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Sovereign loan or debt means debt incurred by a government, usually in the form of bonds issued in foreign currencies and sold to foreign investors. A sovereign loan is a loan made by a financial institution to a government, often to a developing or emerging nation.
A sovereign loan is governed by the sovereign immunity doctrine, which is part of international law and says that payment of a sovereign loan or debt cannot be demanded by the lender. The only recourse is to have the payment rescheduled, to reduce the interest rates, or to repudiate the debt. A government that defaults on a sovereign loan is at risk of losing credibility in the international community, including lowering its sovereign debt rating. A default also can affect the global performance of stock and bond markets.
A sovereign debt or sovereign loan is not owed by a country’s citizens, but by its government. It is not considered a national debt and the money obtained is used at the discretion of the borrowing government. It can be given to banks or private companies or used to pay for infrastructure projects.
The government doing the borrowing may adapt different solutions to guarantee the repayment of the loan, such as by printing money or increasing taxes. Sovereign debts can differ in terms of the currency used upon issuance, maturity and interest rates.
Sovereign loan example
Argentina defaulted in 2001 on over $95 billion in debt. The default cut off the country’s access to international capital markets. In April 2016, the country’s sovereign debt issues were resolved and its debt restructured. Foreign investors and lenders are showing interest in Argentina again as confidence in the nation builds. GE Energy Financial Services recently agreed to help fund two thermal energy projects in Argentina. The nation’s private companies also are becoming more active in international markets.
The following nations have a clean slate when it comes to sovereign loans: U.S., Denmark, Belgium, Canada, Finland, Mauritius, Norway, New Zealand, Malaysia, England, Switzerland and Singapore.
Debt can be a good thing if you handle it correctly. Find out more about managing debt at Bankrate.com.