What are sovereign risks?

Sovereign risks refer specifically to the risk that a government will default on its debt obligations. This can occur when a nation cannot meet its repayment commitments on government bonds or loans. Such risks are significant because they can have widespread implications for both domestic and global markets. A default can lead to a downgrade of the country's credit rating, increase borrowing costs, and adversely affect economic stability.

In the context of international finance, sovereign risk is crucial for investors who hold government bonds or engage in cross-border lending. When considering investments in a country, understanding the local government's financial health, economic policies, and political stability can provide insights into the likelihood of a default occurring.

The other options reflect risks associated with different financial areas but do not capture the essence of sovereign risk. Corporate debt risks pertain to businesses rather than governments, individual investor risks are personal investment-related concerns, and changes in private sector borrowing do not directly relate to government obligations. Thus, the focus on government default risk accurately defines sovereign risks in the financial context.