Sovereign debt: the assessment

This article serves as an introduction to two issues of the Oxford Review of Economic Policy, one entitled Sovereign Debt: Understanding Bond Markets During the Eurozone Crisis and the second Sovereign Debt: Lessons from the Past, Reforms for the Future. We begin by documenting recent trends in advanced country sovereign indebtedness and reviewing events that preceded the sovereign debt crisis in the eurozone. The mechanisms through which rising sovereign debt may impact bond yields, economic growth, and inflation are discussed and the evidence for such effects is reviewed. Our discussion highlights that there is no unique threshold beyond which sovereign debt exerts adverse macroeconomic effects, and that in order to understand the consequences of a given debt load one must analyse its structure in terms of internal and external creditors, currency denomination, the time to maturity of the bonds, and the legal code governing debt issuance, as well as various economic and political constraints measuring the fiscal space of the sovereign. We then turn our attention to episodes in which sovereign debt proves excessive and default occurs. We review explanations for the protracted and inefficient nature of defaults and describe some lessons from historical studies examining default outcomes. In the final part of the paper we discuss proposals for averting future debt crises, including jointly issued bonds such as eurobonds, contingent convertible bonds, and elements of a Sovereign Debt Restructuring Mechanism. In the course of our discussion we draw on each of the 11 articles included in the two issues of this journal devoted to sovereign debt.