Sovereign debt vs government debt? (2024)

Sovereign debt vs government 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 occurs when a government's expenditures exceed revenues.

Foreign debt is debt owed to a lender from another country. It has been on the rise for decades, with many unwelcome side effects. Sovereign debt is debt issued by a country's government in order to borrow money. Learn more about how it works and what countries can use it to accomplish.

At the top is Japan, whose national debt has remained above 100% of its GDP for two decades, reaching 255% in 2023.

There are two major categories for federal debt: debt held by the public and intragovernmental holdings. The debt held by the public has increased by 118% since 2013. Intragovernmental holdings increased by 41% since 2013.

A sovereign bond, or a government bond, is a specific debt instrument issued by the government. You can avail it in both foreign currency and domestic currency. The sovereign bond yield is the interest rate paid on a government sovereign bond.

The U.S. national debt is the sum of public debt that is held by other countries, the Federal Reserve, mutual funds, and other entities and individuals, as well as intragovernmental holdings held by Social Security, Military Retirement Fund, Medicare, and other retirement funds.

As of January 2023, the five countries owning the most US debt are Japan ($1.1 trillion), China ($859 billion), the United Kingdom ($668 billion), Belgium ($331 billion), and Luxembourg ($318 billion).

Around 70% of Japanese government bonds are purchased by the Bank of Japan, and much of the remainder is purchased by Japanese banks and trust funds, which largely insulates the prices and yields of such bonds from the effects of the global bond market and reduces their sensitivity to credit rating changes.

Nearly every year, the government spends more than it collects in taxes and other revenue, resulting in a deficit. (The debt ceiling, set by Congress, caps how much the U.S. can borrow to pay for its remaining bills.) The national debt, now at a historic high, is the buildup of its deficits over time.

Is the US debt a problem?

The U.S. national debt has soared to historic levels relative to the size of the U.S. economy. Many economists say that a rapidly mounting debt load could soon diminish U.S. economic growth, restrict government spending on important programs, and raise the likelihood of financial crises.

To finance the federal debt, the U.S. Treasury sells bonds and other types of “securities”. Anyone can buy a bond or other Treasury security. When a person buys a Treasury bond, they effectively loan money to the federal government in exchange for repayment with interest at a later date.

The financial position of the United States includes assets of at least $269 trillion (1576% of GDP) and debts of $145.8 trillion (852% of GDP) to produce a net worth of at least $123.8 trillion (723% of GDP).

Foreign holders of United States treasury debt

Of the total 7.6 trillion held by foreign countries, Japan and Mainland China held the greatest portions, with China holding 868.9 billion U.S. dollars in U.S. securities. Other foreign holders included oil exporting countries and Caribbean banking centers.

Investing in U.S. sovereign bonds is fairly straightforward and can be done on TreasuryDirect.gov. Buying foreign bonds is a bit more tricky and is usually done via a broker through an account set up for foreign trading. The broker would typically buy the bond at the prevailing market price.

The government is an authority ruling a country, whereas sovereignty is a feature of countries. There are countries lacking sovereignty. The basic conditions of a sovereign country include an effective government (which is not dependent on any other government), population, and territory.

With a debt of $290.5 billion, Switzerland ranks as one of the top countries that owe the US money. Investors in Switzerland have also increased their holdings of US debt. The country's other main creditors include countries such as Germany and France.

The obvious reason is Japan willfully EXPORTS manufactured goods to the United States, and earns United States Dollars, which it wants to own. Those US Dollars are ultimately paid into Japan's checking account at the Federal Reserve. Japan can then pay Japanese companies in domestic Yen, not in foreign currency.

China is one of the United States's largest creditors, owning about $859.4 billion in U.S. debt. 1 However, it does not own the most U.S. debt of any foreign country. Nations borrowing from each other may be as old as the concept of money.

The United States pays interest on approximately $850 billion in debt held by the People's Republic of China. China, however, is currently in default on its sovereign debt held by American bondholders.

What happens if China dumps US bonds?

If China were to sell all of its U.S. Treasury bonds, it could potentially lead to higher interest rates in the United States, a weaker U.S. dollar, reduced investor confidence, increased borrowing costs for the U.S. government, and broader implications for global financial markets.

The case of debts arising from World War II is somewhat less complicated. At this time only four countries, discussed below, owe the U.S. government debts of any size arising from World War II programs to aid our allies. Other countries have paid their debts in full.

As recently as 2020, total debt in the United States relative to GDP exceeded China's. But as of mid-2022, China's relative debt burden stood 40 percent higher than America's.

The value of U.S. Treasury securities held by residents of Russia amounted to 33 million U.S. dollars in June 2023, the lowest over the period under consideration. Furthermore, in March 2020, the figure decreased sharply to 3.85 billion U.S. dollars, down from 12.6 billion U.S. dollars one month prior.

The federal government borrows money from the public by issuing securities—bills, notes, and bonds—through the Treasury. Treasury securities are attractive to investors because they are: Backed by the full faith and credit of the United States government. Offered in a wide range of maturities.