External Debt

Abstract

The term ‘external debt’ refers to financial obligations incurred by individuals or, more commonly, institutions resident in one country vis-à-vis those resident in another. In other words, the obligations cross the borders of sovereign states. Usually different nationalities or citizenships are involved, as well as different residencies, but this is not strictly necessary. For instance, a US corporation in the United States may borrow from a US bank branch on London, which in turn funds the loan by taking deposits from American residents of the United States. The involvement of a financial intermediary in London means that this chain of transactions among American nationals is governed in part by English law and regulations rather than, or as well as, US law (and of course the laws may conflict). In fact, legal or regulatory differences are likely to be the reason why such all-American transactions move ‘off-shore’ in the first place. For example, reserve or liquidity requirements applying to US banks in London may be less severe than those applying in New York, thus enabling the London branch to offer more attractive terms than its New York counterpart to depositors and borrowers alike.