The International Monetary Fund (IMF) defines external debt as the outstanding amount of those actual current, and not contingent, liabilities that require payment(s) of interest and/or principal by the debtor at some point(s) in the future and that are owed to nonresidents by residents of an economy. The debt includes both principal and interest payments due. To qualify as "external" debt, the payments must be owed by a resident of a country to a non-resident of the country (specifically, where they are located, not their nationality).
For developing countries, debt incurred by governments can often exceed those governments' ability to pay (based on tax revenues and on the nation's gross domestic product). Debt cancellation for underdeveloped countries is a topic that is hotly debated. Government funds spent on poverty reduction, job creation, infrastructure improvement, education and the like foster longer-term growth for a country, possibly leading to lower levels of borrowing in the future. However, the burden of loan repayments often makes these beneficial expenditures impossible. In addition, sometimes the debts were incurred by regimes that are no longer in power (and were sometimes corrupt or incompetent), but the burden to pay down the loan falls to a subsequent administration. The loans are sometimes restructured, allowing longer time-periods for repayment; many believe that the debts should be canceled outright.
What was once an issue for poor countries – debt restructuring – entered the discussion in the spring of 2010 about the debt of developed economies: Greece, most notably, but also Italy, Portugal, Ireland and Spain. Moreover, the risk to the financial markets of a sovereign debt restructuring are considerable, point out some analysts, leading to a drop in confidence for other stressed sovereigns, especially in Europe.
The European Sovereign Debt Crisis has clearly delineated not only the importance of actively managing external debt, but also the increasing interconnectedness of global economies.
Some analysts point to the potential risk of having a high level of government debt in the hands of foreign creditors. For example, from the 1960s onwards, the United States economy was the investment of choice for the rest of the world. According to the Federal Reserve Bank of New York, holdings of US treasury debt attributed to foreigners grew steadily through the 1970s and 1980s and then increased more rapidly through the 1990s, with the biggest shares being held by the United Kingdom and Japan. In June of 1997 Japanese Prime Minister Ryutaro Hashimoto suggested that Japan might find it necessary to sell some of its treasury holdings. The next day, the Dow Jones industrial average fell by 192 points, its largest single-day decline in the prior 10-year period. While Hashimoto later clarified his remarks, stabilizing markets, it pointed out the potential vulnerability of a country whose financial markets can be impinged upon by another country's investment decisions. By mid-2008, more than 60% of US treasuries were foreign owned.  Sources |
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