External Debt
Definition
External Debt is the portion of a country’s total debt that is owed to foreign creditors. It includes government, corporate, and financial‑sector obligations denominated in foreign currencies or owed to non‑residents.
Why It Matters
- Indicates vulnerability to currency fluctuations.
- High external debt can strain a country’s ability to repay if its currency weakens.
- Important for assessing sovereign risk and financial stability.
- Used by the IMF, World Bank, and investors to evaluate external sustainability.
Components
- Sovereign external bonds
- Corporate foreign‑currency debt
- Bank borrowings from foreign institutions
- Multilateral and bilateral loans
Example
If a country owes $500B to foreign creditors and its currency depreciates sharply, the real burden of that external debt increases — raising default risk.