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A sovereign default is a failure by the government of a sovereign state to pay back its debt in full.

If potential lenders or bond purchasers begin to suspect that a government may fail to pay back its debt, they may demand a high interest rate in compensation for the risk of default. A dramatic rise in the interest rate faced by a government due to fear that it will fail to honor its debt is sometimes called a sovereign debt crisis. Governments may be especially vulnerable to a sovereign debt crisis when they rely on financing through short-term bonds, since this creates a situation of maturity mismatch between their short-term bond financing and the long-term asset value of their tax base. They may also be vulnerable to a sovereign debt crisis due to currency mismatch if they are unable to issue bonds in their own currency, as a decrease in the value of their own currency may then make it prohibitively expensive to pay back their foreign-denominated bonds (see original sin).^{[citation needed]}

Since a sovereign government, by definition, controls its own affairs, it cannot be obliged to pay back its debt. Nonetheless, a government which defaults may be excluded from further credit; some of its overseas assets may be seized; and it may face political pressure from its own domestic bondholders to pay back its debt. Therefore governments rarely default on the entire value of their debt. Instead, they often enter into negotiations with their bondholders to agree on a delay or partial reduction of their debt payments, which is often called a debt restructuring or haircut. The International Monetary Fund often assists in sovereign debt restructurings.

List of sovereign debt crises

The following list includes episodes in which risk premia on sovereign bonds have risen sharply, as well as a partial list of actual sovereign defaults and debt restructuring.^{[citation needed]}

References

Jean Tirole (2002), Financial Crises, Liquidity, and the International Monetary System.
Guillermo Calvo (2005), Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy?
Barry Eichengreen (2002), Financial Crises: And What to Do about Them.
Barry Eichengreen and Ricardo Hausmann, eds., (2005), Other People's Money: Debt Denomination and Financial Instability in Emerging Market Economies.
Barry Eichengreen and Peter Lindert, eds., (1992), The International Debt Crisis in Historical Perspective.
Charles Calomiris (1998), 'Blueprints for a new global financial architecture'.

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 {{More footnotes|date=February 2011}}
+A '''sovereign default''' is a failure by the [[government]] of a [[sovereign state]] to pay back its [[debt]] in full.
-In [[politics]] and [[economics]], a '''sovereign default''', '''sovereign debt crisis''' or simply '''debt crisis''' is a failure by the [[government]] of a [[sovereign state]] to pay back its [[debt]] in full — or to pay it back at all (the latter is usually accomplished by either continuously raising the national [[debt ceiling]] or unilaterally abolishing the [[national debt]]; abolishing the national debt is technically at the discretion of a given country's rulers, but may be ''de facto'' impermissible because the lenders refuse to recognise that abolition and continue to actively demand the debt be repaid).
-If potential lenders or bond purchasers begin to suspect that a government may fail to pay back its debt, they may demand a high interest rate in [[risk premium|compensation for the risk]] of default. A dramatic rise in the interest rate faced by a government due to fear that it will fail to honour its debt is a key factor in most debt crises. Governments may be especially vulnerable to a sovereign debt crisis when they rely on financing through short-term bonds, since this creates a situation of [[maturity mismatch]] between their short-term bond financing and the long-term asset value of their tax base. Countries may also be vulnerable to a sovereign debt crisis due to [[currency mismatch]] if they are unable to issue bonds in their own currency, as a decrease in the value of their own currency may then make it prohibitively expensive to pay back their foreign-denominated bonds (see [[Original Sin (economics)|original sin]]).{{Citation needed|date=February 2011}}
+If potential lenders or bond purchasers begin to suspect that a government may fail to pay back its debt, they may demand a high interest rate in [[risk premium|compensation for the risk]] of default. A dramatic rise in the interest rate faced by a government due to fear that it will fail to honor its debt is sometimes called a '''sovereign debt crisis'''. Governments may be especially vulnerable to a sovereign debt crisis when they rely on financing through short-term bonds, since this creates a situation of [[maturity mismatch]] between their short-term bond financing and the long-term asset value of their tax base.
+They may also be vulnerable to a sovereign debt crisis due to [[currency mismatch]] if they are unable to issue bonds in their own currency, as a decrease in the value of their own currency may then make it prohibitively expensive to pay back their foreign-denominated bonds (see [[Original Sin (economics)|original sin]]).{{Citation needed|date=February 2011}}
-Since a [[sovereignty|sovereign]] government, by definition, controls its own affairs, it cannot ''legally'' be obliged to pay back its debt. Nonetheless, a government which defaults may be excluded from further [[credit (economics)|credit]]; some of its assets within the national borders of the lender nation(s) may be seized; and it may face political pressure from its own domestic bondholders to pay the debt back. These factors can easily cause all kinds of economic [[ripple effect]]s within the country's on-the-ground economy, affecting jobs, infrastructure investment, and similar. Therefore governments rarely default on the entire value of their debt; instead, they often enter into negotiations with their bondholders to agree on a delay or partial reduction (or both) of their debt payments, which is often called a [[debt restructuring]], or, in some more colloquial circles, a "[[Haircut (finance)|haircut]]".
+Since a [[sovereignty|sovereign]] government, by definition, controls its own affairs, it cannot be obliged to pay back its debt. Nonetheless, a government which defaults may be excluded from further credit; some of its overseas assets may be seized; and it may face political pressure from its own domestic bondholders to pay back its debt. Therefore governments rarely default on the entire value of their debt. Instead, they often enter into negotiations with their bondholders to agree on a delay or partial reduction of their debt payments, which is often called a [[debt restructuring]] or [[Haircut (finance)|haircut]]. The [[International Monetary Fund]] often assists in sovereign debt restructurings.
-The [[International Monetary Fund]] often assists in sovereign debt restructurings; in doing so, it may also demand the instigation or continuation of [[austerity|austerity measures]] within the country, such as significant tax rises and [[public sector]] jobs and services reductions. A prime example of such a demand coming directly from the IMF is [[Greece]]; in early June 2011, the IMF encouraged the [[United Kingdom]] to continue its austerity measures and not to change course or lessen them, although it stopped short of actually demanding a specific course of action given that the UK has not yet received an IMF-led [[economic bailout]], as Greece and several other European nations have.
 ==List of sovereign debt crises==

Revision as of 13:44, 8 June 2011

List of sovereign debt crises

References

See also