From The Times November 28, 2009 Sovereign debt: Q&A Ian King, Deputy Business Editor What is sovereign
It is a type of borrowing carried out by a national government which is guaranteed by that government. It raises money from investors prepared to buy its bonds (called gilts in the UK) and guarantees to repay at some point. They will usually pay interest as well.
Why is it important?
Because it is one of the two main ways in which governments can raise money. The other is by putting up taxes. A third, less easily exploited, avenue is privatising or selling state-owned assets.
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It depends on their credit rating. The UK, for example, enjoys a AAA credit rating investors that they will get their money back.
Is it worth buying?
It used to be regarded as risk-less .
the country sees its credit rating trashed. the UK and Japan have been issuing record sums of debt recently. in particular the US. commercial banks have been ordered by regulators to hold a greater proportion of less risky assets on their balance sheets. will be tempted to go soft on inflation as a way of buying back debt more cheaply.Used to be? Do investors in sovereign debt not always get repaid. oversaw the creation of instruments with which the banks could trade this debt. such as good-quality sovereign debt. did in the 1990s. then?
In the 1980s many Latin American countries defaulted as they. making it harder or more expensive to borrow. Investors are also worried that many of the big debt-issuers are not saying how or when they plan to reduce their budget deficits the UK is a classic example in this regard.
Why are people now worried about sovereign debt?
Partly because lots of governments particularly the US.
Yes. This helped put a value on the debt and got it off balance sheets.
And what happens then?
First. There is a danger that there will be so much of it during the next few years that investors will not want to buy. After the Latin American blowout the US Treasury Secretary Nicholas Brady. Some investors are also concerned that some countries. and Russia and Turkey.
So all the banks are stuffed full of this debt then?
. Following the credit crisis.
because all of the banks have been ordered to load up on this stuff. in some cases.
So these CDS contracts give you a good idea of how nervous markets are about types of soveriegn debt?
They do indeed. The seller of the contract makes a payment to the buyer if there is a debt default or.
Can investors protect themselves against governments defaulting on their sovereign debt?
the market now
Thanks. even if the debt-issuer has seen their credit downgraded. by buying a product called a credit default swap (CDS). they have bought it at often uncompetitive rates.
. you ve really cheered me up
Don t mention it. And. Pension funds have lots of it.Afraid so. too. The cost of insuring against a Dubai default rocketed yesterday thinks such an event is more likely to happen in Dubai than even Iceland.