What is meant by 'sovereign debt crisis'?

A 'sovereign debt crisis' refers to a situation in which a country is unable to meet its debt obligations, often due to an inability to pay back loans or bond issuances. When a government borrows money, it creates a commitment to repay that debt under the agreed terms. If the country's economic situation deteriorates—due to factors such as recession, a decline in tax revenue, or mismanagement of public funds—it may find itself in a position where it cannot make the required payments. This can lead to defaults on its loans, which can have severe consequences for its economy and can significantly impact the financial stability of the country as well as its relationships with international investors and other countries.

This definition clearly distinguishes a sovereign debt crisis from other financial issues. For instance, the difficulties in collecting taxes would not directly constitute a sovereign debt crisis, as such issues can be resolved through policy changes or improved enforcement without affecting a country's debt obligations. Similarly, controversies over public spending or economic prosperity do not inherently pertain to the country's ability to repay its debts. Therefore, the essence of a sovereign debt crisis fundamentally relates to the inability of a country to fulfill its public debt responsibilities.