External debt is a type of debt in which a person, bank, entity or institution provides a loan, which is granted to someone from abroad; that is, it is not part of the same territory, so the loan is generally made in foreign currency. The national government of each country is the one that is most indebted through external debt, although in a country the different entities that are in it, can also incur external debts in an independent way, although many times they are financially supported by the State.
What is external debt
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The external debt is all those debts that a certain country owns in relation to public finances to different banking institutions worldwide: we speak of the debts that a country accumulates with respect to foreign entities.
Most of the time, the entities or institutions that provide loans to countries, companies or others are international organizations such as IMF or International Monetary Fund, the aforementioned, World Bank, the Inter-American Bank for Reconstruction and Development or IBRD, the Bank Inter-American Development Bank (IDB), governments of other countries, private banks, etc.
The etymology of the word debt comes from the Latin debita and dehibere, which means "having, without having." On the other hand, the word exterior comes from the Latin exterior and exterius, which means "from more outside."
This can be of two types: external public debt, that is, that which is contracted by the State itself; or of a private type, contracted by the individuals of a nation.
Causes of external debt
On many occasions, it is equivalent to difficult periods faced by the debtor country due to different problems that cannot be solved due to the lack of resources on the part of the public sector, causing countries, especially third world countries such as Latin countries, to resort to obtaining loans or agreements by foreign territories or other entities such as the World Bank, in order to meet certain needs within their territory.
The debt with a country or foreign entity can be caused by several reasons:
- Some national emergency, such as some type of natural disaster, for which the State will require resources with which it can mitigate the situation and help those affected.
- The deficit in the national budget due to government mismanagement, which will produce the need to request foreign resources and be able to cover these shortcomings.
- Due to the need to make investments in the country that did not produce, they were successful, so they could not be canceled.
- The lack of awareness of the authorities about the consequences of what the acquisition of numerous debts implies.
- What is known as unworthy debt, was a concept that was known in 2004, which means contracting a debt aware of the negative consequences that this would entail for the nation, but acquiring it anyway.
- The corruption and misappropriation of funds of public debt for the convenience of private interests.
Consequences of external debt
Borrowing from international entities has negative consequences for a nation or for a private organization, naturally affecting the country's economic engine and society in general. These consequences can be:
- Public and private inflows decrease, as well as investment.
- Capital flight is experienced, at the same time that exports increase due to the collapse of prices.
- The country that owns the debt is increasingly moving away from a scenario of economic and sustainable development.
- Exports increase through the exploitation of national resources and national raw materials are devalued.
- Decrease in resources for areas of public interest such as education, the environment, economic growth and health, among others.
- Increase in unemployment rates, since many small and medium national companies could not compete with the large multinationals.
- Increase in taxes to cover other expenses and the increase in foreign debt inflation.
- The demarcation of social classes due to the vertiginous increase in poverty levels.
Examples of external debts
- The external debt of the United States, which at the beginning of 2020, exceeded 23 trillion dollars, which represents 98% of its GDP, whose origin is located in the crisis of 2008. Although its debt does not exceed its income annually, this country tops the list with the highest amount of foreign debt in the world.
- The external debt of the United Kingdom, which is close to 9 million dollars, exceeding its GDP by 16%.
- Mexico's external debt, according to World Bank figures, stood at 452.9 trillion dollars, a figure that represents double the debt it had a decade ago.
- The Latin American external debt crisis, which was the financial crisis of the 1980s when Latin American countries exceeded their debt by an amount greater than their income without being able to comply with what was due.
