Definition – What does Sovereign Debt mean?
Sovereign debt refers to government bonds that are issued in an international currency in order to raise funds from foreign investors. Sovereign debt and government debt are often confused because they are both intended to raise funds for a nation’s government to create infrastructure, fund programs and so on. The primary difference is that government bonds are marketed to citizens of the issuing nation in the currency of that nation, whereas sovereign debt is marketed to the international investing community in an international currency (the Euro, the U.S. dollar and so on). Sovereign bonds are the main form sovereign debt takes.
ForexTerms explains Sovereign Debt
Governments cost money to run and there are two common ways to raise that money: taxes and debt. As governments want to be re-elected in democratic nations, they tend to prefer high debts over high taxes. However, when they’ve tapped out the locals, they have to tailor bonds for international investors. These sovereign bonds offer a little more security than buying a government bond in a nation’s currency because a nation can inflate its currency to pay back regular government bonds, but not sovereign bonds. Unfortunately, you can’t take a government to small claims court, so when a nation defaults on its sovereign debt, investors take a haircut. For forex investors, sovereign debt levels can be an important data point for gauging the economic health of a nation.