debt crisis managment an analytical framework

8/8/2019 Debt Crisis Managment an Analytical Framework

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Debt Crisis Management An Analytical Framework ( S. Griffith Jones )

Presented by:BABER ALI

BOOK

ManagingWorld Debt


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Debt Crisis Management An Analytical Framework Introduction:

Chapter is intended as frameworkfor analyzing & evaluating debt crisis

mgmt.1st part outline Major Features of Debt Crisis Management in LatinAmerica since 1982.

2nd part explain main feature of debtrescheduling/ adjustment deals inlight of B argaining theory.


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Debt Crisis in Latin

America -B

ackground 1960-1970s Latin Americancountries borrowed huge sumof money from internationalcreditors for industrialization.

1980s The Lost Decade.


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Debt Crisis in LatinAmerica B ackground The CRISES

oil prices skyrocketed,

Decreased purchasing power

Local currency devaluationincrease in interest rates,Unable to repay the debts.

The REALIZATION1982, Mexico declared their Inability to pay back its loans.Restructuring of Debt with a conditionality to accept IMFintervention.


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Debt Re-schedulingDebt rescheduling refers to the formal deferment of debt-service payments and the application of newand extended maturities to the deferred amount.

Rescheduling debt is one of the means to provide adebtor with debt relief through a delay.


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Debt Crisis Management Main Features Contd

Involuntary lending:In Involuntary Lending all

creditor banks were forced

to increase their exposure bya certain percentage.

Level of involuntary lending

is determined by IMF or majorbanks and not by individual bank s management itself.

Collective interest of creditors was involved in

involuntary lending as it avoids default.


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Debt Crisis Management M ain Features Contd

Formation of Steering Committees:For the purpose of negotiations

with debtor governments, steeringcommittees were formed by theprivate banks.

Steering Committees consist of

private banks which are the largestbanks of industrial countries & holdsthe largest debts of particular country.

The role of steering committees is to

negotiate with debtor govts to ensure issuance of new money toLatin America and to ensure maximum debt service repayment.

The existence of the steering committee has been clearly functional to theinterests of the big banks.


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D ebt Re-Structuring :

Debt Re-structuring isused as a mechanismto avoid defaults.

Unilateral Action in which Debtor Governmentsdeclare that the country is in absolute default ortemporary default is avoided by offering debtor

governments an option of Debt Re-Structuring.


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High Cost for Debtor & DevelopedCountries:

Interest of agents, such asexports to Latin America &foreign investors have notbeen sufficiently considered

in debt crisis mgmt.Perspective adopted by

the creditors has been shortterm instead a long term.


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Common MeasuresCommon measures for debt rescheduling deals:

03 indicators are available to measure the effect of debtrescheduling:

The first fundamental indicator shows that how much a debt reschedulingdeal has implied an improvement in foreign exchange situation of acountry.

The second indicator shows the extent to which a particular deal affectsthe change in the net present value of debt. More relevant for mediumand long term loans with a problematic aspect of requiring a long-termforecast for interest rates.

The third indicator shows the change in the financial conditions of debtafter re-scheduling.


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Common MeasuresCommon measures of adjustment deals:

The qualitative indicator distinguishes between those countries whichsigned an upper credit tranche agreement with IMF and those who werenot.

This indicator compare the economic performance of the country asagreed in the context of the IMF programme with what would haveoccurred without fund involvement.

O ther indicators are more financial in nature and clearly link with themedium term substantiability of a programme.


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Types of Negotiations B argainingTheory Contd

Concession/Convergence Approach:

In Concession/Convergence Approach, both parties move towards amutually acceptable outcome through offers, counter offers, threats and

promises.Concession/convergence negotiations follow the formula/detail approachafter a formula has been identified.

Concession/convergence bargaining takes place when the items under

discussion are well established through prior agreement.

P rogressive Construction:

In Progressive Construction, parties deal with related subjects in

sequential talks over a long time span.


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Stages of Debt Crisis ManagementUsing Formula/Detail & Concession/Convergence Approach, 03separate phases in debt re-scheduling/new money adjustmentnegotiations can be identified.

P hase 1 (1982):

In the first phase, the formula for dealing with debt crisis of major banks was hammered out.The formula derived was closer to interest of creditors because:

Perception of debtor governments that unilateral action would endangerthe stability of International Financial system.

Perceiving the problem as temporary.


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Stages of Debt Crisis ManagementInterests of creditor banks was to minimize current & future losses.

The debtors don t have any choice other than to accept the formuladeveloped by creditor countries based on their own interests.

The standard bargaining techniques of threats and promises weremore convincingly used by creditors than debtors.

Many variables were beyond the competency of debtor governments.

Strong position of creditors.


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Stages of Debt Crisis ManagementP hase 2 ( late1982 to second quarter of 1985) :

In this period negotiations followed the concession/convergenceapproach.

P hase 3 ( After mid 1985) :

Similar to phase 1, in which there is a search for new solution .

However Phase 3 differs from Phase 1 in that debtor governments aremore actively making new proposals.


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Differences among adjustment dealsThe reasons for difference in deals reached by differentcountries are :

Higher the foreign exchange reserves, higher will be thebargaining power of a country.

The more democratic and open political culture a country has,more will be bargaining power of a country.

More the value of public opinion, more will be the bargainingpower.

Governments with a greater level of stability on the whole havea greater bargaining power.

Grater the geo-political importance of the debtor country,higher will be the bargaining power.


21/21Thank You!

Debt Crisis Management

debt crisis managment an analytical framework

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