What is foreign debt?

What is foreign debt?

Foreign Debt is also called International Debt or External debt. It is the amount of debt that is owed by one country to other countries or entities outside of the borrowing country’s borders.

A country may find it easy to raise capital for operations and projects by issuing lots of bonds and taking on lots of debt obligations. If this proves to be unsustainable, or if the sheer amount of debt has investors worried, it can have significant detrimental effects and send an economy spiraling out of control.

If a country defaults or looks like it might, banks and investors will divest their holdings in a country’s currency and send its value plummeting, resulting in hyperinflation. It is just so easy for a government to say “yes” to taking in more money, that it is hard to say “no” to issue more bonds. Companies are scrutinized for debt in a similar way, using calculations such as debt-to-equity ratio.

The US National Debt is now about $19 trillion, and it has caused the US to be downgraded for creditworthiness from an AAA rating to an AA rating. Consequently, many American companies that held significant amounts of Treasury bonds were downgraded as well. As of 2016, almost no American companies hold an AAA rating anymore, while there used to be a significant number of them.

Obviously, foreign debt can become a problem. Some would argue that because we have a trade deficit in which we are importing more than we are exporting, and because this has caused us to have fewer domestic taxpayers, our tax revenue has not been able to keep up with our international debt obligations, and the amount of our National Debt continues to grow.

Most, but not all, of our national debt is foreign debt. About $5 trillion of the $19 trillion debt is owed domestically. This debt service can be taxable to the recipient, which keeps some of the money within national borders. The debt interest and repayment obligations that go oversees cannot be taxed domestically.

What is the Size of our National Debt?
What is Subordinated Debt?