Sovereign Debt in the 21st Century

Abstract

The borrowing, servicing, and, occasionally, restructuring of sovereign debt will profoundly affect the lives of most people living on this planet in the 21st century. The depth and liquidity of modern international capital markets have facilitated the accumulation of massive sovereign debt stocks and, of equal significance, have nurtured the dangerous assumption that those debts will always be able to be refinanced with the proceeds of new borrowings when they mature. This assumption—that sovereign debts can be refinanced in perpetuity—is a modern conceit. Lenders as recently as 40 years ago would have regarded it as naïve, bordering on reckless. The belief that sovereign debt will never have to be repaid (in the sense of being retired with current government resources), but will always be refinanced has significantly altered the nature and extent of sovereign risk in this century.