt crisis that will span the next 10 years, said economist Arthur Laffer Jr. Global debt hit a record of $307.4 trillion in the third quarter of 2023, with a substantial increase in both high-income countries and emerging markets.

Foreign holders of United States treasury debt

Of the total held by foreign countries, Japan and Mainland China held the greatest portions, with China holding 797.7 billion U.S. dollars in U.S. securities. Other foreign holders included oil exporting countries and Caribbean banking centers.

Private non-bank investors absorb disproportionately more sovereign debt supply than other investors. Moreover, non-bank investor demand is most responsive to the yield.

Who does the US owe money to? ›

A sovereign default is a nation's failure to repay its debt obligations. It has serious economic consequences for the nation, making it expensive or impossible for it to borrow money in the future. It also causes domestic turmoil.

Debt-to-GDP Ratio for Advanced Economies in 2023

At the top is Japan, whose national debt has remained above 100% of its GDP for two decades, reaching 255% in 2023. *For the U.S. and Canada, gross debt levels were adjusted to exclude unfunded pension liabilities of government employees' defined-benefit pension plans.

Under President Salinas, Mexico signed the North American Free Trade Agreement (NAFTA) with the United States and Canada, which went into effect in January 1994. The second was to regain access to international financial markets, which Mexico had lost after defaulting on its debt in 1982.

A country is in default when it can't pay its debts. This lowers its credit rating and decreases the cost of its debt. The country's entire economy can suffer and it may see less investment in the future as global investors become wary of buying that country's debt.

The European sovereign debt crisis was a chain reaction set in the tightly knit European financial system. Members adhered to a common monetary policy but separate fiscal policies – allowing them to spend extravagantly and accumulate large amounts of sovereign debt.

The debt crisis was preceded by—and, to some degree, precipitated by—the global financial downturn that soured economies throughout 2008–09. When the “housing bubble” burst in the United States in 2007, banks around the world found themselves awash in “toxic” debt.

The list of sovereign debt crises involves the inability of independent countries to meet its liabilities as they become due. These include: A sovereign default, where a government suspends debt repayments.