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What is a sovereign default?

Sovereign default

A sovereign default is an event where a sovereign nation fails to pay back its debt. In particular, the term is used when a government refuses to pay either or both the principal or interest on the bonds it has issued to finance its spending due to an economic crisis.

Where have you heard about a sovereign default?

Whenever you invest in a government bond, such as U.S. Treasuries, your broker should advise you that there is a small, if unlikely risk that the government defaults on its debt. The best-known default in recent history was by Russia in 1998, caused by a drop in global commodity prices.

What you need to know about a sovereign default.

Even a perceived risk of a sovereign default can seriously affect the prices of government bonds and the global financial markets. When these risks rise significantly, a sovereign debt crisis occurs, as seen in Europe after the 2008 financial crisis. A government bond is often assumed to be a risk-free bond, but you should be aware that there is always a risk, however small, that a nation defaults and investors lose their capital. In emerging market states, government bonds will pay a higher rate of interest to compensate investors for the higher risk of a sovereign default.

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