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.
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.
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.
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.
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)
