This chapter focuses on specific problems posed by sovereign debt (that is, debt incurred by governments, typically those of developing countries) to foreign investors seeking a competitive return. Most recently sovereign debt has taken the form primarily of loans from commercial banks, although in earlier periods, governments raised funds abroad mainly through bonds issued in foreign capital markets. Whatever form it has taken, three broad facts have characterized sovereign debt: (1) governments have at times been able to borrow substantial amounts; (2) much of what they borrow, they eventually repay; and (3) repayment is often complicated, involving delay, renegotiation, public intervention, and default. The chapter provides an overview of these facts. It focuses on three central questions. The first question is why countries ever choose to repay their debts. The second question is what can go wrong. The last question is what can be done to correct these problems. The chapter also presents a discussion of some insights that he literature may provide for alternative forms of international finance.
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