Why Do Countries Have External Debt?

Understanding the complexities of external debt, country borrowing, and private sector debt.

Why Do Countries Have External Debt?
Photo by Eyestetix Studio / Unsplash

It's a common misunderstanding that a country's external debt should balance to zero.

However, it's not as straightforward as that.

Let's dive into the complexities of external debt to understand why all countries can have external debt at the same time.

Borrowing and Lending

External debt doesn't mean all countries owe money.

Some countries, such as China, are major lenders to other countries.

Debt can come from the private sector through bonds and other financial instruments.

This widespread borrowing and lending contribute to the scenario where all countries have external debt simultaneously.

Inter-Country Borrowing

To add to the complexity, countries can borrow from one another, creating a web of debts that inflate the total owed.

For instance, Country A might borrow 1 trillion but also loan 500 billion to Country B, resulting in a total owing of 1.5 trillion despite the original debtor only being owed 1 trillion.

This complexity has been subject to confusion, with many struggling to make sense of it, as humorously highlighted in the video by the 'front fell off' guys.

While it may seem perplexing, the world of international finance and debt is a complex web that goes beyond simple debtor-creditor relationships.