Are there any negative consequences for a country having no debt?
USA never confiscated Nazi Germany's gold despite being at war

Why would a country ever allow another country to be deeply in debt to the first one? Why not just stop exports at the tiniest inconsistency?

I would not lend $100 to someone on the street in exchange for the promise that he will find me and give them back to me! Furthermore I would not lend those hundred bucks to a friend if he owes me and other people in the friend circle lots of money.

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    There are no guarantees, but countries are motivated to pay it back because, if they don't, interest rates will go up and countries will be less inclined to lend in the future.
    – Publius
    Commented Aug 31, 2013 at 7:18
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    When I owe you $1000, it's my problem. When I owe you $1,000,000, it's your problem.
    – user4012
    Commented Sep 3, 2013 at 2:08

6 Answers 6


That depends on the type of agreement the two parties have with each other (and probably even who those are).

The short answer is: States can be forced to pay back their debt.
The legal framework for this is the Convention on the Recognition and Enforcement of Foreign Arbitral Awards from 1958. How this will actually work is complicated.
Firstly there are several places where one can sue the debtor nation - either a bank in the state where the debts have been issued (Which often is NOT in the debtor state - if the debt is denominated in $ it often is the US of A) or an international arbitration court (e.g ICC International Court of Arbitration**).

An example for the first one is Argentine vs. NML Capital. The debt has been issued in the Southern District of New York and thus that is where everything about the debt was decided.
This year it was decided that Argentine has to pay - currently it hasn't.

The other way would be via a case at one of the many international arbitration courts. That firstly means that both the host and the country of the suing company/state need to be in some treaty which actually allows for arbitration (E.g. Germany and Greece do have an bilateral treaty but it does not have such clauses).
If they do the debt-holding company/state needs to submit its case. The way the "court" proceeding will go depends on the court.
For example the ICSID has 3 arbitrators - one assigned by the claimant, one by the respondent and one by both (or if they cannot decide on one by the ICSID itself). Those three people then get to together and work it out. There's a list of finished cases where the award gives you the complete information about that trial. (Don't expect any other ISDS to be so transparent - the ICC doesn't even give out the names of the companies involved if not both opt-in to do so)

But after the award there is an even bigger problem: How to actually FORCE the country to pay its debt?
Firstly the assets of the debtor nation can be seized. Those are e.g. ships and planes that are for some reason in another country. There are a few a little more complex ways:
A extremely successful way is via the payment system. ALL US$ payments go over FedWire, all € go over TARGET2 - but there are also smaller clearing systems.
Because of Elliot vs Peru Euroclear was forced to withhold payments to Peru's creditors before Elliot Singer's debt was payed of. Something similar is happening for Elliot vs. Argentine with the NY Bank of Mellon. Argentine payed some of it's creditors $539 Million but this could not be actually given to them as Mellon would have violated Judge Griesa's order.

Theoretically some central banks are so independent from their countries that they enjoy little legal protection - Luecadia (from Luecadia vs. Nicargua) tried to get their money this way but Nicargua just moved it to Switzerland, while Cardinal vs. Jemen was settled out of court.

** There is a list of awards which is almost useless because surely not all companies are called the claimant. However in UNIDROIT PRINCIPLES and STATE CONTRACT there are a few cases where international debt between corporations and states is decided upon

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    The Argentina case is a very unusual one, rooted in Argentina's earlier difficulties (which led it to accept rather unusual conditions in the first place) and many states objected to the approach taken by US courts in this matter. Neither the 1958 convention nor the International Court of Arbitration are specifically intended to deal sovereign debt or automatically apply to it. Obviously hedge funds will try to get everything they can from the US legal system but all this hardly amounts to a framework to force states to pay their debt in general.
    – Relaxed
    Commented Nov 28, 2014 at 23:04
  • Incidentally, arbitration has to be accepted by both parties, which is exactly the opposite of what happened with Elliott and Argentina. Argentina strenuously denied that the NY judge was even competent to hear the case but it was hit by a court decision, not an arbitral decision.
    – Relaxed
    Commented Nov 28, 2014 at 23:10
  • @Relaxed yes Argentine is unusual - however it is an example where people are trying to get back international debt owed to them. I think I've made a distinction between courts and arbitration courts - feel free to edit to emphasis that further. I actually wasn't sure whether only debt issued over Government bond is in the scope of this question so I just decided to add arbitration to my answer - for the layman that is some form of debt and proper legal advise is beyond my capabilities.
    – user45891
    Commented Nov 28, 2014 at 23:14
  • @Relaxed: Yeah, most of the time in the 20th century it didn't work like this, although there is a recent trend to try to make it happen politics.stackexchange.com/questions/78333/… Commented May 2, 2023 at 16:16

Intuitively, the debtor seems to be the weaker party and to an extent it is but there is much more to debt (sovereign or not) than that. Obviously, creditors also profit from lending. Interestingly, countries sometimes actually borrow money at negative interest rates (taking inflation into account), which underlies how desperate some private actors are to lend money to them in turbulent times.

Also, it's tempting to see a trade surplus as a sign and source of power but it can actually be the opposite, the result from a weak interior demand and an aging population (as in the case of Germany). By an accounting identity, trade surplus is necessarily equal to net capital outflow. Since they do not consume or invest so much at home, Germans sorely need an outlet for all their savings (not necessarily sovereign debt but foreign debt in general) and profit from bubbles elsewhere (say US subprime lending or real estate in Spain before the crisis).

They can't easily run from that without suffering severe consequences, both parties are caught in this game and the build-up of debt is just as beneficial to the creditors (and encouraged by them) as it is to the debtors.

Incidentally, note that sovereign debt is being paid back constantly. Sovereign debt is not like a credit card, it's issued in the form of securities (bonds) with a fixed term between a few weeks and thirty years. The details vary somewhat but when a bond reaches maturity, it is paid back entirely.

Outside of crisis situations, many countries can simply roll-over on their debt, offering new ten-year bonds (or whatever) to pay back the ones that expire, effectively “renting” money indefinitely. They can do that because even though they borrow large sums of money, they also have huge resources and are expected to maintain their ability to pay for a long time in the future. But states do pay back their debt, all the time.

So lowering the total debt (in relative or in nominal terms) and paying back are mostly separate things. Individual lenders are not buying a vague promise that debt would go down some time in the future, they are buying a debt instrument with specific properties and predefined payment dates that most states honor most of the time.


There's no guarantees, but countries are motivated to pay it back because, if they don't, interest rates on their next bonds will be much higher and they will have trouble to finance their debt, which will cause opportunity costs and shrink their GDP in the long run. However, countries tend to use inflation as a way to pay back their debt, when the debt is denominated in their own currency, when their debt go up to an unsustainable level.


If a bank loans an individual money, say to buy a car, the terms are clear and legally enforceable - so much money per month over so many months, otherwise we repossess the car. The bank has legal recourse, meaning that they can pursue civil and perhaps criminal legal enforcement of their claims. Loans between sovereign states are often worded this way, but they don’t work that way.

Naive lenders will put a loan to a sovereign government on the books just like a business down the street: principal outstanding, total interest due, etc. This instrument is valued via a combination of factors, among them payment history, current global interest rates, global demand for credit, political initiatives within the country, and the vague idea of ‘global prosperity and security’. A loan to the UK is affected by an uprising in Syria and fracking in the US - Syria could involve a major expense if the UK becomes militarily involved, US fracking is reducing demand for petroleum, which is good for the UK economy, but bad for that part of the UK that extracts and sells oil. The naive lender believes that these things are the material determinates of repayment, although just this level of exploration suggests how volatile global events can be.

Banks that have been doing this successfully for a few hundred years (and there aren’t very many of them left) have a different perspective. The deal is not between the bank and the sovereign state, it’s between the bank and the wealthy interests within the country. Understood another way, I don’t loan money to a non-profit food bank, I loan money to a food bank run by friends that I know and understand. I don’t have to trust them, but I do have to know their culture. Therefore, the currently elected leader of country XYZ has personal assets in the $millions. The opposition leader and his up-and-coming replacement also have significant personal wealth, or the eventual capacity to obtain it. Therefore, the money I assign to the government is basically under their stewardship, and it’s their responsibility to see that it’s invested in ways that I approve of. Note that if my economic literacy is no better than theirs, I will never see the money again. This happens with clockwork regularity.

The US has, for example, about 140 million workers, of which about 125 million are currently working. The US is largely a service economy, therefore the workforce spends a lot of it’s time seated at desks pushing bytes around in computers. One might also find auto technicians, landscapers (yard care), teachers, and truck drivers. One finds that these workers earn on average about $45,000 per year, and the assets required to keep them equipped is about $20,000. $20,000 x 140 million workers is about $3 trillion.

In comparison, the US has about 60 million people over the age of 65, the age we describe as ‘retirement’. If one presumes that it is necessary to live on $2000 per month, or $24,000 per year, times the 15 years one lives between 65 and the life expectancy of 80. The amount of cash that needs to ‘saved’ to meet these retirement objectives is about $10 trillion (($24,000 x 60 million x 15 years) / 2, since the ‘average’ retiree is halfway through their retirement). Therefore retirees need $7 trillion more in assets than workers need in assets to keep the economy running.

The landscaper owns the truck and equipment himself - any loans are likely to be solely for the vehicle, at perhaps $10,000. The teacher is working in a classroom financed by taxpayer bonds - unless the school has been around long enough the bonds are paid off. In short, it’s possible that half the business capital in the US is in the form of loans or stock, at say $1.5 trillion. The US stock market is valued at roughly ten times that ($16 trillion), however most valuation has little to do with cash flow. Therefore, nearly all of the cash people have saved for retirement is ‘frustrated’ - it has no productive use. This means it gets parked in what are in effect non-interest bearing securities (T-Bills), cash accounts, overpriced stocks, or non-performing ‘real’ assets such as largely vacant commercial real estate. Thus if someone offers to pay a ‘real rate of return’ there are plenty of people that see the interest rate but pay no attention to the risks: their current situation is hardly any improvement.

Thus money is loaned to, in effect, charismatic politicians half a world away that are accustomed to, and skilled at, promising everything to everyone. Now that the money is in their hands, the question becomes ‘What incentive exists to keep them making their interest payments?’. Part of it is fresh loans - in that sense the entire scheme is Ponzi, pay off old creditors to suck in new ones. Another is actions on the global stage - in certain cases, for instance, the US wants an ‘international consensus’ as a justification for enforcing something in Iraq or Afghanistan. A country in debt is far more pliable toward such requests than one that isn’t. This only goes so far, if the local political will is dead set against it it won’t happen. If the country produces something the lender needs, such as oil, it’s possible to freeze overseas assets or exports, sometimes more for embarrassment value than anything else. Certain creditors confiscated Argentina’s cadet training ship in such an enforcement action.

When a country gets in serious trouble the outside creditors begin to second-guess the government, thus we find the IMF instructing Greece to implement ‘austerity’. In short, if the government is making promises it can’t afford, the outside creditors are the ones that direct the government to change course. Usually this involves massive civil disturbance - however at some point the citizens realize that they are living unsustainably. In theory (at least in democracies) this should result in a complete flush of the current governing elites, realistically it puts a new government in power, however one has noticed recently that such governments may only last a few weeks - or not form at all.

If someone puts $1000 into Government A in 1980 at 7%, then they make (in theory) $70 (or the interest on the remaining outstanding principal) in interest per year from 1980 until the debt is repaid, say 30 years later. $70 x 30 years is $2100 in interest alone. Thus from the investor perspective they may have ‘gotten their money back’ even if the principal was never repaid. The deal basically boils down to two factors: taxpayer tolerance (as the government pays debt via taxation), or ‘greater fool’ as new suckers replace old ones.

Germany and Japan have lots of money sitting around in banks, and export oriented economies. Therefore if the Germans want to sell a high-speed rail line to China or India they offer to finance it - thus in effect the loan is predicated on the revenue earned from the completed system. In the short term, the loaning country has ‘created jobs’ in it’s homeland, which may or may not positively affect overall income and tax revenues, and has a somewhat tenuous ‘IOU’ from the buyer. If the project goes well and the countries get along, the loan gets repaid - if no one takes the train and the countries get in a spat it’s all gone. Generally by that time the loaning country has moved on to other issues, and considers the fallout to be a minor distraction.

In short, there are a lot of ‘ifs, and’s, but’s’, and other nuances. This is almost always wrapped up in other international relations and geopolitics. Thus it is simply one piece of a hugely complicated chessboard.

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    I will need to read this article several more times.
    – Vorac
    Commented Sep 3, 2013 at 8:23
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    There are many claims in here that would benefit sources to back them up... Commented Sep 6, 2013 at 21:25
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    I had a hard time reading this "answer". You're jumping around between different topics too often without closing out the topic that you were already on. It's also fairly difficult to read your post, and come away with an actual answer to the question: "What are the guarantees that international debt will be payed back ever?". You elude to an answer where there is no guarantee, but you never come out with that explicitly. Commented Dec 2, 2014 at 15:56

Every loan is an investment and has a risk (of not being paid, default).

Countries continue to loan because they trust that future profits from interest outcomes the risk of the other's default.

If you stop loaning and others trust your judgement (e.g. USA stops loaning), everyone stops loaning, and there is a crash, which decreases the capital in the economy, and thus damages your own economy.

So, when deciding "stop loaning or not", you must counterbalance what you trust your future profits will be against the consequences of a crash.

Since there is no clear answer to whether continue to loan or not is economically better, countries tend to not risk a crash and continue to loan.

You can search for the discussion between Keynesian and neo-classical on this.


You wouldn't lent $100 to someone for the promise he will pay it back, neither the banks and the states are making it. If you lent $100, you expect to get back more, $105 or $150, depending on how reliable is the borrower. You risk, and you expect extra profit in case you have luck.

So it is the answer to your question, why banks and states are letting the others to be deeply in dept. They have calculated it will pay off for them. Sometimes, they miscalculate because they underestimate the risk (black swan effect).

World is harsh, and even in everyday's life you meet the situations in which you take extreme risk with no money guarantee. For example, peasants are not payed by some supermarkets as long as the ware isn't sold, and sometimes they give them back rotten products instead of money, saying 'sorry, it wasn't sold'. Why the peasants are accepting such conditions? Because if they would have problems selling it to someone else, maybe in end effect they'd sold 10% of their crops. Stopping export and import is usually an extreme option, because countries want to trade, they profit from trade, even if that profit is connected with harsh conditions and big risk, sometimes resulting in global crises.

  • This is so biased that it is wrong, there are zero and even negative interest rates.
    – Trylks
    Commented Sep 1, 2013 at 1:19
  • Black Swan effect is not a mere miscalculation of risk. It's calculation of risk that is wildly incorrect due to extremely low probability of high-impact outcome.
    – user4012
    Commented Sep 3, 2013 at 2:05

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