What is external debt?

External debt is the amount of money that a country owes to creditors of other countries, be they companies, banks or institutions. It is made up of public debt and private debt. The first refers to the debts contracted by the State and institutions, while the private one is to be assumed by companies and households.

Among the main creditors Abroad there are financial entities, governments of other countries or international organizations with financing capacity such as the International Monetary Fund.

External debt has always caused enough problems for many economies. In large part because the state that owes a lot of money will get interest spending to skyrocket, thus generating a suffocation of the economy. In addition, with the over-indebtedness, the countries will find the tap of the p├ęstamos outside, as no one will dare to lend them money.

Why is there external debt?

There are several reasons that can explain the foreign debt of a territory:

  • The need to have funds to carry out investments in infrastructure. It is common for countries to request money for the construction of bridges, tunnels, roads or railways to improve the well-being of their citizens.
  • For the reconstruction of a territory after suffering a natural catastrophe such as an earthquake, fire or hurricane.
  • Poor management of public and private organizations, which have spent their resources on unprofitable projects.

External indebtedness will have a positive effect when it serves to guarantee greater well-being and development. However, when it is due to mismanagement, the effects will be disastrous, since in addition to the debt incurred, they will have to face interest. In the case of some developing countries, their capacity for progress is hampered by the significant amount of money they allocate from the budget to pay interest on the public debt, which causes some organizations to demand the cancellation of it. .

Leave a Comment