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