Sovereign Debt

Sovereign debt is debt issued by foreign governments.

Sovereign debt is unique because analysts and investors will need to evaluate not only the government’s ability to repay (economic risk), but also its willingness to repay (political risk).

Because default rates on sovereign debt issued in foreign currency have been higher than sovereign debt issued in local currency (after all, a government can print its own currency, but not the currency of another country), two separate ratings (a foreign currency rating and a local currency rating) are typically issued for sovereign debt.

While the four C’s approach is relevant to sovereign debt, the principles must be considered in a macroeconomic and political context.