We explain what a country's external debt is, its causes and consequences. Furthermore, the external debt of Latin American countries.
What is external debt?
External debt or external debt It is the total amount of money that a country owes to all foreign or international institutions that is, abroad. It is distinguished from the internal debtwhich is the money owed by the State to the citizens of its own country.
The key condition of external debt is that The debtor belongs to the local economy of the country, while the creditor is outside it. In this way, it covers two types of international debt:
- Public debt: that which corresponds to the State.
- Private debt: which corresponds to companies and private entities.
Regarding creditors, they can be private financial entities, such as foreign banks, or financial cooperation organizations such as the International Monetary Fund (IMF), among others.
The external debt It is usually expressed in foreign currency, generally in international hard currencies (such as US dollars or euros), and, depending on the case, may have different interest rates (fixed or variable), short or long term.
As with personal debts, The terms will depend largely on the margin of confidence inspired by the economy of the debtor country. A country prone to default (called in technical jargon default), that is, if you cannot pay the debt because you are bankrupt, you will receive worse credit conditions than someone who pays punctually or who has sufficient financial support to pay off their debts in an emergency.
Although the vast majority of countries in the world have some margin of external debt, the countries with the highest debt usually belong to the so-called “third world.” This is due, in part, to the fact that they have weaker economies, as a result of their historical conditions, which prevents them from accessing better debt conditions. Thus, they end up adding debts that become increasingly difficult to pay.
See also: Bonds
Causes of external debt
Among the reasons why a country acquires a foreign debt are:
- Tackling major infrastructure works (roads, trains, airports) or to the recovery and reconstruction of areas affected by major natural disasters (earthquakes, fires, hurricanes).
- Promote the development of new economic sectors such as industrialization or agricultural expansion.
- Compensate for the economic crisis (deficit, stagflation, depression) caused by mismanagement or unforeseeable events (such as a pandemic or global economic depression).
- Finance military campaigns in complicated international contexts (invasions, secessions).
- Carry out historic repairs for economic, social and cultural damage caused to other nations in the past.
Consequences of external debt
Among the possible consequences of a high and sustained external debt are:
- The decline in private investment and, therefore, the economic impoverishment of the country, since the bulk of the capital is dedicated to paying the debt.
- The reduction of state resources which translates into less social investment, little ability for governments to maneuver and, at the same time, increased tax pressure.
- Devaluation of the local currency because as the volume of economic activity decreases, there is less demand for money against international hard currencies.
- The rise of inflation as a consequence of the decrease in economic activity and, therefore, in the supply of products and services.
- Social and political instability derived from all the previous consequences.
However, it should be noted that high levels of international debt may also be due to a very active and resource-demanding economy despite the fact that it continues to be an economy dependent on foreign capital. Therefore, the external debt figure should not be taken alone as a clear indicator of wealth or poverty.
External debt of Latin American countries
The Latin American region is among those with the highest external debt on the planet, partly because its economies have traditionally been dependent on the purchase of raw materials by the European continent and the United States. The current debt (2021) of Latin American countries amounts to:
| Latin American country | External debt (in millions of US dollars) |
|---|---|
| Argentina | 393,900 mm US$ |
| Bolivia | 15,964 mm US$ |
| Brazil | 606,484 mm US$ |
| Chili | 114,960 mm US$ |
| Colombia | 171,993 mm US$ |
| Ecuador | 58,259 mm US$ |
| El Salvador | 20,171 mm US$ |
| Guatemala | 26,964 mm US$ |
| Haiti | 2,604 mm US$ |
| Honduras | 11,850 mm us$ |
| Mexico | 605,699 mm US$ |
| Nicaragua | 14,354 mm US$ |
| Panama | 37,166 mm US$ |
| Paraguay | 14,642 mm US$ |
| Peru | 82,137 mm US$ |
| Puerto Rico | 34mm US$ |
| Dominican Republic | 43,711 mm US$ |
| Uruguay | 32,603 mm US$ |
| Venezuela | 162,000 mm us$ |
Continue with: Financing
References
- “External debt” in Wikipedia.
- “External debt-foreign debt” in Expansión.com.
- “Accumulated external debt, total (DOD, current US$)” in the World Bank.
- “What is and what is not external debt?” in Voices in the Phoenix of the Faculty of Economic Sciences of the University of Buenos Aires (UBA).
- “What is External Debt?” in The Economic Times.
