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À Presented to: Sir Fahad À Presented By: Anam¶s Group
Presentation of International Finance
Islamia University of Bahawalpur
Jinnah campus Rahim Yar Khan
Nimra Ahsan Khadija Liaquat Anam Bari Sahar Saeed
38 37 36 02
Third-World Debt Crisis, 1982-1989
Looking Ahead Introduction What is Third-World Crisis Causes of Third-World Crisis Cost of Third-World Crisis How Real was the Threat of an International Banking Collapse? Solutions How to Cancel Third World Debt Cooperative Intervention Plaza and Louvre Agreement 5 .
Mexico and Argentina as high economic growth Failure of common belief Countries don t go bankrupt In 1982 Mexico declared it could not meet schedule payment of 100 billion One years time 42 debtor countries were negotiating schedule repayment 6 .The Third-World Debt Crisis: 1982 .1989 High interest rate loan to Brazil.
The Third-World Debt Crisis: 1982 .1989 7 .
9 1990 59.1 34.1 37.4 34.8 28.2 8 .144 4.3 35.8 53.1 20.927 5.173 10.7 38.8 Debt Service (as a % of Exports) 1980 27.6 33.4 93.1989 Total External Total External Debt Debt (Millions Of $US) (as a % of GNP) 1990 1980 Algeria Argentina Bolivia Brazil Bulgaria Congo Cote d'Ivoire Ecuador 26.9 20.105 47.118 17.3 10.3 31.1 0.2 1.1 98.806 61.0 63.1 48.276 116.956 12.8 56.0 58.3 33.The Third-World Debt Crisis: 1982 .
4 4.1 42.386 16.524 10.497 21.1 11.4 27.3 27.8 23.1989 Total External Total External Debt Debt (Millions Of $US) (as a % of GNP) 1990 1980 Mexico Morocco Nicaragua Peru Poland Syria Venezuela 96.5 32.305 30.1 51.7 22.2 1990 27.7 9 .9 26.0 16.0 4.810 23.9 11.5 17.9 20.3 112.The Third-World Debt Crisis: 1982 .105 49.446 33.1 Debt Service (as a % of Exports) 1980 49.5 53.3 46.
The Third-World Debt Crisis: 1982 .1989 10 .
The Third-World Debt Crisis: 1982 .1989 Major Cause for Crisis: Poverty as a General Motive for Borrowing The Specific Economic Conditions of the 1970s 11 .
for example.The Third-World Debt Crisis: 1982 . and agencies for international aid each advocate their own particular definition of poverty depending upon the interests. the statistics are appallingly high. almost beyond comprehension.1989 Poverty as a General Motive for Borrowing Economists. whether noble or self-serving. Consider. whatever the bias of the analyst or the method used to estimate the number of global poor. social scientists. which they are protecting or pursuing. politicians. Nonetheless. 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 12 .
1989 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 13 .The Third-World Debt Crisis: 1982 .
1984). International Debt: Systemic Risk and Policy and Policy Response (Washington. Cline.1989 The Specific Economic Conditions of the 1970s Effect Oil Price Increase in Excess of US Inflation (1974-82 cumulative) Real Interest Rate in Excess of 1961-80 Average: 1981 and 1982 Terms of Trade Loss. The Third-World Debt Crisis: 1982 . DC: Institute for International Economics. 13. p. 1973-82 Amount 260 41 79 21 401 482 14 .Source: William R. 1981-82 Total Total Debt Increase. 1981-82 Export Volume Loss Caused by World Recession.
15 . Due to anti-inflationary policies interest rate went up to 20% Most of the debt was used for subsidies rather than productive investment.1989 Cause for Crisis: Between 1979 1980 commodity prices fell by 27% USD began a speculative climb that by 1985 had almost doubled its value.The Third-World Debt Crisis: 1982 .
1989 Demand side of debt Non-productive Investments Debt for Military Expansion The oil price factor The interest rate factor Economic mismanagement factor 16 .The Third-World Debt Crisis: 1982 .
The Third-World Debt Crisis: 1982 .1989 Non-productive Investments Debt for Military Expansion 17 .
The Third-World Debt Crisis: 1982 .1989 The oil price factor 18 .
1989 The interest rate factor Economic mismanagement factor 19 .The Third-World Debt Crisis: 1982 .
The Third-World Debt Crisis: 1982 .1989 Supply side of debt The Loose lending factor Ideological Miscalculations Political Miscalculations Bank Euphoria Portfolio Mismanagement Financial cycle Theory 20 .
The Third-World Debt Crisis: 1982 .1989 The Loose lending factor Ideological Miscalculations Political Miscalculations 21 .
The Third-World Debt Crisis: 1982 .1989 Bank Euphoria Portfolio Mismanagement Financial cycle Theory 22 .
1989 The debt problem The gravity of the Debt Problem Top Borrowers Top lenders USA Top lenders UK Bank Failures 23 .The Third-World Debt Crisis: 1982 .
1989 The gravity of the Debt Problem 24 .The Third-World Debt Crisis: 1982 .
The Third-World Debt Crisis: 1982 .1989 Top Borrowers 25 .
1989 Top lenders USA 26 .The Third-World Debt Crisis: 1982 .
1989 Top lenders UK 27 .The Third-World Debt Crisis: 1982 .
The Third-World Debt Crisis: 1982 .1989 Bank Failures 28 .
Mexico announced it could not meet scheduled repayments on its almost $100 billion of external debt 29 . it was more expensive for the debtor nations. For example.The Third-World Debt Crisis: 1982 . such as Brazil and Mexico.1989 Since most debt was denominated in dollars. In August 1982. to acquire dollars to meet debt-service payment.
1989 What are the Costs of the Debt Crisis? 3 Main Consequences: Decline in the quality of life Political violence associated with decline Decline on developed world 30 .The Third-World Debt Crisis: 1982 .
The Third-World Debt Crisis: 1982 .1989 How Real was the Threat of an International Banking Collapse? Sharp reduction in loan exposure Reserve against potential losses 31 .
1989 Solutions Repudiation Minor adjustments in repayments Debt reduction 32 .The Third-World Debt Crisis: 1982 .
1989 Handling of Crisis In the period of 1982-1985. IMF. U. and stretching the repayment interval. US Treasury extended $1. credits.S.The Third-World Debt Crisis: 1982 . treasury.7 billion loan to Mexico to maintain payments Between 1982-84 IMF & World Bank made $12 Billion of stand by credit In 1985 US treasury proposed $20 billion of additional private bank lending 33 . reschedule payment. and World Bank provided grant loan. FED.
Brady plan provided three options for these countries: (i) reduced 35% principle of old debts.S. (ii) decreased interest rate to 6.25%.The Third-World Debt Crisis: 1982 . In 1989.1989 Handling of Crisis In 1988 Citibank started writing-off bad debts of third world. program to ease third-world debt. (iii) issued new loans 34 . Japan offered $65 billion over 5 years to needy nations to support U.
The Third-World Debt Crisis: 1982 . Third World debts could be cancelled with little or no cost to anyone. but to the general advantage of the world economy 35 . Indeed.1989 How to cancel Third-World Debt In fact. cancellation would be not only the simplest process imaginable.
1989 How to cancel Third-World Debt The first option is to remove the obligation on banks to maintain parity between assets and liabilities The second option. yet permit banks to retain them for purposes of accountancy 36 . and in accountancy terms probably the more satisfactory (although it amounts to the same policy). is to cancel the debt bonds.The Third-World Debt Crisis: 1982 .
37 .1987. and effected the Louvre Accord. 1985.Cooperative Intervention Situations whereby G-7 central banks work together to stabilize exchange rates. Agreement to cooperate reached in the Plaza Agreement.
the introduction of an expansive U.S. 1985-1996 The US had held a fairly passive stance toward US$ exchange rates during the first 10 years of the float.The Plaza-Louvre Intervention Accords and the Floating-Rate Dollar Standard. Reagan administration adopted supply-side economics²increased defense spending and reduced taxes causing double deficits.S. The fiscal deficit required borrowing from foreign trade surplus countries such as Japan. In 1980s. fiscal policy combined with tight monetary control started the U. European policymakers leaned toward tighter monetary policies to halt the slide of their currencies. and Germany to buy U.S. trade balance deteriorated. dollar on a prolonged appreciation. In 1981. By early 1985. export firms to lose international competitiveness and the U. The strong dollar caused U. dollar had appreciated nearly 50% in real terms against an average of the world¶s other major currencies. 38 . Taiwan. China. This may upsurge the demand of bonds leading to the higher demand for US$. but the downside of tighter money was and adverse effect on domestic economic performance.S. fiscal and trade deficit. the U.S. bonds.S.
1985-1996 On September 22. 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.The Plaza-Louvre Intervention Accords and the Floating-Rate Dollar Standard. Policymakers for the G-5 countries plus Canada and Italy (G-7) met at the Louvre in France on February 22. and the US ±met at the Plaza Hotel in New York City. The substance of the Louvre meeting was a set of Target Zones. Consequently. This type of exchange rate system is a managed float. officials from the Group of Five (G-5) countries ± UK. The dollar fell sharply on this news and continued to decline through 1986. or exchange rate ranges. that the central bankers agreed to defend using active foreign exchange intervention. 1987. the system is not a true flexible exchange rate system. The G-5 officials issued an accord announcing that they would intervene jointly to foster dollar depreciation. which is a system of flexible exchange rates but with periodic intervention by official agencies. Japan. 39 . 1985. West Germany.
Looking Back Introduction What is Third-World Crisis Causes of Third-World Crisis Cost of Third-World Crisis How Real was the Threat of an International Banking Collapse? Solutions How to Cancel Third World Debt Cooperative Intervention Plaza and Louvre Agreement 40 .
End of Presentation Thank You 42 .