What is sovereign risk?

Sovereign risk refers to the risk that a government might default on its debt obligations or otherwise fail to meet its financial commitments. This type of risk can arise from political instability, economic downturns, or changes in government policies that affect the ability or willingness to repay foreign or domestic debts. Investors, banks, and financial institutions assess sovereign risk when dealing with bonds, loans, or other investments tied to a country's government. Managing sovereign risk is critical for international lenders and investors seeking to minimize potential losses.