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.
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.
