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What Is Sovereign Debt?

The term “Sovereign Debt” refers to the debt issued by national Government in the international or foreign currency. Sovereign debt are also known as Sovereign bonds, these bonds are issued in the international currently and can be sold to other countries and foreign investors. It is very common that when a country needs huge capital to support the spending, it can borrow money from other countries by issuing the sovereign bonds. It has to pay the interest money on specific period and principal amount on the maturity period. It is equivalent of borrowing money from other countries or public to meet the country’s spending. It is one of the two main ways in which governments can raise money. The other is by putting up taxes. Sovereign debt is guaranteed by the government, and in many cases, it is considered to be free of risk. This risk-free aspect mainly depends on their credit rating which help investors weigh this risk.and reassures investors they will get their money back.

Sovereign Debt

Sovereign debt is generally a riskier investment when it comes from a developing country, and a safer investment when it comes from a developed country. The government of a country with an unstable economy will tend to denominate its bonds in the currency of a country with a stable economy. Developing countries typically will have sovereign debt denominated in a widely used foreign currency, such as the US Dollar. This can cause problems when the nation runs out of the foreign currency for any of various reasons. Investors in sovereign bonds denominated in foreign currency have the additional risk that the issuer may be unable to obtain foreign currency to redeem the bonds.

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