Sovereign Debt

Nations have been borrowing money from each other for years. Nation to nation borrowing has become second nature. Capital is the name of the game in a democratic government, but all types of governments need money so a large -scale financial "pass-the-buck for a price" attitude permeates this borrowing process. Funding through borrowing, which helps governments to function, is called Sovereign Debt.

Sovereign debt takes shape as bills, bonds, and other financial instruments issued by a country to a debt holder. The term Sovereign debt can also apply to the aggregate amount owned by a group of countries like the European Union. Sovereign debt was considered high quality debt in the past because it was highly unlikely that a nation would default on its loans.

If a nation does default, lenders usually have no recourse in terms of collecting the debt. Defaulting does not make it harder for a nation to borrow money in the future, but that's not necessarily the case anymore. The other interesting point about defaulting on Sovereign Debt in this global economy is there are no other direct consequences related to the default other than currency devaluation in the foreign exchange market.

Weak currency exchange does produce some economic repercussions in terms of imports and exports, but in a sense, weak currency in certain nations helps the global economy. A weak currency means lower prices for their goods and services and that can stimulate growth. Argentina's financial demise and recovery, and Russia's default in 1998 demonstrated that fact.

Some nations may default on some financial obligations, but not all of them, and in some cases that's a strategic move to get lenders to negotiate the Sovereign Debt. That scenario seems to be commonplace in underdeveloped nations that need assistance due to poor fiscal choices and inept governments. In terms of modern Sovereign Debt, the Greece is opening the door for debt reform through bankruptcy. Most countries find that fact hard to believe, especially when the IMF and the European Union gave Greece 110 billion Euros in 2010 to prevent a major default.

The default clock is ticking for Greece as well as for other members of the European Union. It will take major as well as painful adjustments, and some hefty losses by bondholders, to salvage the Greek economy. Most financial experts say that the country's sovereign debt will explode into a modern day default that could shake the foundation of the European Union since Portugal, Spain and Ireland are drowning in their sovereign debt as well.

The birthplace of the Western World and a founding father of sovereign debt may become the graveyard of the Western Welfare State. Perhaps such a disaster will create more willingness for people to re-examine the whole idea of sovereign debt and giving governments the responsibility for providing so many services – so badly – to citizens. There is almost nothing that the private market cannot do better. Government monopolies, lacking competition, will continue to create disastrous situations until then leading to more and more nations facing sovereign debt defaults.