The Role of Sovereign Debt in Global Economy

The term ‘sovereign debt’ is taken to mean the money owed by a central government, which will typically be responsible for balancing the books of a given nation or at the very least ensuring that their country doesn’t fall into the position of being effectively bankrupt.

Here is one of the best free online explanation by a famous finance blogger MoneyForTheRestOfUs on how sovereign dept affects businesses and individuals:

Recent years have seen something of a world debt crisis and sovereign debts have reached untenable levels even among some of the most advanced economies on Earth. So it is interesting then to wonder at just what the role of sovereign debt really is within the context of the global economy.

European misadventures

If a small nation sees its sovereign debt reaches unsustainable levels and faces bankruptcy as a country then the consequences won’t usually be felt much beyond that country or its surrounding region.

But the fallout from the bankruptcy of a big country with a major economy can be significant and there is often a real danger of a domino effect.

This was and remains at the root of much of the economic fears for countries in the Eurozone, several of which found themselves teetering on the brink of collapse in the wake of the Financial Crisis of 2008.

Thankfully for the likes of Spain, Ireland and Portugal, and indeed for the rest of us, the Eurozone countries that faced the worst sovereign debt scenarios in recent years were bailed out and given a chance to grow their way out of their respective deficits.

Slow growth

The key issues really with having serious problems with sovereign debt is that it leaves governments with very limited options when it comes to finding ways to stimulate economies and economic growth within a particular country. These are the reasons in part why so many European countries and others have been struggling so desperately to generate economic growth in recent years.

Limited options

A low growth economy in which governments are concerned that their sovereign debt levels are too high is also likely to be a country in which interest rates will be low.

We have seen since the 2008 crisis hit in earnest that central banks from the US to Europe and beyond have kept their interest rates at very unusually low levels for extended periods of time.

This low interest rate stance has been viewed as necessary from the point of view of trying to ensure economic stability but in terms of encouraging GDP growth the situation isn’t necessarily ideal.

All of which can leave countries and companies, as well as investors and employers, with a relatively slender array of options when it comes to finding ways to improve their positions and their prospects.

A global ecosystem

In isolation, an unsustainable sovereign debt imbalance would not necessarily have a big impact on the global economy.

But the global economy is now very much a co-dependent system and if any of its key players are significantly hindered then this can have very wide-reaching ramifications and that is certainly the case when it comes to sovereign debt and specifically the difficulties still being grappled with in this context across the Eurozone and elsewhere in the world as well.

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