Learn about Sovereign Debt with iMinds Money's insightful fast knowledge series.
Sovereign debt is the debt of a country or government. This debt is usually comprised of bonds issued by the government. Sovereign debt can be contrasted with government debt. Government debt is when bonds are issued in a nation's own currency. Therefore, this debt is mostly created within a country's own economic boundaries. Sovereign debt, however, is created from bonds issued in foreign currencies or through loans from international financial institutions. The total of debts owed to both domestic and foreign lenders is known as national debt.
National debt issued to both domestic and foreign parties is typically issued via bonds. A bond is basically an IOU. The investor will lend money to the government and the government will, at some point, repay the investor. The bond states the specific date that it will mature, that is, when it will be repaid, and the rate of interest the bond will accrue. Bonds, while different in many ways, are similar to stocks in that they are able to be traded. Bonds tend to be issued only by large corporate bodies or governments, due to the risk of the issuer not being able to repay the bond once it matures.
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