What Is Creditor Nation?
A creditor nation has positive net international investment position (NIIP) after reconciling all of the financial transactions completed between it and the rest of the world. Simply put, it has a cumulative balance of payment surplus.
- Creditor nations are those that lend more money to the world than they borrow from it.
- Being a creditor nation grants a country some power and influence, particularly when negotiating trade agreements with debtor nations.
- The status of being a creditor nation can change over time with the ebbs and flows of the domestic and global economy.
Understanding 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 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 the 1980s when its balance of payments turned negative.
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 of a country. The NIIP consists of the difference between foreign assets that domestic residents own and domestic assets held by foreign entities.
As mentioned, the status of creditor nation can be gained or lost due to changes in both a country's domestic economy and the global economy as a whole. In the Eurozone, as of 2020, Germany and the Netherlands have been the main creditor nations as they've maintained positive NIIP for many years. In Asia, China, Japan, Singapore, and Taiwan are the main nations with positive NIIP, investing more in other countries.
China, Japan, Singapore, and Taiwan have all been increasing their international investment positions, with China in particular buying large amounts of U.S. Treasury bonds. Japan is the largest creditor nation in terms of the balance of its NIIP, and has been so for many years. In North America, only Canada is a creditor nation.
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. 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: No Longer a Creditor Nation
The United States is currently the most indebted country, according to its NIIP. This means the value of its domestically owned assets is less than its liabilities to foreign investors. The U.S. 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 cautioned against likening the United States to other big debtor nations, such as Brazil and Mexico, because the American economy was vastly stronger.
Analysts also suggested the U.S. had to send more of the money it earned overseas than it received back from investments overseas. This hasn't happened in any meaningful way, so the U.S. remains in debt to the rest of the world. This has often been attributed to American's overconsuming with the rest of the world providing both financing and products.
Interestingly, the financial crisis starting in 2008 seemed to bend the curve back towards balance, but then the negative NIIP trend reestablished, going from negative $2.5 trillion in 2010 to negative $14 trillion in 2020. In contrast, China, the worlds second largest economy, has expanded its position as a creditor nation from $1.5 trillion to $2.2 trillion from 2010 to 2020. The top two creditor nations, as of 2020, were Japan and Germany. The former had a NIIP of $3.4 trillion while the latter posted a $2.5 trillion figure.