A government's major risk

Governments are also possible to fail to pay back their loans due to their lacks of financing ability. However, a government is likely to face incredible risk when it does not have an independent monetary system. The most classic example is the Eurozone economy. In the Eurozone, countries do not have their independent central banks, they have one united central bank. When they do not have their own independent central banks, they cannot lower the real value of their loans as they do not have influence over the inflation rate via their monetary policies so they cannot use monetary policies to lower their costs of borrowing. Such governemnts' default risk is very likely to be higher than those with independent central banks.

However, exogenous factors are very important sources of risk. Governments have limited control over these exogenous factors unless they have significant global influence. For example, the US is the largest economy and has very influential power over the global economy, when it experiences an economic crisis, other economies are very likely to be dragged into the crisis as well. However, many countries do not have such influence, their currencies are not the mainstream currencies used in global trading; therefore, their exports and imports largely depend on other economies' performance and the values of their currencies are also likely to be dependent of other large economies' currencies. When there is a strong correlation but weak influence, their economies become very fragile towards exogenous risks. In addition, the risk of black swan events can be exogenous and endogenous.

Overall, the government's major default risk comes from ineffective tools to generate economic growth when necessary and uncontrollable and unobserved events which damage the economy.