External debts is the portion of a country's debt that is borrowed from foreign lenders through commercial banks, governments or international financial institutions.
If a country fails to repay its external debt, it is said to be in sovereign default.
External debts can take the form of a tied loan, whereby the borrower must apply any spending of the funds to the country that is providing the loan.
If a nation is unable or refuses to to pay it is said to be in sovereign default and this can lead to the lenders withholding future releases of assets that might be needed by the borrowing nation. Such instances can have a rolling effect. The borrower's currency may collapse and the nation's overall economic growth will stall.
If potential lenders or bond purchasers begin to suspect that the government may fail to pay back its debt, they will sometimes demand compensation for the risk of default. This is sometimes referred to as sovereign debt crisis.