What is Sovereign Debt

What is Sovereign Debt explained by professional forex trading experts the “ForexSQ” FX trading team.

What is Sovereign Debt?

Sovereign debt is simply money or credit owed by a government to its creditors. These debts typically include securities, bonds or bills with maturity dates ranging from less than a year to more than ten years. But the term can also be used to describe future obligations like pensions, entitlement programs, and other goods and services that were contracted but not paid.

Concerns around sovereign debt have been growing since World War II.

During that time, many countries went into debt to finance either the war itself or the rebuilding efforts afterwards. However, modern Keynesian economics supports a fairly high level of public debt to pay for public investment in lean times under the premise that it can be paid back by the growth that follows.

Measuring Sovereign Debt

Sovereign debt is can be measured using a variety of different metrics. Often times, these metrics are used in order to determine if a country’s sovereign debt is too high given its gross domestic product (GDP) or abilities to tax its citizens. But these factors should also take into account a country’ GDP growth rate, which can dramatically influence its future ability to repay debt.

The three most popular metrics are:

Total Public Debt – The total public debt is the total amount of debt outstanding. But without context, this figure isn’t very informative and can be misleading. As a result, most experts look towards Debt-to-GDP and Debt per Capita as common measures.

Debt as a Percent of GDP – Debt as a percentage of gross domestic product is simply the total public debt divided by GDP. Countries with a debt greater than their GDP (or a ratio over 100%) are generally considered to be over indebted.
Debt per Capita – Debt per capita is simply the total debt divided by the number of citizens. A debt per capita that is in excess of per capita income reduces the likelihood that the government will be able to make up its shortfall through traditional taxation.

International investors can find the levels of public sector debt via the World Bank, CIA World Factbook or individual central bank websites.

Sovereign Debt Statistics

Sovereign debt levels have been on the rise since World War II. From Russia’s financial crisis in 1998 to Argentina’s default in 2001, these debts have been the source of much financial turmoil. But what countries are most at-risk and what countries are deemed safe for international investors? Below are some statistics from the CIA World Factbook using 2014 data.

Here are the sovereign debt levels for some popular countries:

United States – 74.4% of GDP
Canada – 94.8% of GDP
Mexico – 42.1% of GDP
Japan – 231.9% of GDP
Germany – 74.3% of GDP

The five most indebted countries relative to their GDP are:

Japan – 231.9% of GDP
Zimbabwe – 184.1% of GDP
Greece – 171.1% of GDP
Lebanon – 134.8% of GDP
Jamaica – 132.8% of GDP

The five least indebted countries relative to their GDP are:

Liberia – 0.5% of GDP
Saudi Arabia – 1.6% GDP
Oman – 4.9% of GDP
Wallis & Futuna – 5.6% of GDP
Kuwait – 6.5% of GDP

Sovereign Debt Ratings

Sovereign debt ratings can help investors determine the credit risks associated with a given country by taking into account not only debt levels, but political risk, regulatory risk and other factors.

Some studies have shown that these ratings can influence debt costs by as much as 25% per notch. The three most popular credit rating agencies are Standard & Poor’s, Moody’s Investor Services, and Fitch Ratings.

Common sovereign debt rating websites include:

Moody’s Investor Services Sovereign Debt Ratings
Fitch Ratings Sovereign Debt Ratings

The top five highest-rated countries as of 2015 include:

Australia
Canada
Denmark
Germany
Hong Kong

The top five lowest-rated countries as of 2015 include:

Puerto Rico
Argentina
Grenada
Greece
Ukraine

Key Points to Remember

Sovereign ratings provide investors with insights into the credit quality of entire nations, which affects their public finances and companies.
The highest quality countries include Australia and Canada, while the worst rated countries include Puerto Rico and Argentina.