Sovereign Debt Crisis has a long history which goes much beyond the developing countries. During the Great Depression of 1930, default in debts came from France and UK. In 1956, Argentina had to face debt repayment problems which led to the formation of Paris Club. With borrowing having increased significantly during mid 1970’s, Mexico in 1982 came up with measures to fight debt crisis. The decade 1980- 1990 was known as “lost decade”. In 1994 Mexico was hit by ‘Tequila Crisis’ which passed to Latin America and many other developing countries. Similar defaults also happened in 1997 in Russia followed by the biggest sovereign default in 2002 by Argentina when it defaulted $141billion (Dodd, 2002).
Currently America is going through the worst economic crisis of all times. Bankruptcy of major American companies like General Motors, Ford and Chrysler, financial institutions like JP Morgan, the sub prime crisis has all together resulted in the worst crisis of the American economy. There have been huge job cuts and consumer spending is at an all time low. Huge lending by the government to bail out the bankrupt companies and other economies has led to huge debt on the treasury. In this context fear of sovereign default and currency crisis is all pervasive.
National debt refers to the total liabilities that government has. For US it is the sum total of all the outstanding debts that the Federal Government owes. Federal deficit refers to the difference between the amount of money that the US government collects from the public called receipts in the form of taxes and other sources and the amount it actually spends referred to as outlays. Financial deficit has two parts, ‘On-budget’ and ‘Off-budget’.
The total debt can be regarded as the total of accumulated deficits and off-budget surpluses. The treasury needs to borrow money from the public in order to meet the on-budget