Debt Stock Definition

Debt stock refers to the total value of the debt that a nation owes to all lenders. Debt stock is a separate category from debt service payments, which are the payments that a nation makes on its debt. These categories are necessary because the terms of a loan to a government may change, such as a wealthy country allowing a poorer country to defer interest payments on its debt.

Foreign Aid

Aid that reduces a nation's total debt stock may not stimulate the economy. For example, a poor nation may owe $100 billion to foreign lenders and have debt service payments of $5 billion per year. If the wealthy nation that holds the loan writes off $50 billion of the loan but still requires the poor nation to pay $5 billion a year for debt service, the poor nation does not have more cash available to spend.

Internal Debt Stock

Internal debt stock is the debt that the nation owes to lenders located within the country. Internal debt stock is not as much of a problem because it is usually denominated in the nation's own currency. The nation's central bank can create more money to pay off these internal loans. If some government agencies hold the debt of other government agencies, the government may be able to cancel the debt.

External Debt Stock

External debt stock is owed to foreign lenders, including banks and other nations. These loans are often denominated in foreign currencies. If the central bank creates more money to pay off the debt, this causes the exchange rate of its currency to drop, so it will still owe the same amount of foreign currency.

Interest Rate

Changing the interest rate on the debt does not affect the size of the current debt stock. If a nation owes $200 billion at 5 percent interest, and the foreign lender reduces the interest rate to 4 percent, the nation will still owe $200 billion. Reducing the interest rate on the debt reduces the growth rate of the debt stock, because the nation will need to borrow less money from foreign lenders to make debt service payments.

GDP Ratio

Debt stock is usually reported in comparison to the country's gross domestic product. A country that owes $200 billion with a GDP of $200 billion is more risky to invest in than a country that owes $300 billion but has a GDP of $600 billion. High debt stock discourages foreign private investors, but a foreign government may still be willing to loan money to the nation for political reasons, such as supporting a loyal ally.

References

About the Author

Eric Novinson has written articles on Daily Kos, his own blog and various other websites since 2006. He holds a Bachelor of Science in business administration from Humboldt State University.