What is Creditor Nation

A creditor nation has a cumulative balance of payment surplus. A creditor nation has positive net investment after recording all of the financial transactions completed between it and the rest of the world.

BREAKING DOWN Creditor Nation

Creditor nations have invested more resources in other countries than the rest of the world has invested in them. To determine if a country is a creditor nation, one must account for the the nation's overall debt balance when calculating the balance of payments.

Creditor nations can sometimes lose their status and become debtor nations. This happened to the United States in 1988 when its balance of payments turned negative.

Since 2006, balance of payment statistics compiled by the International Monetary Fund have been uploaded into a useful online database that can be accessed through the IMF website. In addition to countries' balance of payments figures, the database also includes the “Net International Investment Position” (NIIP) of a country. The NIIP consist of the difference between foreign assets that domestic residents own and domestic assets held by foreign entities.

Germany and Switzerland have lately been the main Eurozone creditor nations as they've maintained large and positive NIIP. Investors keep an eye on NIIP figures when measuring the creditworthiness of a country and its businesses. Ultimately, terms of trade will be determined by nations with capital to lend, and debtor nations will be the ones that have to pay the bill.

The United States: No Longer a Creditor Nation

The United States is currently the most indebted country, according to its NIIP, which means the value of its domestically owned assets is less than its liabilities to foreign investors. Countries with a positive NIIP are considered to be creditor nations, while those with a negative NIIP are debtor nations. For everyday investors, the NIIP of a country promises to be a leading indicator of a country’s overall fiscal responsibility. Diversifying holdings in both creditor and debtor nations could help spread a portfolio’s risk over time.

The United States became a debtor nation in 1985 for the first time since World War I. However, a country's status as a debtor nation does not necessarily indicate the strength of that nation's economy. At the time of the shift in status, analysts also cautioned against likening the United States to other big debtor nations, such as Brazil and Mexico, because they said the American economy was vastly stronger. Analysts at the time said the new status probably meant it had to send more of the money it earned overseas than it received back from investments overseas.