Foreign debt is also referred to as external debt. Foreign debt is distinguished from other kinds of foreign investment capital inflow such as foreign ownership, because it carries with it the obligation to pay interest or to repay principal.

There are two ways of looking at debt. One is simply to add up all non-equity liabilities. This is gross foreign debt, the major component of which is the total amount of borrowings from non-residents by residents of Australia. Net foreign debt is equal to gross foreign debt less non-equity assets such as foreign reserves held by the Reserve Bank and lending by residents of Australia to non-residents.

As can be seen in the Appendix, Australia’s net foreign debt has grown dramatically from the beginning of the 1980’s, reaching a peak of $330 billion in 2001-02. This is very high, especially when considering

In future years Australia must pay interest on its foreign debt and returns on foreign equity, both of which constitute an outflow of funds on the net income category of the Current Account. However, because only a portion of profits are actually remitted overseas, the effect of the outflow of dividends from equity financing may constitute less of an income drain on the Current Account than the interest payments on foreign debt. This is why Australia tends to focus attention on net foreign debt rather than total foreign liabilities. In addition, when equity financing is undertaken in the form of direct investment, profits only need to be remitted if the venture is successful.

Despite this, there have been many financial crises in the past. Recent examples of this include the Third World debt crisis beginning in 1982 and the Mexican crisis of 1994/95. Each crisis is characterised by a currency crisis often leading to a banking crisis, and this is exemplified by The East Asian Crisis where numerous large companies collapsed whilst large amounts of money to foreign economies. For example, in January 1997 Hanbo Steel, a large Korean company, collapsed under US$6 billion in debts, therefore leaving a lot of money unpaid, weighing heavily on the bank(s) supporting the company.

Increasing borrowing costs is also another argument dealing with the accumulation of foreign debt in an economy. As Australia’s net external debt rises, particularly when we must borrow abroad to service the debt, lending countries become concerned about the country’s ability to repay the debt and start to charge a risk premium. Thus the costs of borrowing rise for everybody.

Some topics in this essay:
Account Surplus, Steel Korean, Current Account, Appendix Australia’s, Financial Account, Foreign Debt, Statistics ABS, Australia’s GDP, foreign debt, Third World, Asian Crisis, current account, net foreign debt, net foreign, debt servicing, service debt, debt servicing ratio, debt service, australian dollar, amount foreign, level foreign, equity financing, foreign debt economy, amount foreign currency, foreign debt debt,