Foreign debt can also be defined as the external debt and it is categorized as a debt or the part of the total debt that is hold for the foreign investors or foreign buyers. The foreign buyers are the buyers that don’t belong to the debtor country and are non-residents of that country.
The working of the Foreign Debt
In order to qualify for a foreign debt one thing must be sure that you are not the resident of that particular country. In addition to that the debt must be issued from the resident of the country to the non-resident. In this case the residence is not determined by the place of birth or by means of nationality. In this case the resident means the place where the borrower has planted his center of interest or the place where he has rooted his business.
A number of entities can act as the debtor of the foreign debt. For example sovereign nations, business entities and individuals can be act as debtor of the foreign debt. The debt can be in the form of money owed to private banks, outside governments or global financial institutions like the World Bank or International Monetary Fund (IMF).
Foreign debt is placed within four broad categories:
- Private non-guaranteed debt
- Public and publicly guaranteed debt
- Central bank deposits
- Loans due to the World Bank and IMF
Why Foreign Debt Important
Foreign Debt can be used as an instrument to find about the financial stability of the country. Investors often use this parameter to determine whether a country is suitable for future investment or not. The analysis of the investors includes consideration of the fiscal and the monetary policy of the country along with availability of the foreign debt.
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