third-world debt crisis,

Presentation of International Finance

Presented to: Sir Fahad Presented By: Anam’s

Group

Anam’s GroupBS Commerce (2007 – 11)

7th Semester

Islamia University of Bahawalpur

Jinnah campus Rahim Yar Khan

Nimra Ahsan 38Khadija Liaquat 37Anam Bari 36

Sahar Saeed 02

Honourable membersOf Anam’s Group

BS Commerce 7st semester

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Third-World Debt Crisis,1982-1989

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Looking Ahead

IntroductionWhat is Third-World CrisisCauses of Third-World CrisisCost of Third-World CrisisHow Real was the Threat of an International Banking Collapse?SolutionsHow to Cancel Third World DebtCooperative InterventionPlaza and Louvre Agreement

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The Third-World Debt Crisis: 1982 - 1989

High interest rate loan to Brazil, Mexico and Argentina as high economic growthFailure of common belief “Countries don’t go bankrupt”In 1982 Mexico declared it could not meet schedule payment of 100 billionOne years time 42 debtor countries were negotiating schedule repayment

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Total External

Debt(Millions Of $US)

1990

Total External Debt

(as a % of GNP) 1980

Debt Service (as a % of Exports)

1980

1990

Algeria 26,806 47.1 27.1 59.4

Argentina 61,144 48.4 37.3 34.1

Bolivia 4,276 93.3 35.0 34.1

Brazil 116,173 31.2 63.1 20.8

Bulgaria 10,927 1.1 0.3 56.9

Congo 5,118 98.0 10.8 20.7

Cote d'Ivoire 17,956 58.8 28.3 38.6

Ecuador 12,105 53.8 33.9 33.2

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Total External

Debt(Millions Of $US)

1990

Total External Debt

(as a % of GNP) 1980

Debt Service (as a % of Exports)

1980

1990

Mexico 96,810 30.5 49.5 27.8

Morocco 23,524 53.3 32.7 23.4

Nicaragua 10,497 112.1 22.3 4.1

Peru 21,105 51.0 46.5 11.0

Poland 49,386 16.3 17.9 4.9

Syria 16,446 27.1 11.4 26.9

Venezuela 33,305 42.1 27.2 20.7

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Major Cause for Crisis:

Poverty as a General Motive for BorrowingThe Specific Economic Conditions of the 1970s

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Poverty as a General Motive for BorrowingEconomists, social scientists, politicians, and agencies for international aid each advocate their own particular definition of poverty depending upon the interests, whether noble or self-serving, which they are protecting or pursuing. Nonetheless, whatever the bias of the analyst or the method used to estimate the number of global poor, the statistics are appallingly high, almost beyond comprehension. Consider, for example, these estimates taken from the September 1990 UN Chronicle : 1 billion people live in absolute poverty 100 million persons are completely homeless 800 million persons go hungry every day 1.75 billion people are without access to safe drinking water 1.5 billion persons are without access to primary health care

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Poverty as a General Motive for Borrowing

The central debate concerning the definition of poverty centers around the two most prominent types of measurements: income analysis and basic needs analysis

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The Specific Economic Conditions of the 1970s

Effect Amount

Oil Price Increase in Excess of US Inflation (1974-82 cumulative)

260

Real Interest Rate in Excess of 1961-80 Average: 1981 and 1982

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Terms of Trade Loss, 1981-82 79

Export Volume Loss Caused by World Recession, 1981-82

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Total 401

Total Debt Increase, 1973-82 482

Source: William R. Cline, International Debt: Systemic Risk and Policy and Policy Response (Washington, DC: Institute for International Economics, 1984), p. 13.

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Cause for Crisis:Between 1979 – 1980 commodity prices fell by 27%USD began a speculative climb that by 1985 had almost doubled its value.Due to anti-inflationary policies interest rate went up to 20%Most of the debt was used for subsidies rather than productive investment.

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Demand side of debt

Non-productive InvestmentsDebt for Military ExpansionThe oil price factorThe interest rate factorEconomic mismanagement factor

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Non-productive Investments

Debt for Military Expansion

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The oil price factor

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The interest rate factor

Economic mismanagement factor

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Supply side of debt

The Loose lending factorIdeological MiscalculationsPolitical MiscalculationsBank EuphoriaPortfolio MismanagementFinancial cycle Theory

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The Loose lending factor

Ideological Miscalculations

Political Miscalculations

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Bank Euphoria

Portfolio Mismanagement

Financial cycle Theory

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The debt problem

The gravity of the Debt ProblemTop BorrowersTop lenders – USATop lenders – UKBank Failures

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The gravity of the Debt Problem

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Top Borrowers

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Top lenders – USA

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Top lenders – UK

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Bank Failures

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Since most debt was denominated in dollars, it was more expensive for the debtor nations, such as Brazil and Mexico, to acquire dollars to meet debt-service payment. For example, In August 1982, Mexico announced it could not meet scheduled repayments on its almost $100 billion of external debt

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What are the Costs of the Debt Crisis?

3 Main Consequences:Decline in the quality of lifePolitical violence associated with declineDecline on developed world

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How Real was the Threat of an International Banking Collapse?

Sharp reduction in loan exposureReserve against potential losses

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Solutions

RepudiationMinor adjustments in repaymentsDebt reduction

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Handling of CrisisIn the period of 1982-1985, U.S. treasury, FED, IMF, and World Bank provided grant loan, credits, reschedule payment, and stretching the repayment interval.US Treasury extended $1.7 billion loan to Mexico to maintain paymentsBetween 1982-84 IMF & World Bank made $12 Billion of stand by creditIn 1985 US treasury proposed $20 billion of additional private bank lending

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Handling of CrisisIn 1988 Citibank started writing-off bad debts of third world.Japan offered $65 billion over 5 years to needy nations to support U.S. program to ease third-world debt.In 1989, Brady plan provided three options for these countries: (i) reduced 35% principle of old debts; (ii) decreased interest rate to 6.25%; (iii) issued new loans

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How to cancel Third-World Debt

In fact, Third World debts could be cancelled with little or no cost to anyone. Indeed, cancellation would be not only the simplest process imaginable, but to the general advantage of the world economy

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How to cancel Third-World Debt

The first option is to remove the obligation on banks to maintain parity between assets and liabilities

The second option, and in accountancy terms probably the more satisfactory (although it amounts to the same policy), is to cancel the debt bonds, yet permit banks to retain them for purposes of accountancy

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Cooperative Intervention

Situations whereby G-7 central banks work together to stabilize exchange rates. Agreement to cooperate reached in the Plaza Agreement, 1985, and effected the Louvre Accord,1987.

The Plaza-Louvre Intervention Accords and the Floating-Rate Dollar Standard, 1985-1996

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• The US had held a fairly passive stance toward US$ exchange rates during the first 10 years of the float. In 1980s, Reagan administration adopted supply-side

economics—increased defense spending and reduced taxes causing double deficits, fiscal and trade deficit. The fiscal deficit required borrowing from

foreign trade surplus countries such as Japan, Taiwan, China, and Germany to buy U.S. bonds. This may upsurge the demand of bonds leading to the higher demand

for US$. In 1981, the introduction of an expansive U.S. fiscal policy combined with tight monetary control started the U.S. dollar on a prolonged appreciation.

By early 1985, the U.S. dollar had appreciated nearly 50% in real terms against an average of the world’s other major currencies.

• The strong dollar caused U.S. export firms to lose international competitiveness and the U.S. trade balance deteriorated. European policymakers leaned toward

tighter monetary policies to halt the slide of their currencies, but the downside of tighter money was and adverse effect on domestic economic performance.

The Plaza-Louvre Intervention Accords and the Floating-Rate Dollar Standard, 1985-1996

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• On September 22, 1985, officials from the Group of Five (G-5) countries – UK, West Germany, Japan, and the US –met at the Plaza Hotel in New

York City. The G-5 officials issued an accord announcing that they would intervene jointly to foster dollar depreciation. The dollar fell sharply on

this news and continued to decline through 1986. The Plaza meeting provided a clear signal to markets that the major industrial countries were willing to intervene in a coordinated effort to influence exchange rates.

• Policymakers for the G-5 countries plus Canada and Italy (G-7) met at the Louvre in France on February 22, 1987. The substance of the Louvre

meeting was a set of Target Zones, or exchange rate ranges, that the central bankers agreed to defend using active foreign exchange intervention.

Consequently, the system is not a true flexible exchange rate system. This type of exchange rate system is a managed float, which is a system of

flexible exchange rates but with periodic intervention by official agencies.

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Looking Back

IntroductionWhat is Third-World CrisisCauses of Third-World CrisisCost of Third-World CrisisHow Real was the Threat of an International Banking Collapse?SolutionsHow to Cancel Third World DebtCooperative InterventionPlaza and Louvre Agreement

?HAVE ANY QUESTION

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End of PresentationThank You

third-world debt crisis,

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