Definition of sovereign debt

This is debt that is issued by a national government. It is theoretically considered to be risk-free, as the government can employ different measures to guarantee repayment, e.g. increase taxes or print money.

In practice, there have been multiple cases in which governments could not serve their debt obligations and had to default. As a consequence, investors ask for different yields across countries. The more a country's repayment ability is in question and the riskier sovereign debt becomes, the higher is its yield.

Sovereign debt differs within and across countries e.g. by its maturity, the currency in which it is issued and whether it offers nominal or real interest rates.

Example
The stability and growth pact of the European countries that introduced and have used the Euro as their national currency requires each country to maintain a national sovereign debt level that is below (or approaching) 60 per cent of the country's GDP.

Fears about the ability of several European countries to serve their debt obligations in the spring of 2010 led to substantial increases in the yields of sovereign debt issued by these countries. The European Union along with the European Central Bank and the International Monetary Fund reacted by designing a rescue package worth €750 billion. [1]

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Interactive graphic: Sovereign debt levels by country

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