The Handbook of Credit Risk Management, 2nd Edition

CHAPTER 10Sovereign Credit Risk

SOVEREIGN BORROWERS

Sovereign credit risk refers to the risk taken by investors when lending money to countries. There have been a multitude of credit events involving sovereign borrowers in the past 50 years, and as with most other credit events, the events have arisen from borrowing too much, combined with a macroeconomic event or recession, or, in the case of emerging markets, growth not materializing as rapidly as originally anticipated.

Sovereign borrowers are governments of both developing and fully developed economies, including the Group of 12, which have the most developed capital markets, well established laws, and, all things being equal, stable political climates. These borrowers—the countries themselves—will have the political will and means to make good on their debts. Sovereign borrowers can also be the governments of emerging markets as well as those that are nearly as developed as the Group of 12 countries.

There is a range of markets that sovereign borrowers can tap. These are the private capital markets, meaning, the global bond market made up of pension funds, mutual funds, other institutional funds, ETFs, and insurance companies who are buyers. These markets can be both domestic and foreign. There is also the supra‐sovereign market that lends: The World Bank, which makes longer‐dated loans to developing country governments often for infrastructure, and the IMF, which provides short term liquidity facilities to governments ...