Sovereign debt

Sovereign debt is the debt that a country maintains against its creditors . It is, therefore,  the public debt that the State contracts for the purpose of financing. This process is done through the issuance of fixed income securities in the financial markets.

The public debt is the obligation that the State has for the total accumulated loans it has received or for which it is responsible, expressing itself through the total monetary value of the  bonds  and obligations that are held by the public.

Role of sovereign debt in financial markets

The State needs financing to carry out its social and welfare policies, its economic policies and the whole set of activities with the objective of distributing the country’s wealth fairly.

The public debt can affect, in a more or less direct way, economic variables on which the real functioning of the economy basically depends, such as the money supply, the interest rate, the savings and its forms of channeling, either national or foreign, and intermunicipal.

While it is true that, in some cases, such as European countries, the management of  monetary policy  rests with the  European Central Bank , exempting the Central Banks of each country from this responsibility.

Regarding this function, there are many criticisms by large economists because the country in question loses a primary function as a management tool in the face of possible financial crises, since it cannot modify its interest rates and its currency in order to be more competitive against the outside, balancing and increasing its trade balance, and therefore, its  gross domestic product.

Debt as a risk-free asset

The most stable sovereign debt worldwide is known as the risk-free asset, and is calculated as a differential with respect to other countries, with the objective of measuring the  risk premium  of a country in the event of bankruptcy or  default .  The sovereign debt par excellence with less risk, are the 10-year bonds, since it is considered a long period where interest rates tend to be more stable. We can therefore highlight the American debt known as T-Notes or the 10-year German debt known as the Bund.

Sovereign debt in investment portfolios

Sovereign debt is a very present asset in investment portfolios and serves as a replica for many underlying assets . Mainly, it is the rating or rating agencies , which are  responsible for assessing the credit quality of the latter, among the most important we can highlight S&P, Fitch and Moodys.

There is a criticism regarding credit rating agencies, which is their absence of independence, given that there are conflicts of interest between the companies that pay them, in order to obtain reputation in the market to increase their value and, therefore, their financing power and its benefits.

World sovereign debt

If we analyze the public debt with respect to the GDP of the 30 economic powers of the world, we observe the following:

The public debt of the United States, the world’s largest economic producer, reaches 108.1% of the value of its gross domestic product (GDP), as derived from the most recent estimates of the International Monetary Fund (IMF).

Second, the public debt of the world’s second economic superpower, China, represents only 21.3% of its GDP, this value being, therefore, up to five times lower, in relative terms, than that of the United States. UU.

Not only that; China’s public debt over the level of its production is eleven times lower than that of Japan (245.4%).

Not surprisingly, the Japanese country leads the world ranking of public debt, ahead of the US, which occupies the 11th position, and China, the 145th.

But in the fourth, fifth and sixth place of the world classification by production, Germany, France and the United Kingdom, all of them, countries representing the European economy, present figures of public debt on the GDP of 80.4%, 92, 7% and 93.6%, respectively.

These levels are above those of Brazil (67.2%), which in turn also far exceeds the reduced ratio of public debt to Russia’s GDP (10.4%).

by Abdullah Sam
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