A sovereign or state government can often borrow more cheaply than companies and individuals. There are two main reasons. The state, backed by police and the military, can demand people pay taxes so it can pay back its debts. A state can also print or create more money, to meet its bills, if more conventional and straightfoward methods fail.
Despite these powers sovereign states can and do sometimes renege directly on their debts, rather than doing it by inflation. This can happen if a state owes substantial sums to foreigners and finds its own currency slipping away, making the repayment of foreign debts too expensive. Even allowing for this, markets usually reckon sovereign debt is better quality than other debt, and give it a premium rating in many cases.
So called sovereign debt issued by Euro area countries is no longer truly sovereign debt. These countries no longer have the backstop ability to print the money to meet their obligations in the way the US and Uk are currently doing. It makes default more likely, as we have recently experienced in the case of Greece.
Whilst these states still have most of the normal powers to tax, the Euro area intervenes more and more in how they tax and the extent to which they tax. There is a greater danger in the Euro area of a state losing the consent of its electors to the taxation, as resentment builds up against the Union imposed economic policies on that particular country.
For these reasons I think markets should invent a new category of debt. Let us call them semi-sovereigns, or half sovereigns. They do not have the full range of sovereign powers. Their ratings should reflect this changed reality. This seems to have happened in the markets with debt from Ireland, Greece. Italy, Portugal and Spain, which sells at large discounts to most western truly sovereign debt.
It is time to recategorise Euro area government debt. It is moving closer to regional and local government debt than to sovereign debt. The task of evaluating it is made more complex by the rapidly changing rules governing public spending , taxation, money printing and bond purchase in the Euro area.