External debt or foreign debt, is defined as the set of obligations that a country has (both the public and private sectors) with respect to other countries or institutions. It is therefore the total public debt (contracted by the State and its institutions) and private debt (contracted by companies and families) of a country that is in the hands of foreign creditors, whether they are individuals, financial institutions or governments.
In general, these loans are made, and therefore have to be repaid, in the creditor's currency, foreign currency. Countries usually decide to borrow abroad in order to:
- To face investments in large infrastructures such as roads, bridges, etc
- To meet the necessary expenses following a natural disaster.
However, sometimes countries borrow abroad in periods of crisis or to solve an unfavorable situation resulting from mismanagement of existing resources. This is a pernicious situation, since in the latter case the debt does not generate wealth and interest will have to be paid, which usually leads the country to an even worse situation.
External debt, like debt in general, can be classified as follows:
- Who incurs it: Public external debt or private external debt.
- Its currency: National currency or foreign currency.
- Interest rate: Fixed interest rate or variable interest rate
- Its term: Short-term external debt or long-term external debt.
- The instrument through which it is formalized: Bonds, Bills, etc
The higher the risk of non-payment of the debt, the higher the interest rate the debtor will have to pay.
There are many international organizations that lend to countries in need. Among them are the International Monetary Fund (IMF), the World Bank, the Inter-American Development Bank (IDB), the Inter-American Bank for Reconstruction and Development (IBRD).