http://walters-teachingenglish.blogspot.

com

SOVEREIGN DEBT

Skill: Reading and Writing

Course: Business English
Target Level: Upper Advanced (CEFR C2)
Target Examinations: BULTAS; BEC HIGHER; ICFE, etc.

A. Checking words
1. Use a good dictionary and write the meaning of the words in the table

Word Meaning
debt
previdency
Gross Domestic Product
(GDP)
moratorium
International Monetary
Fund (IMF)
revenue
expenditure
budget
recession
budget deficit
default payment
rating
risk
tax
lender and borrower
subsidy
privatization
bureaucracy
infrastructure
B. Read the text and answer the questions below

THE TEXT
Sovereign debt is the amount of money that is owed by the government of a country. The 1
country is considered to be in default when it cannot pay back its debt on the expiry date. 2
The country can renegotiate its debt if it has the possibility of paying back the loan or it can 3
declare moratorium if it does not have this possibility. Governments generally borrow 4
money from multi-lateral Institutions such as the International Monetary Fund - IMF or from 5
private financial organizations to finance their development projects. The approval is always 6
tied to supervision of how the loan will be used. Although accepted under pressure, no 7
government is happy about this because of its autonomy. 8
9
Obtaining loans from a Multi-lateral Institution such as the IMF is not an easy task 10
nevertheless from the private financial organizations. The country in need must present a 11
detailed information on how the money should be used and also how the loan should be 12
paid back. The private financial institutions consider the rating of the country in order to 13
determine its level of risk. The higher the risk, the more the interest rate is charged on the 14
bond issued by the government. In some cases when the debt to Gross Domestic Product 15
(GDP) ratio is very high, the market may refuse to buy the bond. 16
17
A government borrows money when its revenue from tax is not enough to meet its 18
expenditures or for the purpose of development. Some of the normal expenditures of any 19
government include social security, public workers’ salaries, education, health, security and 20
defense. The development projects are construction of transportation systems, energy 21
generation and distribution systems, water and wastewater systems, agricultural 22
production, construction of schools and homes. These infrastructure projects are the main 23
justifications which governments present in order to obtain loans. 24
25
A thorough investigation of the loans usage will reveal the reasons why the borrowers are in 26
trouble. While in many countries, the administration of infrastructure projects is done 27
directly by government, this is privatized in others. The difference lies in more accountability 28
and less political interference. Political interference is always associated with government 29
administration of companies. Appointment of administrators does not always obey technical 30
criteria. Although privatization is not in itself a panacea, it is less bureautic and makes a well- 31
identified entity responsible for meeting the necessary deadlines. The biggest mistake a 32
government should make is using the loan to mitigate its deficit. Government deficit 33
normally arises from economic recession, high subsidy, high spending in social security, 34
especially, the previdency. 35
36
There is no secret. Reforms have to be carried out. Advances in science and technology 37
which result in improved life expectancy should be a strong argument for any government to 38
reform its previdency. Labor laws should be made flexible in order to accommodate the 39
necessary changes. Governments should also be honest about their data, increase their 40
productivity and reduce bureaucracy. Another area for verification is the government-owned 41
company. The parastatals that are not profitable should be restructured or even sold off in 42
order to reduce the deficit from them. Every government knows what should be done, but 43
does not implement them because of their political implications. 44
45
Although these changes make a government unpopular, their cost should be weighed 46
against the cost of not making them. 47
1. Countries do not like supervision from lenders because:
(a) they were refused the loan
(b) they do not like the lenders
(c ) they do not want foreign interference
(d) they prefer borrowers to lenders
2. In paragraph 2, the writer thinks that:
(a) getting a loan from a private bank is easier
(b) getting a loan from IMF is more difficult
(c ) getting a loan from a private bank is more difficult
(d) getting a loan from a private bank is less difficult
3. The document suggests that:
(a) reforms are not necessary
(b) Previdency be reformed
(c ) a country be denied a loan
(d) a country’s account be verified
4. The main message of paragraph 3 is:
(a) to show how governments obtain loans
(b) to give examples of a government expenditures
(c ) to say what should be reformed
(d) to say the consequences of sovereign debt
5. What do lenders demand before releasing the loan?
(a) high interest rate (b) rating (c ) reform
(d) monitoring the execution of the projects
6. According to paragraph 4, a government enters into debt as a result of:
(a) nominating less qualified professionals to administrate companies
(b) privatization (c ) supervision (d) reform
7. In order not to go bankrupt, a government should:
(a) reform its structure (b) privatize everything
(c ) get a loan (d) prepare a detailed plan
8. In line 8, the word this refers to:
(a) supervision (b) financial institutions (c ) government (d) borrowers
9. In line 11, the word nevertheless means:
(a) less difficult (b) easier (c ) more difficult (d) much more difficult
10. In line 31, the word panacea means:
(a) complete problem (b) incomplete problem
(c ) incomplete solution (d) complete solution
11. The objective of the document is:
(a) to say how governments obtain loans
(b) to say how governments could avoid being into debt
(c ) to show where governments get their loans
(d) tell governments what they should do
12. In one sentence, summarize each paragraph and send your answer to me for
correction.

C. Writing
1. Use the words in exercise A and write an essay (composition) about your
country.
2. Obtain the necessary information from your country’s Ministry of Economy,
Treasury Department, Ministry of Planning, National Statistical Department,
Ministry of Trade and Commerce, Central Bank. With these information:

- identify your country

- give the economic data of your country from the information of number 2
- analyze the economic data and say the situation of your country
- based on your analysis, propose what your country should do
250 – 300 words

Write the composition and send to me for correction.

Answer key
B: 1c 2c 3b 4b 5d 6a 7a 8a 9c 10d 11b