• The causes of foreign, or external, debt are rather simple. Consider the idea of foreign borrowing as going beyond the confines of the financial and productive abilities of a single country. As economies finance imports, they must borrow--but this is only the tip of the iceberg.
  
  

Borrowing

• The simplest cause for foreign debt is the necessity of borrowing to finance imports. Borrowing is not necessary if a state's exports equal or exceed imports, but for countries like the United States that import far more than they produce or export, foreign debt becomes a problem. Another term for this is the "trade deficit," the difference between the borrowing necessary to finance imports and the foreign cash earned through exports.
  
  

Economic Problems

• Economic events or shocks can be a major cause for foreign debt. Say, for example, that the central bank of a country raises interest rates. First, the interest on any external debt has just gone up, and second, there is now less money in circulation, which leads to the rise of the value of the local currency. Once this is done, exports might drop since exports are now more expensive. As a result, the country must borrow to cover the now-depressed state of exports relative to imports. The economy now goes into debt.
  
  

Commodity Prices

• Events such as bad harvests, warfare or oil price shocks can place an economy in a vulnerable position. If the costs of transportation double, or if the state is financing a greater percentage of military products, the state must then borrow to cover the difference. If food becomes more expensive, the state may be forced to borrow to import cheaper food, or even to subsidize the price of now more expensive food. All of this can force a state to borrow and hence become externally indebted.
  
  

Production

• Foreign borrowing to jump-start an economy is a very important means of "seeding" the national economy. If this debt goes into productive enterprises, then the debt can easily be repaid, and the credit worthiness of the state becomes excellent. This was the case in South Korea and Taiwan. Debt was a good thing because it went into highly productive areas. Debt led to a trade surplus as the debt was repaid with interest. But if this money is plowed into non-productive enterprises, or poorly-managed enterprises that go bust, debt is incurred. This has been a recurring problem in Latin America and Africa for many years, where loan cash has been skimmed to line the pockets of civilian and military elites.
  
  

Vulnerability

• States such as Israel or Syria, both highly vulnerable to attacks from each other, go into debt for the sake of their security. In fact, Israel's debt to the United States and Syria's debt to Russia are so large and go so far back that they are virtually unable to be repaid. Most of this debt never went into economic production, but instead to arming the nations. In both cases, the extreme levels of debt can be maintained only due to the patronage of a larger power.