Fun fact: countries can default, just like you can.
Sovereign default is when a country says “srrryyy...can’t pay u back on those IOUs, xoxo anywayz.” Awkward.
Unlike you, nations can sometimes avoid going into default, like by raising taxes or printing money. But sometimes those just aren’t options. Think: Greece.
Sovereign default is a last resort for most countries, since it makes it harder for that country to borrow in the future, thanks to a tainted payback reputation. A country’s sovereign credit rating (like their FICO score) will tank.
Also unlike you, countries can get out of debt unscathed sometimes...if they’re not legally held responsible by any institutions. They’re an entire country, after all.
Given all of that, sovereign defaults are pretty rare. Which is why sovereign bonds are usually considered low-risk...even risk-free if they’re under stable currencies, like the U.S. dollar.
Still, they happen. Usually from major economic crises, which cause investors to demand more interest rates on government debt as it appears increasingly risky to hold. And when sovereign defaults do happen, people disagree about the best course of action. Take Greece, for instance. Some thought austerity was the answer, while others thought that, um...that was just about the dumbest thing they could do.
