What is sovereign debt default? (2024)

What is sovereign debt default?

A sovereign default is a nation's failure to repay its debt obligations. It has serious economic consequences for the nation, making it expensive or impossible for it to borrow money in the future.

Key Takeaways

Sovereign debt is debt issued by the government of an independent political entity, usually in the form of securities. Several private agencies often rate the creditworthiness of sovereign borrowers and the securities they issue.

Asset managers, such as pension funds, typically hold a large amount of government debt. They need relatively safe long-term assets to match their long-term liabilities. Banks also hold large amounts of sovereign debt, especially of governments in the countries where they are based.

According to the International Monetary Fund (IMF), 70 countries are at risk of debt distress—meaning they might default on their loans. That's more than a third of all countries in the world. Some nations have already tumbled into trouble: Lebanon, Russia, Sri Lanka, Suriname, and Zambia have all defaulted.

On the contrary, there would be no money. The national debt accounts for the money in circulation around the world and a country. Principally, the national debt fuels all other debts and its non-existence will result in the complete decimation of money.

Japan and China have been the largest foreign holders of US debt for the last two decades. Japan and China held almost 50% of all foreign-owned US debt between 2004 and 2006. However, this has declined over time, and as of 2022 they controlled approximately 25% of foreign-owned debt.

1) Switzerland. It is no surprise to see Switzerland on this list. Switzerland is a country that, in practically all economic and social metrics, is an example to follow. With a population of almost 9 million people, Switzerland has no natural resources of its own, no access to the sea, and virtually no public debt.

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.

In total, other territories hold about $7.4 trillion in U.S. debt. Japan owns the most at $1.1 trillion, followed by China, with $859 billion, and the United Kingdom at $668 billion. In isolation, this $7.4 trillion amount is a lot, said Scott Morris, a senior fellow at the Center for Global Development.

U.S. Treasury Securities Holders by Type

The largest holder of U.S. debt is the U.S government. Which agencies own the most Treasury notes, bills, and bonds? Social Security, by a long shot. The U.S. Treasury publishes this information in its monthly Treasury statement.

Is the US in a debt crisis?

Currently, the debt ceiling has been suspended altogether as of June 3, 2023, when U.S. president Joe Biden signed the Fiscal Responsibility Act of 2023 into law. This ended the 2023 United States debt-ceiling crisis that began on January 19, 2023, and the suspension will remain in effect until January 1, 2025.

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

So if the U.S. cannot pay its creditors, interest rates on U.S. debt would go up, creating a cascade of higher interest rates. So mortgage rates, credit card rates, car loan rates. All would become more expensive. Finally, there is a real concern about the economy — that a default could spark a recession.

The federal government needs to borrow money to pay its bills when its ongoing spending activities and investments cannot be funded by federal revenues alone. Decreases in federal revenue are largely due to either a decrease in tax rates or individuals or corporations making less money.

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.

With $1.1 trillion in Treasury holdings, Japan is the largest foreign holder of U.S. debt. Japan surpassed China as the top holder in 2019 as China shed over $250 billion, or 30% of its holdings in four years. This bond offloading by China is the one way the country can manage the yuan's exchange rate.

Under current policy, the United States has about 20 years for corrective action after which no amount of future tax increases or spending cuts could avoid the government defaulting on its debt whether explicitly or implicitly (i.e., debt monetization producing significant inflation).

As of 3rd September 2023, United States of America (USA) stands on the first position on the list of Richest Country in the world with the GDP of $26,854 B.

How much debt is Russia in?

Russia National Government Debt reached 271.6 USD bn in Oct 2023, compared with 261.5 USD bn in the previous month.

If we simply consider a nation's gross domestic product—the sum of all goods and services produced by a country during one year—then we would have to conclude that the richest nations are exactly the ones with the largest GDP: United States, China, Japan, Germany.

Consequences of Owing Debt to the Chinese

If China called in all of its U.S. holdings, the U.S. dollar would depreciate, whereas the yuan would appreciate, making Chinese goods more expensive.

The U.S. has the largest GDP in the world and China has the second largest.

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.