International debt or the ability of governments and corporations to raise money outside of their country is vital in maintaining economic and financial liquidity. The most recent example of the advantage of countries or governments raising money through International debt is that of Greece during the recent Greek debt crisis. Strapped for cash, the government’s last resort to paying interest on its external debt and also managing the day to day running of its business was borrowing money from other countries.
International debt and GDP
International debt or money owed by the government of one country to that of another can be in the form of bonds, treasury securities, as in the case of the U.S., or negative trade balance. Trade deficits mean an excessive borrowing nation is able to achieve a higher living standard and is able to provide domestic investment that in turn spurs future economic growth, facilitating repayment of debt. Fostering future economic prosperity is a positive outcome of International debt in many cases.
So when a country is facing budget deficits or there is paucity of money due to high debt to GDP ratio, a country can turn to international debt and raise much-needed money. Later as it emerges from the crisis, it can repay the interest and the principle amount in installments. In fact, money borrowed from other countries can be invested to spur the economy toward reviving GDP.
Developing countries and International Debt
In many countries, International debt is needed to secure development goals, especially by governments not able to access finance from other sources, or those who are charged high interest rates because of their low sovereign debt rating. Many emerging economies such as those in Africa may not be able to attract direct foreign investment. In order to continue investments in the economy, they can turn to bilateral debt or institutions like the IMF and the World Bank. Trade financing is another option that helps in trade development, a growth strategy of many developing countries.
International trade financing helps exporting countries, especially in reducing trade deficit by spurring exports. Rich exporting countries can facilitate trade finance guarantees to importing countries through export credit agencies.
Corporate and Individual advantages
International debt has advantages not just for governments but for corporations and individuals as well. Corporations can raise international debt in different currencies. The currency differential doesn't just diversify risk, it helps shop for lower interest rates in a limitless international market.
International debt has advantages for individuals as well. Diversify your investment portfolio beyond equities. Invest in international debt through bonds and make substantial profits. There are risks, too. Mitigate those risks by investing in different currency bonds. For instance, a Japanese yen bond could be bought by U.S. citizens and they could hedge dollar risks by investing in yen bonds and earn interest in yen. This way, you could also play off the risks of individual currency depreciation.
Sunita Kaul Zutshi started writing in 1988, covering business and political issues. She reported for CNBC, BBC, Dubai Television, the "Financial Express," "Times Of India," "Khaleej Times" and "The Daily Star." She has been a reporter, producer and anchor and has reported live from various countries across the globe. She holds a Master of Arts in English literature from Delhi University.