eli5: if two countries both own portions of each others debt, does that debt cancel out?
In: 397
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.
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