Sovereign Debt Default can be described as the inability of an independent state or regime to completely repay its debt according to initial terms of agreement (Eichengreen & Hausmann, 2005). A government may also object to repay its debts even if the economy is stable. This essay briefly discusses some of the common causes of the Sovereign Debt Default.
To begin with, the Sovereign Debt Default cases in most of the affected countries have been triggered by unwise lending. Developed countries that sometimes offer these debts often fail to assess the ability of the borrowing states to pay back. As a matter of fact, both the past borrowing record and the current repayment ability should be considered keenly before a country qualifies for a debt. When the latter is not executed well, it may easily result in unwise lending, followed by the inability to pay back.
When the global capital flows are reversed, it may lead to the Sovereign Debt Default. This type of reversal may easily be occasioned by unfavourable changes in the international trade volumes. For instance, both the balance and terms of trade may alter the global capital flows (Eichengreen & Hausmann, 2005).
Fraudulent lending may also weaken the ability of a borrowing country to repay a given debt. It is necessary for the due process of lending to be followed so that the borrower is not affected negatively. Fraudulent lending may take place when the interest rate is higher than the ability of the borrower to repay.
Finally, sovereign states or governments with excess foreign debts may also face difficulties in repaying all their debts. Other causes of Sovereign Debt Default include poor revenues, rollover risks and terminal debts.
Reference
Eichengreen, E & Hausmann, R. (2005). Other People’s Money: Debt Denomination and Financial Instability in Emerging Market Economies. London: Princeton University Press.
