Anupama Nair
What is sovereign Debt Management? Sovereign debt management as stated by the IMF “is the process of establishing and executing a strategy for managing the debt of the government in order to raise the required amount of funding, achieve its risk and cost objectives, and to meet any other sovereign debt management goals the government may have set, such as developing and maintaining an efficient market for government securities”. In simple understandable term sovereign debt is a central government's debt. It is debt issued by the national government in a foreign currency in order to finance the issuing country's growth and development. The stability of the issuing government can be provided by the country's sovereign credit ratings which help investors weigh risks when assessing sovereign debt investments. Sovereign debt is alternatively called government debt, public debt, and national debt.
Sovereign debt can either be internal or external debt. The debt owed to an internal party i.e., within the country is called internal debt and those taken from lenders in foreign countries is called external debt. Another way of classifying sovereign debt is by the duration until the repayment of the debt is due. Debts taken for short-term lasts for less than a year, while long-term debt is for more than ten years.
Sovereign debt is usually created by borrowing government bonds and bills and issuing securities. Countries which are less creditworthy has no choice but to directly borrow from world organizations like the World Bank and IMF. An unfavorable change in exchange rates and an overly optimistic valuation of the payback from the projects financed by the debt can make it difficult for countries to repay the sovereign debt. The only option left for the lender, who is unable seize the government's assets, is to renegotiate the terms of the loan. Governments assess the risks involved in taking sovereign debts since countries that default on sovereign debts will have difficulty obtaining loans in the future.
Although sovereign debt will always involve default risk, lending money to a national government in the country's own currency is referred to as a risk-free investment with limits. The debt can be repaid by the borrowing government through raising taxes, reducing spending, or simply printing more money. By doing so, governments are able to remove the need to pay for interest. However, this method only reduces the interest costs of the government and can lead to a condition called ‘hyper-inflation’. Thus, governments still need to fund their projects through the aid of other governments.
Measuring sovereign debt is done differently by different countries differently. The measurement of sovereign debt depends on the company who is doing the measurement and the reason they are doing it. A rating done by Standard & Poor's for businesses and investors only measures debt loaned by commercial creditors. This means that it does not include the money borrowed from other governments, the World Bank, and other international financial institutions. At the same time, the European Union (EU) has limits on the total amount a eurozone country is allowed to borrow which means the EU has broader restrictions when measuring sovereign debt. As such, the EU includes local government and state debt.
The ratings and performance of sovereign debt depends largely on the issuing country's economic and political systems. For example, Treasury bills issued by the United States government are considered a safe haven during times of chaos in international markets. This has led to many countries holding a significant portion of debt, from United States, especially Japan and China. When sovereign debt issued by countries with reckless spending and debt-to-GDP ratio it leads to lots of problems, debt crisis in Greece is an example of problems that can emerge in a nation's economy, if it is unable to service payments related to its debt.
Hope India does not have to take huge debts as we are struggling with economic crisis brought about by the Pandemic.
