🌍 EXTERNAL DEBT SUSTAINABILITY — WHEN BORROWING BECOMES A CURRENCY THREAT
Other

🌍 EXTERNAL DEBT SUSTAINABILITY — WHEN BORROWING BECOMES A CURRENCY THREAT

20 December 2025, 14:55
Issam Kassas
Issam Kassas
0
41


━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━
🌍 EXTERNAL DEBT SUSTAINABILITY — WHEN BORROWING BECOMES A CURRENCY THREAT
━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━

💡 THE CORE IDEA

A country can grow with debt.
But when external debt grows faster than its ability to repay, the currency becomes fragile.
This is where long-term currency crises begin.

━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━
📊 WHAT IS EXTERNAL DEBT?
━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━

External debt is money a country owes to foreign lenders, usually in foreign currency.

It includes:

  • Government bonds held by foreigners

  • Foreign bank loans

  • Corporate foreign debt

  • IMF and international loans

Key problem:
Debt must be repaid in foreign currency, not the local one.

━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━
⚠️ WHY EXTERNAL DEBT IS DANGEROUS FOR CURRENCIES
━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━

1️⃣ Currency Mismatch Risk
If the local currency weakens, debt becomes more expensive to repay.

2️⃣ Capital Flight Risk
Foreign lenders can pull money fast → currency collapses.

3️⃣ Rate Shock Risk
Global rate hikes raise debt servicing costs instantly.

━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━
📉 WHEN EXTERNAL DEBT BECOMES UNSUSTAINABLE
━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━

Warning signs:

  • Debt rising faster than exports

  • Debt denominated mostly in USD or EUR

  • Falling FX reserves

  • Rising bond yields

  • Credit rating downgrades

This combination almost always ends with currency devaluation.

━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━
📈 REAL-WORLD EXAMPLES
━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━

🇹🇷 Turkey

  • High USD-denominated debt

  • Weak reserves

  • Persistent current account deficits
    → TRY collapses repeatedly

🇦🇷 Argentina

  • Heavy foreign borrowing

  • Low export income
    → Repeated currency crises

🇰🇷 South Korea (contrast)

  • High external debt

  • Strong exports + large reserves
    → Currency resilience

━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━
⚙️ PRO TIP — WATCH THESE RATIOS
━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━

  • External Debt ÷ Exports

  • External Debt ÷ FX Reserves

  • Short-Term Debt ÷ Reserves

Healthy zone:

  • Short-term debt covered by reserves
    Danger zone:

  • Short-term debt > reserves

━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━
🚀 TAKEAWAY
━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━

External debt doesn’t kill currencies overnight.
It kills them when confidence breaks.

Countries that borrow in foreign currency must earn foreign currency.
If exports slow or capital flees, the exchange rate pays the price.

In forex, external debt is the quiet risk that turns into sudden collapse.

━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━
📢 JOIN MY MQL5 CHANNEL FOR MORE FOREX FUNDAMENTALS AND REAL-WORLD TRADING INSIGHTS:
👉 https://www.mql5.com/en/channels/issam_kassas