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Sovereign Risk
Sovereign risk is the risk that a government will default on its debt obligations.
Meaning in Practice
Investors assess fiscal sustainability, political stability, and economic performance to evaluate sovereign creditworthiness. Rating agencies assign sovereign credit ratings reflecting default probability.
Why It Matters
High sovereign risk increases borrowing costs and can destabilize domestic banks holding government bonds. It may also affect currency stability.
Market Impact
Rising sovereign risk leads to higher bond yields, currency depreciation, and equity market volatility. Spillover effects can impact the broader financial system.
Example
A sharp increase in public debt triggers investor concerns about a country’s ability to service its obligations.
Related Terms
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