Saturday, February 4, 2012

Sovereign Debt Crisis

A sovereign debt crisis occurs when one or more government or sovereign entities become at risk of being unable to pay their obligations. Governments become vulnerable to this through fundamental factors such as the accumulation of excessive debt obligations (particularly external debt or debt issued in a currency in which the government has no control) and persistent deficits; while a downturn in economic growth, and a spike in interest rates can exacerbate the problem in the short term. A 'liquidity crisis' is when the government is unable to borrow money e.g. to replace existing debt that is maturing, while a 'solvency crisis' is where the government fundamentally has too much debt. Sovereign debt crises have the potential to greatly impact on investments through the direct holding of the debt/bonds issued by the sovereign, but also through the associated market disruption that may come. Sovereign debt crises will generally be resolved through a number of options such as: debt restructuring, outright default or repudiation, printing money or hyperinflation, or through fiscal austerity. The manner in which the crisis is resolved will have materially different implications for investors.

Similar Fund Terms:
 Debt Crisis, Debt restructuring, Credit default, Default, Market crash, Bear Market

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Fund Management Terminology and Concepts Explained:

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