The Role of Sovereign Debt in International Financial Stability

Abstract

This study investigates the pivotal role of sovereign debt in shaping international financial stability, employing a mixed-method approach that integrates quantitative econometric analysis with qualitative case studies. Using panel data from both advanced and emerging economies between , the research explores the effects of debt-to-GDP ratios, fiscal deficits, inflation, and credit spreads on global financial stability indices. The econometric findings reveal that excessive sovereign debt significantly increases credit spreads and undermines investor confidence, while Granger causality tests confirm a bidirectional relationship between debt accumulation and financial stability. Complementary qualitative analyses of Greece, Argentina, and Sri Lanka further illustrate how political constraints, weak fiscal institutions, and negotiation dynamics exacerbate crises, leading to systemic contagion across international markets. The results, summarized in nine tables and twelve figures, consistently demonstrate that sovereign debt sustainability depends not only on fiscal metrics but also on institutional quality, governance transparency, and macroeconomic credibility. Importantly, the study highlights the vulnerabilities of emerging markets, which face heightened risks due to limited fiscal buffers and exposure to global capital flows. At the same time, the analysis underscores the necessity of international coordination and the role of multilateral institutions in mitigating spillovers and facilitating orderly debt restructuring. Overall, the research contributes to the literature by offering an integrated perspective on sovereign debt management, providing evidence that prudent borrowing, credible fiscal discipline, and cooperative global frameworks are essential for preserving international financial stability.