The Changing Landscape of Sovereign Credit Risk

The risks to global financial stability posed by recent defaults by government borrowers have, for the most part, been manageable. However, the dynamics underpinning the ad hoc arrangements for resolving sovereign defaults are changing. Public debt burdens in many advanced economies are set to increase further, thanks to sluggish economic growth, aging populations and higher interest rates. Over a 20-year horizon, these factors could trigger a new cycle of debt restructurings involving advanced-economy sovereigns with significant global economic and financial impact. The potential scale of future defaults is illustrated in scenarios involving different combinations of advanced-economy and emerging-market sovereigns. The conclusion is that, despite obstacles, a more formal, rules-based system will likely be needed to underpin global financial stability in a world of larger defaults on government debt