What is Sovereign Credit?

Mary McMahon
Mary McMahon

Sovereign credit is credit available for use by a sovereign nation to fund various government activities. The amount of credit is determined by the financial resources available and may change in response to shifting economic conditions. Nations can use their credit to embark on a wide variety of endeavors, ranging from funding public works projects to providing social services to citizens. Like individuals and companies, sovereign entities can have credit ratings set by third parties.

Man climbing a rope
Man climbing a rope

Nations with strong resources can usually access more credit. They may have raw resources like precious metals they can turn into sources of funding, along with various investments. Resource-poor nations or nations with very high debt are less able to access sovereign credit, as they are poor credit risks; they may not be able to repay debts they take on, or may have difficulty with the terms of a debt.

Sovereign credit ratings include factors like total sovereign debt, economic health, and political activities. Higher credit ratings indicate a strong economy and a moderate load of debt that the nation is controlling with regular payments and wise fiscal management. Low ratings can be a warning of economic turmoil or sovereign debt too high for a nation to be able to realistically service and maintain. Poor sovereign credit ratings can make it harder to access credit to refinance and reorganize debt, just as they can for individuals with bad credit histories.

Credit and debt for governments tend to work slightly differently than they do for people and corporations, as governments generally cannot declare bankruptcy. They can default on debt and may attempt to renegotiate or receive debt forgiveness for outstanding debts, but they are not subject to bankruptcy courts and cannot access protections and other benefits. Generally, nations are deemed low credit risks, but there can be circumstances that may change this, such as a threatened change of regime that a government might use to evade older debts.

Information about current sovereign credit ratings can be found in a number of financial publications, along with discussions about debt, how much credit is likely available to given nations, and how agencies are determining credit ratings. Adjustments to national credit ratings are usually items of news as they either indicate economic and political instability, or a successful attempt to turn around a poor economy. Both are of interest to economists, investors, politicians, and members of the general public who have an interest in policy and world events.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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