External debt is not a problem in itself; indeed, debt instruments are an important element of any financing strategy. B ut it can become a problem when the foreign borrowing is unrelated to productive investment, or when a net debtor country is hit by a severe shock to its key macroeconomic variables. Under these circumstances, the claims on the debtor can quickly exceed its capacity to generate the required resources to service its debts. I f these claims are not matched by new credit inflows (or by higher interest receipts from investments abroad) servicing the external debt amounts to a transfer of resources to the rest of the world, which, if significant, reduces domestic spending and growth, thus further compromising its ability to make payments when they fall due.[...]