The Causes and Consequences of Sovereign Debt
Hany H. Makhlouf

Abstract
Sovereign debt is the focus of an intense interest and concern in many countries and international financial institutions, not only because of its impact on the economies of both the lending and borrowing countries, but also due to its impact on the growingly integrated and inter-connected world economy. Measured as a percentage of the gross domestic product (GDP), sovereign debt has risen in many countries in recent years to levels in excess of 100 and even 200 percent of their GDPs; thus, affecting their economic growth and stability, and bringing some countries to economic stagnation and even to the border lines of economic collapse. Although high levels of such debt have traditionally been associated with wars and making poor public policy choices, sovereign debt has also risen and fallen with the business cycles and government financing and/or subsidizing of socially or politically desirable, but growingly unaffordable, programs whose costs usually accelerate with inflation and growing populations. Among the questions to be examined in this paper are: How do nations manage their debt portfolios? At what level of debt should a government realize that its debt obligations have escalated to unmanageable and dangerous levels? How do governments avoid or deal with the unintended negative consequences of frequently recommended solutions to sovereign debt problems? And are there universallyrecognized and accepted mechanisms, processes, and procedures to solve sovereign debt problems?

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