Commerce Foreign Debt Essay

1173 words - 5 pages

Foreign debt (which is also referred to as external debt) is, by simple definition, an amount of money that one country owes another. It means the amount borrowed from non residents by residents of Australia. Australia has the second highest level of foreign debt in the world, with the US coming out on top. Australia’s big foreign creditors are the US, the UK and Japan.Foreign debt can be measured as a percentage of Gross Domestic Product (GDP). It is used this way to show the magnitude of the debt in comparison to the level of output of the economy. It can also be a good reflection of the economy’s ability to repay the debt.Foreign debt in Australia has been rising steadily since 1981. It was equal to less than 15% of GDP. Now it is approximately 52% of GDP. It has risen by approximately an average 17.2% each year.Foreign debt can also be put in the forms of gross foreign debt and net foreign debt. The difference between the two is that while gross foreign debt calculates and includes ALL our international liabilities (debt), net foreign debt takes into account what the rest of the world our international assets (what the rest of the world owes us). Recently in December 2005 - February 2006, Australian net foreign debt has risen to $472.823 billion, growing 5 percent.During the same period of time (Dec’05 - Feb‘06), Australia’s account deficit (spending more money than it takes in) has increased to about $14.5 billion. These latest figures from the Reserve Bank of Australia show that foreign debt is proving to be a problem for the Australian economy. Foreign debt is ever increasing and this debt is a growth constraint for the Australian economy. There is the constant threat of international downgrading of our national credit rating, which is currently at Triple A credit rating, and also the depreciation of the Australian dollar.Foreign debt is not to be confused with national debt. National debt, also named the public sector debt, is entirely government borrowing from Australian residents and non-Australian residents. It is a calculating the debt owed by all levels of government and does not include the borrowings from the private sector e.g. banks and companies. Foreign debt also consists of more debt from the private sector than from the public sector. This is due to governments preferring to borrow locally, but Australians have a limit on how much it can lend to borrowers, therefore it ‘forces’ the private sector to borrow funds overseas.Why is foreign debt constantly on the rise? Foreign debt can be what is said as a ‘vicious cycle’. When countries borrow money from overseas, it is due to rising prices from importation of goods and services. Often the interest placed on the overseas debt surpasses the amount that is received from exports. In order to be able to cover the debt, what borrowing outlet do they turn to? Overseas funding…again. This places them deeper and deeper into debt and...

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