External debt refers to the amount of money a country owes to other countries or external banking organizations. International financial institutions lend to developing countries to improve infrastructure and economic activity. Sustainability is important for external debt, and countries with high GDP can sustain more debt. Countries unable to service their debt have extension and forgiveness options, but high foreign debt can lead to economic control by creditors.
External debt, also known as external debt, is a term used to classify the amount of money a country owes to other countries or external banking organizations such as the World Bank. There are many reasons why a country might choose to take on foreign debt, including infrastructure development or economic stimulus. As of 2009, the estimated foreign debt for all countries in the world combined hovered at around $56.9 trillion USD.
The idea of foreign debt is hardly new; since the rise of civilization, it was not uncommon to borrow money or resources from friendly territories. Wars were fought, cities were built and natural disasters were faced thanks to the concept of foreign debt. The United States has adopted the foreign borrowing policy since its inception; the Revolutionary War was financed largely by borrowing from nations friendly to the colonizer’s cause.
The near-global use of foreign borrowing has led to the establishment of international financial institutions, or IFIs. These are essentially banks subject to international law and managed by employees of member nations. Many of the better known IFIs were established after World War II when economic relief was needed to bandage the many countries that suffered the bleeding and wounds that were left in the wake of global warfare.
Since then, many IFIs have specialized in lending to developing or Third World countries that will help improve infrastructure and economic activity in hopes of benefiting the global economy. Some IFI detractors suggest that these institutions are rife with corruption and potential danger, claiming that international law is a fragile and extremely vague set of guidelines created by unelected officials. Many disagree with the idea that a democratic country with a clear set of laws can be subject to international laws that its citizens have not voted or elected officials to join.
A term that comes up frequently when considering external debt is sustainability. For external debt to be sustainable, a country must have a gross domestic product (GDP) high enough to pay and eventually repay the debt while continuing its own economic function. Therefore, a country with a high GDP or a large employed population may be able to sustain much more debt than a small or poor country. In the US, for example, 2009 debt was around $13.5 trillion, but it was only 98% of GDP. Zimbabwe, on the other hand, has a much smaller debt at just over $5.8 billion, but that amount totals 282.6% of GDP.
As it is generally in the interests of the global economy to stay afloat, countries that cannot service their external debt generally have a variety of extension and forgiveness options. Some richer countries will offer debt relief in exchange for trade deals or in exchange for putting economic resources into improvement programs such as education for women. The danger of high foreign debt is extreme: if one country owes a large majority of debt to another, the borrowing country may choose to pay off all debts as a way of claiming economic control, forever changing the ownership of an indebted nation to your creditors.
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