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Sovereign Debt and Default

Apr 21, 2022

 

 

Our English vocabulary selection today has to do with sovereign debt and default. This is a very relevant topic as soaring commodity prices and higher interest rates are putting the finances of many poor countries at risk.

Okay. Let’s get started with the key vocabulary, then you’ll hear a short text for listening practice.

New Vocabulary

Creditor: The entity that lends money.

Debtor: The entity that borrows the money.

Default: Failing to repay a loan.

Sovereign debt: The amount of money that a country's government has borrowed.

Multilateral institutions: These are formed by three or more nations to work on issues that are relevant to each of them. Examples are the World Bank (WB) and the European Investment Bank (EIB).

Floating interest rate: An interest rate that moves up and down with another benchmark rate.

Unsustainable debt: Debt not able to be maintained at the current rate or level.

Restructure debt: To change the terms on loans to make them easier to pay back.

Debt distress: Unsustainable debt can lead to debt distress—that’s when a country is unable to fulfill its financial obligations and the debt needs to be restructured.

Capital flight: Capital flight occurs when money quickly leaves a country as a result of an event, or as a consequence of a policy.

Here is a text to practice your reading comprehension.

SOVEREIGN DEBT AND DEFAULT

Surging food and energy prices are causing serious problems in highly indebted poor countries.

On April 12th Sri Lanka said that it would suspend payments on the $35bn its government owes foreign creditors.

Sri Lanka may not be the only sovereign debtor to default on its payments in these current conditions.  High food and energy prices are leading to high inflation in other poor and middle-income countries, leaving policymakers little room for fiscal policy and causing unrest in the streets.

In these current conditions, it is the poorest countries that suffer the most. Food prices, which are up by nearly 20% this year, make up a greater share of consumer spending in poor and middle-income countries, and this makes inflation more likely to spiral out of control.

According to the World Bank, nearly 60% of these world’s poorest nations are currently in debt distress or at high risk of it. One worry is that almost a third of their total debt carries a floating rate of interest, and those interest rates are bound to rise due to monetary tightening.

This situation is further complicated as policymakers in poor and middle countries need to worry about capital flight and falling exchange rates, when the  Federal Reserve raises interest rates over the next year.

It is difficult to see a solution in the near term. Many multilateral organizations, like the IMF, only lend to countries with sustainable debts. Policy makers have a big job ahead.

Okay.. that’s it for the text. Let’s review the vocabulary one last time.

  • Creditor: The entity that lends money.
  • Debtor: The entity that borrows the money.
  • Default: Failing to repay a loan.
  • Sovereign debt: The amount of money that a country's government has borrowed.
  • Multilateral institutions: These are formed by three or more nations to work on issues that are relevant to each of them. Examples are the World Bank (WB) and the European Investment Bank (EIB).
  • Floating interest rate: An interest rate that moves up and down with another benchmark rate.
  • Unsustainable debt: Not able to be maintained at the current rate or level.
  • Restructure debt: To change the terms on loans to make them easier to pay back.
  • Debt distress: Unsustainable debt can lead to debt distress—when a country is unable to fulfill its financial obligations and debt restructuring is required.
  • Capital flight: Capital flight occurs when money quickly leaves a country as a result of an event or as a consequence of a policy.

 

That’s all for now. Until next time, this is Alan Robert. Goodbye.

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