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What is External Debt?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 29 October 2016
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External debt is the collective debt owed by a nation to foreign creditors. It includes debt taken on by citizens, businesses, and government agencies, with creditors like international organizations, foreign governments, foreign banks, and so forth. Many countries carry very high external debt, with the United States typically at the top of the list, but as long as they can service their debt successfully, it may not be regarded as a financial risk. Nations with weak economies, however, can have trouble paying for their external debt and this can become a problem.

Typically, external debt is in the form of foreign currency. All monies paid for interest, fees, and other costs associated with the debt are also in that foreign currency. For countries with a strong currency, this does not post a significant threat, as they will be able to successfully export goods and services to the country where the debt is located to earn money to repay the debt. This leads to a net outflow of cash, goods, and services to a foreign country, but if domestic companies also hold foreign debt, that outflow can be balanced by inflow from other countries.

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Some nations have a weak economy, often accompanied with falling currency values. This can cause external debt to become a serious problem, as they cannot repay it. It is not possible to provide goods and services in high enough volume to earn funds to repay the debt, and the unfavorable exchange rate makes conversion from one currency into another a losing proposition. These nations typically do not hold much debt of their own to balance outflows for debt servicing and can become impoverished as a result.

Rising external debt is a concern in some regions of the world. Some nations have such high rates of this type of debt that bankruptcy and debt negotiations have been necessary to address the issue, as they cannot repay the debt under the established terms. Large external debt for some nations is believed to have been a contributing factor to the economic crisis that began erupting in the early 2000s, with several European nations like Greece playing a prominent role in defaults on debt.

Governments track their own external debt closely and government agencies typically monitor the known debt of other nations. This information can become important when decisions are made about participating in lending, trade agreements, debt forgiveness programs, and other economic activities.

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anon290767
Post 4

Why is the UK's external debt so high?

NathanG
Post 3

@nony - Yes, I agree. The United States is in a difficult position, but not an impossible one. I believe that we are far from negotiating any form of external debt relief like Greece did.

In a worst case scenario, I believe that the International Monetary Fund and the World Bank can step in to provide some assistance. What really affects our ability to continue to service the debt is the strength of the U.S. economy.

As we experience economic recovery, more money will flow into the treasury and therefore more money will be available to service foreign debt. The legendary Warren Buffet himself said that he stands by our credit rating, and this man’s got a track record of making good investments. We will get out of this crisis; it will take time.

nony
Post 2

@miriam98 - Relax, the sky is not falling. I don’t see debt cancellation in the cards. We are still able to service our debt, and despite all the hoopla about the world switching to another reserve currency, I don’t believe that will happen anytime soon.

For these nations to undercut the dollar would only undermine them in the process; the United States uses those dollars to purchase many foreign imports. A falling dollar would make it difficult to purchase those goods.

Like it or not, we are all in this together; it’s a symbiotic relationship, and the only win-win proposition is for the United States to continue to be strong. We are still servicing our foreign debt, and will continue to do so, for many years to come.

miriam98
Post 1

I believe that the United States is undergoing a serious debt crisis, funded by years and years of borrowing from foreign governments to subsidize our operational budgets.

I believe that we are in a situation similar to that experienced by Greece, and that we too may be forced to be declare a moratorium on our debts. That act alone would be enough to rattle worldwide markets on a scale that is unfathomable, because the dollar is still the world’s major reserve currency.

I hope that this does not take place, but unfortunately I see a day of reckoning that is just around the corner. One of the prominent credit agencies has already downgraded the debt of the United States.

While our credit remains strong, there is a growing perception that our national deficit, in the trillions of dollars, is simply unsustainable.

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