Is Foreign National Debt Risk-Free?

Topics: United States dollar, Debt, Currency Pages: 2 (508 words) Published: June 28, 2011
Because a national government cannot go bankrupt, someone hold this opinion that it is safe to lend to a foreign government. As to me, I don’t agree that it’s definitely safe to lend to a foreign government. Compared with the other investment methods, lending to a national government in the country's own currency is often considered "risk free". However, risks can be more suffered when it comes to foreign national debt Firstly, , the market interest rate tends to be unstable and different for debts of different countries, which is a practical problem to both the debt in the country’s own currency and the foreign purchasers. Secondly, policies in the other countries can be unstable which can be anything but risk-free to the foreign purchasers. Examples of this phenomenon include Spain in the 16th and 17th centuries, which nullified its government debt seven times during a century, and revolutionary Russia of 1917 which refused to accept the responsibility for Imperial Russia's foreign debt. What’s more, some other political risks may be caused by the external threat. For example, all borrowings by the Confederate States of America were left unpaid after the American Civil War. Last but not least, the most risky element is the various change of foreign exchange rate. As far as I am concerned, the foreign exchange market is by far the largest and most liquid market in the world. It is a 24-hour market which means that exchange rates and market conditions can change at any time in response to developments that can take place at any time. Any changes in the target country’s currency or in the home country’s currency may influence the yields of the purchasers. For example, U.S. Treasury bonds denominated in U.S. dollars are often considered "risk free" in the U.S. This disregards the risk to foreign purchasers of depreciation in the dollar relative to the lender's currency. What’s more, lending to a national government in a currency other than its own does not give the...
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