A Cross-Country Comparison of External Debt

External debt accrues as a result of borrowing by Australian residents from residents of other countries. It includes the borrowings of both the private and government sectors. Net external debt represents gross debt less lending by Australian residents to non-residents. Debt, however, is not the only form of external liability. Foreigners can also hold equity claims in the form of share portfolios, and ownership of subsidiaries or branches or real estate. Australians also have equity and property investments abroad. Adding Australia’s net equity liabilities to net external debt gives the overall net claims against residents – that is, net external liabilities, or the net international investment position. This indicates whether a country is a net supplier of funds (debt and equity) to the rest of the world, or a net user of funds from abroad. In analysing the figures, the absolute levels of the various measures of indebtedness are usually related to a measure of national income or production, typically GDP. The debate in Australia has focused largely on the level of net external debt, and to a lesser extent on the broader measure of liabilities, which also includes equity. Both forms of liabilities ultimately have to pay a return to the holder of the asset – either in interest or dividends. A distinction is often made, however, on the basis that debt is characterised by a contractual obligation to pay interest and principal and failure to pay then results in default and possible bankruptcy for the borrower concerned. In contrast, equity holders share in the earnings of the enterprise, with dividend payments dependent upon the enterprise having the capacity to pay.