Definition of Sovereign Debt Default

What is a "sovereign debt default"? What is the definition of the term "sovereign debt default"?

In order to help define this term, let's break it down into two parts - "sovereign" and "debt default".

"Sovereign" means "independent and unlimited by any other". So, a sovereign nation is an independent nation that acts on its own behalf. An example of a sovereign nation would be the United States or Germany.

Definition of Sovereign Debt DefaultA "debt default" occurs when a debtor is unable to meet the terms of their debt repayment agreement. So, if you were expected to repay $1,000,000 a month on a billion dollar loan and couldn't afford the payment, then you would be in default of your agreement.

So, combine the two definitions and "sovereign debt default" refers to when an independent authority (such as a nation) defaults on their debt obligations.

The sovereign debt default is quite rare, but it certainly does occur. Some of the more recent examples include Ecuador in 2008 and Peru in September of 2000.

Most sovereign nations that default due so for financial reasons (they don't have the money to make their payments), but there is the rare circumstance (such as Ecuador in 2008), when the nation fails to repay for a different reason. In Ecuador's case, the nation felt as though the debt was "illegal and illegitimate" and chose to default for "moral reasons".

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