Sovereign Debt

This list will help you navigate the sovereign debt crisis in Europe. It is not exhaustive and we will be adding definitions as new terms come up.

Sovereign Debt

The debt of governments. Just like people use IOUs to promise to repay their debts, governments use bonds. When a government sells a bond, or “issues” it, is the same as that government borrowing money. The buyer of the bond, or “bondholder,” is lending that money. As with any loan, lenders charge an interest, called a “coupon.”

Bond Markets

Where bonds exchange hands. In order to cover their expenses, governments first sell bonds in auctions. When investors buy these bonds directly from governments, it is known as the “primary market.” Investors can then trade bonds among themselves in the “secondary market.” The higher the price of a bond, the less money the bondholder gets back in interest: this is the ”yield.” If the government is considered trustworthy, its bonds sell for prices slightly higher than their face values, therefore the yields are low—generally the case for strong economies like the U.S. and Germany. On the other hand, if investors see a risk that the government won’t pay its debts, demand for the bonds falls, the prices drop, and the yields rise. Low yields mean governments pay less to borrow.

Measuring success in bond auctions

One of the ways to know how a government is perceived by the markets. When observers want to know how well a government auction went, they look at the yield: a high yield means it went badly, a low yield means it went well. Germany plays by its own rules to keep borrowing costs low, however: to keep yields low, it sets a minimum price below which it will not sell bonds to anyone except its central bank, the Bundesbank. Since the yield is kept artificially low, the measure of success in Germany is how many bonds the Bundesbank kept. The more it kept, the worse it went.