What Is Sovereign Debt?

Definition and Examples of Sovereign Debt

Definition

Sovereign debt is money owed by a government to its creditors. It can be used to gauge the creditworthiness of a country.

Young man calculating financial bills at home
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Definition and Example of Sovereign Debt

Sovereign debt refers to how much money the government of a nation owes. It may owe money to individuals, organizations, or other governments.

  • Alternate names: government debt, national debt, public debt

Foreign creditors are typically foreign governments that hold a portion of a country's debt. State and local governments, or citizens who have bought government bonds, are examples of domestic creditors. These debts are often a mix of bonds, notes, and bills with varying maturity dates.

Note

Sovereign debt can also describe future liabilities, such as unpaid pension debt.

How Sovereign Debt Works

Governments buy and sell goods and services, distribute payments, and assess taxes in order to meet their obligations, bring in revenue, and control the economy. This combination of spending and taxation is known as "fiscal policy." Under a contractionary fiscal policy, the money that a government brings in is higher than what it spends, resulting in a budget surplus. Expansionary fiscal policy occurs when the money that a government spends is higher than what it brings in, resulting in a budget deficit.

If there is a budget deficit, a government may borrow money to make up the difference. That borrowing is called "sovereign debt." Nations typically borrow by issuing bills, notes, and bonds backed by the credit of the government.

Like other debts, governments have to pay interest on the debt they take on. This means that expansionary fiscal policy, and the sovereign debt it creates, can increase the burden on taxpayers in the future. If sovereign debt continues to rise, it can cause foreign governments to distrust a country's assets. This can lower the value of the country's currency relative to those of other countries.

As a result, sovereign debt impacts a country's ability to carry out essential governmental activities through taking on and repaying debts. Sovereign debt ratings issued by credit-rating agencies, including Standard & Poor's, Moody's Investors Service, and Fitch Ratings, can help investors determine the credit risks associated with a given country. These ratings take into account debt levels as well as political risk, regulatory risk, and other factors.

Note

Other factors that affect a country's creditworthiness include per capita growth, GDP growth, inflation, economic development, and any history of default on sovereign debts.

Types of Sovereign Debt

There are two main types of sovereign debt.

  • Debt held by the public: This is government debt held by individuals, corporations, state and local governments, and foreign governments.
  • Intragovernmental debt: This is the debt that a government owes to itself. It refers to debt held by government accounts—for example, government trust funds, revolving funds, and other special funds.

Note

About 90% of intragovernmental debt in the United States is held in federal trust funds, primarily for Social Security and retirement programs for federal employees and members of the military.

How to Measure Sovereign Debt

Sovereign debt can be measured in different ways. Commonly used measures of government debt include:

Gross Federal Debt

Gross federal debt is the sum of the debt that a government owes other entities and the debt it owes itself. To calculate it, add the debt held by the public to the intragovernmental debt.

Debt Held by the Public

The most common and useful metric, debt held by the public reflects gross debt after excluding intragovernmental debt. It's the debt metric that the Congressional Budget Office (CBO) most commonly uses in its debt reports. The debt-to-GDP ratio, which is debt as a percentage of the gross domestic product (GDP), is often used to make sense of the debt by framing it in relation to the size of the economy. It's calculated by dividing the debt held by the public by the GDP.

Debt Subject to Limit

Debt subject to limit is found by subtracting debt issued by non-Treasury agencies and the Federal Financing Bank from gross federal debt.

Note

Debt held by the public is the most useful measure of sovereign debt. It measures the outstanding debt that a country has incurred to cover its deficits.

How Much Is the Sovereign Debt?

Below are the sovereign debt levels for some major countries. These debts are expressed as debt held by the public as a percentage of GDP.

  • United States: 150.36% of GDP (2021)
  • Canada: 130.31% of GDP (2021)
  • Mexico: 66.14% of GDP (2020)
  • Japan: 257.75% of GDP (2020)
  • Germany: 78.66% of GDP (2020)
  • Greece: 237.61% of GDP (2020)
  • France: 145.81% of GDP (2020)
  • Portugal: 145.47% of GDP (2021)
  • Italy: 183.49% of GDP (2020)
  • Brazil: 106% of GDP (2018)
  • Chile: 43.82% of GDP (2020)
  • Colombia: 82.85% of GDP (2019)
  • Israel: 73.16% of GDP (2019)
  • Korea: 58.77% of GDP (2020)

Key Takeaways

  • Sovereign debt, also known as "national debt," is the debt that a country owes to its foreign and domestic creditors.
  • It falls into two categories: debt held by the public and intragovernmental debt.
  • Sovereign debt comes from a government's borrowing activity and rises under an expansionary fiscal policy.
  • Sovereign debt gives a view of a country's economic health and creditworthiness.
  • There are multiple metrics for calculating the debt. Debt held by the public relative to the GDP is one of the most common.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Federal Reserve Bank of St. Louis. "Sovereign Debt Crises: It’s All Greek to Me," Page 1.

  2. ScienceDirect. "Does Government Debt Affect the Exchange Rate? An Empirical Analysis of the U.S.-Canadian Exchange Rate."

  3. Federal Reserve Bank of New York. "Determinants and Impact of Sovereign Credit Ratings."

  4. Congressional Budget Office. "Federal Debt: A Primer."

  5. Peter G. Peterson Foundation. "How Much Is the National Debt? What Are the Different Measures Used?"

  6. Organisation for Economic Co-operation and Development. "General Government Debt."

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