Sovereign credit risk is the risk of a government becoming unwilling or unable to meet its

loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that d ...

obligations, as happened to

Cyprus Cyprus ; tr, Kıbrıs (), officially the Republic of Cyprus,, , lit: Republic of Cyprus is an island country located south of the Anatolian Peninsula in the eastern Mediterranean Sea. Its continental position is disputed; while it is geo ...

in 2013. Many countries faced sovereign risk in the

Great Recession The Great Recession was a period of marked general decline, i.e. a recession, observed in national economies globally that occurred from late 2007 into 2009. The scale and timing of the recession varied from country to country (see map). At ...

of the late-2000s. This risk can be mitigated by

creditor A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property ...

s and stakeholders taking extra precaution when making

investment Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing i ...

s or

financial transaction A financial transaction is an agreement, or communication, between a buyer and seller to exchange goods, services, or assets for payment. Any transaction involves a change in the status of the finances of two or more businesses or individuals. A ...

s with firms based in foreign countries. Five key factors that affect the probability of

sovereign debt A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit oc ...

leading to sovereign risk are:

debt service ratio In economics and government finance, a country’s debt service ratio is the ratio of its debt service payments (principal + interest) to its export earnings.Glossary of Statistical TermsDebt service ratio OECD, Sep 25, 2001. A country's internation ...

import ratio Import ratio, in economics and government finance, is the ratio of total imports of a country to that country’s total foreign exchange (FX) reserves. The ratio can be inverted and is referred to as the reserves to imports ratio. This ratio divid ...

, investment ratio, variance of export revenue, and domestic

money supply In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include Circulation (curren ...

growth. The probability of loss increases with increases in debt service ratio, import ratio, variance of export revenue and/or domestic money supply growth. Frenkel, Karmann, Raahish and Scholtens also argue that the likelihood of rescheduling decreases as investment ratio increases, due to resultant

economic productivity Productivity is the efficiency of production of goods or services expressed by some measure. Measurements of productivity are often expressed as a ratio of an aggregate output to a single input or an aggregate input used in a production proce ...

gains. However, Saunders argues that

debt rescheduling Debt rescheduling is the lengthening of the time of debt repayment by restructuring the terms of an existing loan. Types of resecheduling In retail banking, the debt rescheduling can be applied for personal loans given to individuals as educa ...

can become more likely if the investment ratio rises as the foreign country could become less dependent on its external creditors and so be less concerned about receiving

credit Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt), ...

from these countries/investors.

References

Government debt {{Econ-stub

See also

References