What is Sovereign Debt?

A country's government issues sovereign debt to borrow money. Sovereign debt is also known as government debt, public debt, and national debt

Governments borrow for various reasons, from financing public investments to boosting employment.

The level of sovereign debt and its interest rates will also reflect the saving preferences of a country's businesses and residents, as well as the demand from foreign investors.

How to Measure Sovereign Debt

Sovereign debt is can be measured using a variety of different metrics. Oftentimes, these metrics are used to determine if a country’s sovereign debt is too high given its gross domestic product (GDP) or ability to tax its citizens.

But these factors should also take into account a country’s GDP growth rate, which can dramatically influence its future ability to repay debt.

The three most popular metrics are:

  1. Total Public Debt – The total public debt is the total amount of debt outstanding. But without context, this figure isn’t very informative and can be misleading. As a result, most experts look towards Debt-to-GDP and Debt per Capita as common measures.
  2. Debt as a Percent of GDP – Debt as a percentage of the gross domestic product is simply the total public debt divided by GDP. Countries with a debt greater than their GDP (or a ratio over 100%) are generally considered to be over-indebted.
  3. Debt per Capita – Debt per capita is simply the total debt divided by the number of citizens. A debt per capita that is more than per capita income reduces the likelihood that the government will be able to make up its shortfall through traditional taxation.

International investors can find the levels of public sector debt via the World Bank, CIA World Factbook, or individual central bank websites.