Sovereign debt and its restructuring framework in the eurozone (2024)

FAQs

What is sovereign debt restructuring? ›

Debt restructuring: Changing the terms of sovereign debt to make paying debt service more manageable (can involve changing maturities, adding grace periods, reducing the principal amount of the debt, reducing the interest rate, debt service suspension, etc.)

The Common Framework requires a CF debtor country that signs a memorandum of understanding (MOU) with participating creditor countries to seek debt treatment from its other creditors that is at least as favorable as that of the MOU.

In the context of a sovereign debt restructuring, the debt of state-owned or state-affiliated entities may also need to be restructured, either because those credits have been explicitly guaranteed by the sovereign or because attempting to draw a distinction between the finances of the sovereign and the related entity ...

The European sovereign debt crisis resulted from the structural problem of the eurozone and a combination of complex factors, including the globalisation of finance; easy credit conditions during the 2002–2008 period that encouraged high-risk lending and borrowing practices; the 2008 global financial crisis; ...

Key Takeaways

Sovereign debt is debt issued by the government of an independent political entity, usually in the form of securities. Several private agencies often rate the creditworthiness of sovereign borrowers and the securities they issue.

Restructuring normally is accomplished in three ways: via an extension, a composition, or a debt-for-equity swap. An extension occurs when creditors agree to lengthen the debtor firm's repayment period. Creditors often agree to suspend temporarily both interest and principal repayments.

Four of these countries—Belarus, Lebanon, Sri Lanka, and Venezuela—are in actual default. The eight remaining countries at highest risk are Argentina, Egypt, Ghana, Kenya, Pakistan, Russia, Tunisia, and Ukraine. In building and refining our tracker over the years, we've gained an unexpected insight.

Asset managers, such as pension funds, typically hold a large amount of government debt. They need relatively safe long-term assets to match their long-term liabilities. Banks also hold large amounts of sovereign debt, especially of governments in the countries where they are based.

Sovereign debt is the government debt of a country, a sovereign nation. It is also referred to as government debt, national debt, public debt, or country debt. The sovereign debt of a country consists of all its debt liabilities to both domestic and foreign creditors.

Managing sovereign debt risk is crucial to maintain economic stability. High levels of debt can lead to reduced investor confidence, higher borrowing costs, and potential default.

Why is sovereign debt good? ›

The national debt enables the federal government to pay for important programs and services even if it does not have funds immediately available, often due to a decrease in revenue.

Sovereign default is the failure by a country's government to pay its debt. Sovereign default inevitably slows the nation's economic growth and hampers investment from overseas. Overwhelming debt is the main cause of sovereign default.

The European sovereign debt crisis was a chain reaction set in the tightly knit European financial system. Members adhered to a common monetary policy but separate fiscal policies – allowing them to spend extravagantly and accumulate large amounts of sovereign debt.

With increasing fear of excessive sovereign debt, lenders demanded higher interest rates from Eurozone states in 2010, with high debt and deficit levels making it harder for these countries to finance their budget deficits when they were faced with overall low economic growth.

period of economic uncertainty in the euro zone beginning in 2009 that was triggered by high levels of public debt, particularly in the countries that were grouped under the acronym “PIIGS” (Portugal, Ireland, Italy, Greece, and Spain).

A debt restructuring might include a debt-for-equity swap, in which creditors agree to cancel a portion or all of the outstanding debt in exchange for equity in the business. A nation seeking to restructure its debt might move the debt from the private sector to public sector institutions.

Can damage your credit: Restructuring debt can negatively affect your credit in many ways, especially since you're no longer paying your account as agreed. If your lender marks the debt as settled — meaning that it was paid in full, but for less than you originally owed — it can impact your score for years to come.

As of February 2024, five countries are in different stages of negotiations for a debt restructuring: Suriname, Zambia, Sri Lanka, Ghana and Ethiopia. Suriname reached a deal with Paris Club lenders and bondholders, and has now reached an agreement in principle with China.