Various Kinds of External Debt

External debt is debt owed by a country to foreign lenders. External debt is an important part of the economic picture of a nation for a few reasons, and failure to make loan repayments can cause serious economic upheaval. External debt has historically been problematic for developing countries and figured prominently in the Latin American debt crisis of the 1970s. Though developing nations have tended to have more trouble with external debt, the developing world, particularly the United States, does carry large external debt balances.

Types of External Debt

External debt includes almost every kind of money owed both publicly and privately within a nation’s borders to governments, businesses and private individuals in other nations. Money borrowed by one government from another country’s government, corporate stocks owned by foreign nationals and bills accrued by one country’s citizens through doing business with a foreign country all count as external debt. The only international foreign transactions excluded from external debt are financial derivative contracts and equity transactions.

External Debt versus GDP

To judge the impact of external debt, economists compare external debt to the Gross Domestic Product (GDP). GDP captures a nation’s production capabilities – in other words, it shows how many goods they can produce to generate the money to repay their debts. Countries with high external debts and low GDPs are at risk of defaulting on their external debt payments. Lapses on external debt payments can cause, among other things, devaluation of currency, which can lead to broader economic collapse within a country.

Dangerous Debt

Government external debt can be particularly problematic for a country. External debt accrued by the government is usually associated with deficit spending. That means the government was using foreign money to pay for domestic expenses. Government debt default can have more wide ranging implications for a nation than the default of a single corporation. Social services, employment and other government services can all take a hit if external debt payments overwhelm the public sector.

Tracking the Debt

Governments tend to track the external debts of other nations, but several international bodies also keep records, including the International Monetary Fund and World Bank. These groups also often get involved in managing external debts gone wrong, negotiating repayments and sometimes even offering low interest loans to struggling countries to repay their debts.

References

About the Author

Lily Welsh is a freelance writer from North Carolina, though she has spent much of her adult life living abroad. She is the About.com Guide to Music Careers, and her work appears frequently in other Web-based and print publications. Welsh has worked in the music industry for 15 years and counting and holds B.A.s in international studies and economics.