External debt is a word that derives from a Latin word and is made up of two terms that in themselves have a particular meaning. These are debt and external.
The concept of debt refers to the obligation that a subject has to pay, reimburse or satisfy something to another. Typically, the concept is related to money. To contract a debt there must be an object that makes the transaction between both individuals necessary; it can be something real or abstract (a house or a favor).
External is an adjective that allows us to mention what is manifested from a place to the outside; when this last concept is opposed to that of internal. The exterior of a country, is all territory that is outside the limits of the national.
However. The notion of external debt is related to the debts that a country has with foreign entities, including both public debt (contracted by the State) and private debt (contracted by individuals). See Abbreviation Finder for acronyms related to external debt.
It is common for external debt to be held with supranational organizations such as the World Bank or the International Monetary Fund. If a country experiences problems in paying its debt (that is, in repaying the money together with the agreed interest), this situation has repercussions on its economic development.
A nation decides to incur foreign debt when it allows it to conserve its own resources or receive foreign resources to enhance its development. Frequently, however, the weight of the debt with its interest ends up affecting the country, which may have certain difficulties in making its payments.
Sometimes, even, the State requests money for a certain purpose and ends up allocating it to another. In this way, it contracts external debt and does not meet its objectives, compromising its future.
In some cases, the foreign debt becomes really unpayable for the country and the creditors end up forgiving it or, at least, cutting interest. We must not forget that the money that the State allocates to pay the debt and its interest supposes resources that are removed from other areas of its budget (such as health or education).
The external debt crisis
There is a period in history that is known as the debt crisis and that has been one of the main causes of the economic disaster that we are experiencing at this time.
The origin of this crisis dates back to 1973. That year the value of oil multiplied four times and the producing countries began to earn large sums of money. Then, the private banks went to these countries in search of loans since the interests there were very low.
In 1979, however, interest rates rose and the countries that had acquired these loans had to go to other States in search of more credits that would help them pay those already assumed. In this way, a long chain of indebtedness was developed that led to the debt crisis that took place in 1982. At this time, all types of exports other than oil were despised; The countries most affected by these changes in the world economy were those of the Third World (which invested more money in repaying the interest on that debt than in their own development).
The consequences of this economic disaster were that the countries that had become indebted did not have the capacity for internal savings, one of the main economic needs of a territory to bet on its development.
To this day, the countries that were indebted for more than forty years are still trying to pay or request that their debt be forgiven, in order to be able to bet on the impulse of the national economy. Unfortunately, the economic hierarchies that lead the world lead us to believe that there will continue to be a few who are enriched and many, many who have to continue begging or juggling to pay the external debt; of course, at the expense of citizens’ money. But that is what the capitalist system is all about, a version of Darwinian theory brought to the realm of economics.