WASHINGTON, DC – Sovereign debt has been back in the news recently, this time because of a United States Supreme Court ruling concerning Argentine debt. As a result of the ruling, a complicated issue is likely to become even more so.
Sovereign debt has been a major feature of the international financial system for centuries. Kings borrowed, often internationally, to finance wars and other expenditures. When they couldn’t pay, as sometimes happened, sovereigns defaulted.
Today, sovereigns are more often democratically elected governments, but they still borrow. And they still occasionally find themselves in situations in which their debt has become unsustainable and they need outside help to continue to meet their debt-service obligations.
When private firms (or subnational governments) become insolvent, there are normally legal bankruptcy procedures to determine what to do. Without such procedures, a market economy would be unable to function.