eli5: if two countries both own portions of each others debt, does that debt cancel out?
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Most national governments will not own another governments debt. Instead, it will be individual organizations who own it. That doesn’t cancel out.
It would be like if I had a debt to Visa and worked for Mastercard, and you had a debt to Mastercard and worked for Visa, those debts don’t somehow cancel out.
Not really because those debts serve different uses. Two countries could negotiate the debt away but it’s not immediate.
US Treasury bonds are viewed as “good as cash” which means a lot of governments will have at least a part of their currency reserves in the form of US government debt. And countries often owe the US government for various things. For example, the WWII lend lease debt from the UK to the US. They paid it off on a schedule and even though the UK government easily had the money to pay it off, they didn’t.
At the end of the day government debt is not a simple thing. All modern currencies like the USD and Euro are essentially a representation of a country’s debt to another and are not that different from for example China owning a bunch of US treasury bonds.
Countries’ debt isn’t typically owed to other countries, but to investors. Countries issue bonds they sell to investors with specific maturity dates and interest rates. Investors (could be individuals, but mostly institutional investors like retirement/pension funds, insurance companies, university endowments). Countries might buy other country’s bonds as a way to park foreign currency reserves, but it’s done so strategically and not something they’d necessarily want to have cancel — which would be difficult anyhow due to differences in maturity, interest rate, exchange rates and all.
Not automatically. Generally the way government debt works is with government bonds.
Country A will sell A-Bonds to raise money. Maybe Country B buys some. Country B now has a certificate saying they can redeem their A-bonds for A-money at a future date.
Independently, Country B will sell B-Bonds to raise money. Maybe Country A buys some. Country A now has a certificate saying they can redeem their B-Bonds for B-money at a future date.
The two cases may not be the same date. They may not be for the same amount of money. The exchange rate between A-money and B-money may float which complicates things. There’s no reason for the two countries to cancel out other’s debt.
If either country wanted to change what they owned or what they owed, there is an open market for bonds. They can sell the bonds that they own at any time. Because it’s an open market, it could be bought by anyone — often some random stranger who may not live in either country. A country could decide to buy back its own bonds. The only fixed thing is the maturity date on the bond. That’s the date that the bond is automatically converted to cash.
Yes and no.
In reality, most countries/central banks hold debt instruments that are issued by most other countries. These are called foreign reserves and are necessary for international trade and monetary policy.
There’s a calculation called a country’s net debt, which effectively cancels out assets and liabilities to a single positive or negative number. Some countries, like Norway, have a negative net debt.
That being said, countries aren’t like individuals, they issue tens of thousands of bonds (IOUs) which are auctioned off and traded in secondary markets. Whether the country issuing the debt holds more in foreign reserves doesn’t change the fact that they it will have to pay back the bond to whoever holds it.
No, because then no one’s earning any interest and we can’t keep imagining more money into the world. It’s simple economics.
“debt” is the common term but the real name is “bond”. They don’t cancel out because they are different agreements.
To keep it simple. I can issue a bond that says I will pay whoever hold this napkin in 2030 $1000. You buy that napkin from me for $950.
Next year you can issue a bond that you will pay whoever hold this (different) napkin in 2035 $1000 and sell it to me at $900.
How would they cancel out? Who would own the $50 different? How do you deal with the difference in years (2030 vs 2035). I might not even have your napkin anymore because I sold it to Iris who now reside in France.
Even if countries agree to a cancellation terms, there are millions of these bonds on the market and it requires significant manpower to track down, count, reconcile and calculate their values. The easier way is to just let them run their course.
How do countries actually pay each other? Like how is the money transferred?
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