Day: July 7, 2020

How Countries Navigating through National Debt?How Countries Navigating through National Debt?

It is a common scenario among average individuals to apply a loan at when they run short of money to pay their dues and needs an immediate backup. Things are quite difficult already for an individual. But what about for an entire country? For most of the developing economies, the only possible way for them to keep progress is by issuing sovereign debt. So how countries are dealing with their national debt while also surviving to grow?

Several countries, particularly the developing economies are issuing debt in an effort to raise funds. This is the same to how a business takes a loan in financing new project or how a family may be applying for a mortgage. The only difference in this analogy is the size. Sovereign debt loan will most probably cover billions of dollars while business or personal loans will just be a tiny fraction of this amount.

Understanding Sovereign Debt

Sovereign debt is basically the promise of the government in paying the money it borrowed. It’s the value of bonds that are issued by the country’s government. An obvious difference between sovereign debt as well as government debt is the fact that the letter is being issued in domestic currency while the former is issued using foreign currency. The loan is being guaranteed by the country of issue.

Before going for a sovereign debt of the government, the investors carefully determine the involve risks of the investment. Sometimes, the debt of a country like the US is deemed risk free while debt of developing or emerging countries carries bigger risks.

There are multiple variables that come into play just as:

  • The plan of the government in repaying the debt
  • The possibility of the country to default and;
  • Government stability

At times, this risk analysis is almost the same to how corporate debt is performed. Though when it comes to sovereign debt, the investors may at times left more exposed. Due to the political and economic risks for sovereign debt outweighs the debt from developed countries, the debt is usually given with a rating below the safe AA and AAA status and might be deemed to be lower than the investment grade.

What if the Country Defaulted?

Defaulting on sovereign debt might be a lot complicated than defaulting on corporate debts. This is simply because of the fact that domestic assets can’t be seized in paying the funds back. Instead, the terms of debt is renegotiated, and usually leaving the lender in unfavorable position.