What Is a Creditor Nation?
A creditor nation has a cumulative balance of payment surplus. 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.
- Creditor nations are those that invest more in the world than the world invests in them. Another way of looking at this is that a creditor nation lends more money to the world than it borrows 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 can change over time with the ebbs and flows of the domestic and global economy.
Understanding Creditor Nations
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.
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 of a country. The NIIP consist of the difference between foreign assets that domestic residents own and domestic assets held by foreign entities.
The World's Creditor Nations
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. As of 2018, Germany and Switzerland have been the main Eurozone creditor nations and they've maintained positive NIIP for many years. In Asia, Japan, mainland China, Hong Kong and Singapore are the main nations investing increasing amounts in other countries. China, Japan and Singapore have all been increasing their international investment positions, with China in particular buying large amounts of U.S. Treasury bonds. 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 $9.5 trillion in 2018.