Definition: A nation is a sovereign entity. Any risk arising on chances of a government failing to make debt repayments or not honouring a loan agreement is a sovereign risk.
Description: Such practices can be resorted to by a government in times of economic or political uncertainty or even to portray an assertive stance misusing its independence. A government can resort to such practices by easily altering any of its laws, thereby causing adverse losses to investors.
Example: Countries like Argentina and Mexico had defaulted on their loan payments in 1970s to a big extent after the oil shock.