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    International Debt Crisis/ Latin American Debt Crisis: - Arpana Chandra - Santosh Sarate

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    The document discusses the international debt crisis faced by Latin American countries in the 1970s-1980s. Key points include: - Latin American countries borrowed heavily in the 1970s for industrialization projects but faced difficulties repaying debts when interest rates rose in the 1980s. - The US Federal Reserve tightened monetary policy in 1979, raising interest rates which increased debt service costs for Latin American countries. - By 1982, Brazil was the first country unable to pay its debts, and by 1983 21 countries had defaulted on payments. - Proposed solutions to the crisis included the Baker Plan which emphasized economic reforms and growth in debtor nations, and the Brady Plan which focused on reducing debt burdens.

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    International Debt Crisis/ Latin American Debt Crisis: - Arpana Chandra - Santosh Sarate

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    sweetsep8
    88 views29 pages
    The document discusses the international debt crisis faced by Latin American countries in the 1970s-1980s. Key points include: - Latin American countries borrowed heavily in the 1970s for industrialization projects but faced difficulties repaying debts when interest rates rose in the 1980s. - The US Federal Reserve tightened monetary policy in 1979, raising interest rates which increased debt service costs for Latin American countries. - By 1982, Brazil was the first country unable to pay its debts, and by 1983 21 countries had defaulted on payments. - Proposed solutions to the crisis included the Baker Plan which emphasized economic reforms and growth in debtor nations, and the Brady Plan which focused on reducing debt burdens.

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    The document discusses the international debt crisis faced by Latin American countries in the 1970s-1980s. Key points include: - Latin American countries borrowed heavily in the 1970s for industrialization projects but faced difficulties repaying debts when interest rates rose in the 1980s. - The US Federal Reserve tightened monetary policy in 1979, raising interest rates which increased debt service costs for Latin American countries. - By 1982, Brazil was the first country unable to pay its debts, and by 1983 21 countries had defaulted on payments. - Proposed solutions to the crisis included the Baker Plan which emphasized economic reforms and growth in debtor nations, and the Brady Plan which focused on reducing debt burdens.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    88 views29 pages

    International Debt Crisis/ Latin American Debt Crisis: - Arpana Chandra - Santosh Sarate

    Uploaded by

    sweetsep8
    The document discusses the international debt crisis faced by Latin American countries in the 1970s-1980s. Key points include: - Latin American countries borrowed heavily in the 1970s for industrialization projects but faced difficulties repaying debts when interest rates rose in the 1980s. - The US Federal Reserve tightened monetary policy in 1979, raising interest rates which increased debt service costs for Latin American countries. - By 1982, Brazil was the first country unable to pay its debts, and by 1983 21 countries had defaulted on payments. - Proposed solutions to the crisis included the Baker Plan which emphasized economic reforms and growth in debtor nations, and the Brady Plan which focused on reducing debt burdens.

    Copyright:

    Attribution Non-Commercial (BY-NC)
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    of 29

    International Debt Crisis/

    Latin American Debt Crisis

    -Arpana Chandra
    -Santosh Sarate
    Introduction
    • In the year 1970’s many Latin American countries
    notably Brazil, Argentina and Mexico borrowed huge
    sums of money for Industrialization.

    • Between 1975-1982, the latin american debt to


    commercial banks increased at a cumulative annual
    rate of 20.4 %

    • At one point of time the debtor countries found it


    difficult to pay back the debt.
    1970’s
    •The 1970s was an inflationary
    decade.

    •Collapse of Bretton Wood system.

    •Oil prices rose during the year


    1973 and quadrupled in the year
    1979.

    •One of the main reason was the


    Yom Kippur war and Iranian
    revolution. Both the time, OPEC
    countries had cut production.

    •The increase in oil prices


    generated huge current account
    surpluses for OPEC members.
    • Every year, billions of dollars were transferred to OPEC
    members from oil importing nations.

    • In the Mid 1970 Saudi Arabia and other OPEC members used
    their new surpluses to purchase deposits from world
    commercial banks.

    • At the same time, higher oil prices caused non-OPEC


    developing countries greatly to increase their credit demands.

    • In the mid-1970s, banks recycled OPEC’s surpluses to non-


    OPEC developing nations.
    1970’s
    • In late 1979, Mr. Paul Volcker was appointed as a
    new chairman of the US Federal Reserve Board
    (i.e., American central bank).

    • Immediately, he initiated an anti-inflation


    campaign.

    • In between the year 1975 to 1980, only 4


    countries had postpone payments.
    1980’s
    • From 1980, the FED tightened the money supply.

    • The tightening of American monetary policy impacted indebted countries


    in three ways:
    As interest rates rose, debt service payments also rose sharply.
    The quantitative demand for their exports fell.
    As commodity prices declined, they faced lower "terms of trade"
    (exports/imports)

    • In the year 1982, brazil was the 1st country to accept its inability to pay back.

    • By 1983, the number of countries defaulting their payments had reached


    21.
    Borrowings
    • Latin American
    Real Interest Rates
    The 3 major reasons for
    the interest rates to go up
    were:

    •Tight monetary policy

    •Budget deficit

    •Tax Incentives for


    investments introduced by
    the government.
    Because of which it lost
    $744b.
    Effect on the US Exchange Rate
    Capital Flight
    • Since 1982, the debt crisis has crippled the development efforts of
    most Latin American economies.

    • Yet even as Latin American countries have run up large foreign


    debts, their own wealthiest citizens have been investing heavily
    abroad, acquiring enormous stocks of foreign assets.

    • This phenomenon is known as “capital flight”.

    • From 1973 to 1987, capital flight from Latin America added up to


    $151 billion, or about 43 percent of the total external debt acquired
    during those same years.
    Causes of Capital Flight
    • Capital flight occurs when (usually wealthy) individuals in
    Latin America decide to reallocate their wealth from
    domestic to foreign assets. For these individuals, three
    basic forms of domestic asset:, are available:

     holdings of money on current account


     savings in the domestic financial system,
     or investments in real productive activity.

    • Capital is sent abroad when these domestic alternatives


    appear increasingly unattractive to local elites.
    Effects of Capital Flight
    • Reduction in growth potential.

    • Erosion of the tax base.

    • Distributional Consequences.
    What Went Wrong - Debtors
    Non-productive Investments
    This would seem to suggest that a large proportion of borrowed funds either went into the
    unproductive sector or by-passed economies of poor countries altogether. A common factor
    to the two arguments is that third world countries did not devote the funds towards
    increasing their own capacity to service loans.

    Debt for military expansion


    A clear example was the purchase of 200 aircraft by the French airforce at a discount of 25%,
    after Dassault had sold 350 Mirage III’s abroad

    The oil price factor


    The debt crisis can also be explained – in part - by deterioration in the world economic
    environment caused by the oil price rise that began to escalate in 1971; after the oil price
    had dropped from $1.50 a barrel in 1960 to $1.30 a barrel in 1970 . Much of the blame for
    the oil price rise is attributed to the collapse of the innovation of the Bretton Woods system
    of fixed exchange rates that had allowed governments to liberate themselves from
    limitations imposed by a fixed parity.
    • The interest rate factor :-
    There is adverse effects of weak investments on national solvency, the
    tendency for developing countries to apply large proportions of borrowed
    capital to unproductive uses do not seem to conclusively explain the
    accumulation of foreign debt by third world countries
    • Economic mismanagement factor :-
    The main indictment on governments of poor countries is that should have optimised
    the presence of debt by focussed their policies towards increased generation of
    foreign exchange to meet future obligations for debt service. A large number of
    developing countries also adopted inward looking industrial strategies, aiming at
    domestic production of previously imported goods as a means of saving foreign
    exchange
    US Lenders
    UK Lenders
    What Went Wrong- Lenders
    • The Loose lending factor :-
    The rapid increases in deposits in the banking systems is also notable for creating
    additional financial capacity that enabled Banks to commit higher amounts in loans to
    the borrowing public in the own countries most of whom deposited their money back in
    the banking system. At every stage of the lending process the banks created more
    deposits with the final result that the original loans were multiplied several time as
    lending continued.

    • Ideological Miscalculations :-
    Walter Wriston, who served as head of Citibank Corporation that was still a
    leading financial institution in the USA - around 1967 - was one of the proponents of the‘sovereign
    risk hypothesis’. Wriston contended that a country ‘…how badly off, will “own” more than it
    “owes”. He maintained that countries could not go bankrupt, nor could they disappear and that
    even if they had short-term cash flow problems, the cure would be ‘sound programs and time to

    allow them to work’


    • Bank Euphoria :-
    The banking sector in the western world also contributed to the debt crisis through the
    application of methods that were outdated and insufficient for measuring credit risk. With
    the benefit of hindsight there is reasonable ground to perceive naivety among the banks in
    the consideration of single country loans as well as the aggregate level of their portfolios to
    the third world Countries
    The Baker Plan :“Growth, the Key to Breaking
    the Debt Crisis”
    • The Baker Plan proposals begun in October 1985 by then US Treasurer Secretary
    Baker at Seoul

    • The Baker plan emphasized that the debt crisis could only be resolved through
    sustained growth by the debtor countries.

    To achieve the desired growth, the plan recommended programs of economic


    reform and structural adjustment for the debtor countries, including greater
    reliance on the private sector, curtailment of state subsidies and price controls,
    steps to stimulate both foreign and domestic investment, and export promotion
    and trade liberalization
    • He stressed the importance of foreign investment as non-debt-creating. He also
    pointed out that equity investment has a high degree of permanence and is not
    debt-creating. Moreover he pointed out, it can have a compounding effect on
    growth, bring innovation and technology, and help to keep capital at home.

    • The Baker plan gives new importance to the World Bank and other Multilateral
    Development Banks (MDBs), mainly the Inter-American Development Bank, both
    by increasing their disbursements and, as a condition of this, by giving them a
    bigger share of policy formation. The World Bank will be expected to increase from
    11% to about 20% of total credits its non-project lending, in the form of structural
    or sectoral adjustment loans, aimed at improving either the whole economy, or key
    sectors such as foreign trade. In the past these loans have been linked with IMF
    programs. But countries such as Brazil were anxious not to be tied to two sets of
    conditions, and may regard the World Bank as more sympathetic to their pleas for
    gradualism and flexibility than the IMF.
    The Brady Plan.
    “key To The crisis is Debt Reduction

    • On March 10, 1989 the United States approach to managing the Third
    World debt took a dramatic turn. Treasury Secretary Nicholas F. Brady
    acknowledged that serious problems and impediments to a
    successful resolution of the debt crisis still remains. The framework
    that Brady outlined in his speech is only a first step toward designing
    and implementing a more effective approach to dealing with the
    problem.
    • The framework that Brady outlined in his speech is only a first step
    toward designing and implementing a more effective approach to
    dealing with the problem. The major elements of the Brady initiative
    are as follows.
    The Highly Indebted Poor Country Initiative
    (HIPC) “Debt Forgiveness is The Key”
    After the Baker plan and its call for growth failed, and then the
    Brady plan and its call for debt reduction failed, HIPC came along
    and proposed the ever popular proposal for debt forgiveness. In
    October 1996, there was a major shift by the IMF and the World
    Bank when they produced a debt relief initiative, which
    contemplated for the first time the cancellation of debts, owed to
    them.
    The agreement also recommended a strategy to enable countries
    to exit from unsustainable debt burdens. Briton’s Chancellor
    proposed that the Initiative should be financed through the sale of
    IMF gold. The Initiative proposed 80% debt relief by the key creditor
    countries (Japan, U.S., Germany, France and Briton). The World Bank
    announced the establishment of a Trust Fund to finance the
    Initiative.
    PRESENT DEBT
    Conclusion

    • Its believe that future economic crises in developing countries


    should be handled on a case-by-case, market oriented basis,
    not by a predetermined arrangement supervised by
    international financial institutions.

    • The major reason for case-by-case approach for future


    crises is the vast changes that have occurred in recent years in
    international markets that have strengthened and greatly
    diversified international financial flows.
    THANK YOU

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