What are the causes of a sovereign debt crisis? How can countries get out of a sovereign debt crisis?
There are different causes. A sovereign default means that a government cannot pay a debt it owes.
- It could be that the government is facing reduced income, e.g. through a local or global depression. So the cause could be a banking crisis on some other part of the globe.
- It could be that the government is facing increasing mandatory (non-discretionary) spending, e.g. through a rise in interest rates or through higher-than-expected retirement payments. Again the reasons for this could be global or local.
- It could be that the government refused to do the maths.
Some government debt is a good thing for the financial market, and there are some situations where deficit spending is appropriate. Too much of it is a bad thing. Exactly where the border is only becomes clear in hindsight.
Many observers believe that German debt/spending measures during the 2008 banking crisis were a good thing, cushioning the impact of the crisis, and that German austerity measures since 2010 were also a good thing, to restore the financial "breathing space" against future need.