Sovereign Debt Stress

The standard measure — debt/GDP — is the wrong denominator. A government pays debt from revenue, not from GDP. A country with 100% debt/GDP but 15% tax collection has a debt/revenue ratio of 667% — a crisis level. The correct diagnostic starts with revenue: what fraction of government income goes to debt service, and how fast is that fraction growing? a-00082, a-00088

Critical Insight: Local vs. Foreign Currency

The single most important factor in any sovereign risk assessment: are debts in the country’s own currency? a-00088

• Local currency: CB can monetize → manageable
• Foreign currency: CB cannot help → must service or restructure

Warning Signals Hierarchy (Severity Order)

1. Debt/revenue ratio rising year-over-year
2. Debt service consuming >80% of revenue
3. Foreign holders reducing positions
4. Yield curve inversion (funding stress)
5. Net selling of sovereign debt ← this is the red flag a-00058, a-00089
6. CB net worth going negative a-00096
7. Capital flight + domestic savers buying inflation hedges a-00094

Inference

Debt/revenue and service ratios are slow-moving structural measures — useful for 3–5 year positioning. Net selling of sovereign debt by foreigners is the fast signal: when it tips from reduced buying to active selling, the funding crisis is imminent, not hypothetical. a-00058, a-00089

The r vs. g Sustainability Equation

When the interest rate on debt (r) exceeds nominal growth (g), debt/income ratios rise automatically without any new borrowing. a-00072, a-00073 Once r > g persists, the nine-stage crisis sequence becomes nearly deterministic: each stage removes escape routes until only monetization or restructuring remains.

CB Balance Sheet Risk

Central bank balance sheets introduce a secondary fragility that most analysts ignore. When a CB buys sovereign debt at low yields and yields subsequently rise, the CB marks losses. A CB with negative net worth is not technically insolvent — it can always print — but it loses political credibility and its anti-inflation mandate weakens. a-00096 The Fed entered this condition in 2022. It constrains how aggressively the CB can fight the next inflation shock.