International Debt
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Transcript of International Debt
![Page 1: International Debt](https://reader030.fdocuments.in/reader030/viewer/2022032700/55d6e515bb61eb7f338b46a6/html5/thumbnails/1.jpg)
The Political Economy of Third World Debt
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International Debt: An Overview• International (Third World) debt is among the most
contentious problems facing the present international economy.
• It highlights the disparity between North and South within the international system.
• At the same time, it ties the two inextricably together by challenging the stability of the present system.
• As of 2002, the total amount of debt in the international financial system amounts to US$ 2,484,838 million
• This is approximately 57% of the debtors’ collective GDP.
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17%
34% 30%
12%
8%
Sub-Saharan AfricaNorth Africa and the Middle EastLatin America and the CarribeanAsia and OceaniaEurope
Figure 1: Outstanding International Debt by Region
Where Does the Money Go?
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14%
10%
33%
18%
19%
6%
Least Developed CountriesOther Low-Income CountriesLower-Middle Income CountriesUpper-Middle income CountriesCEECS/NIS in transitionOther High Income Countries
Figure 2: Outstanding International Debt by Type of Country
Where Does the Money Go?
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Where is the Money From?
10%
22%
24%15%
9%
21%
Multilateral CreditorsOfficial Bilateral CreditorsExport CreditsBank Loans and DepositsDebt SecuritiesOthers
Figure 2: Outstanding International Debt by Type of Country
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A History of Recurrent Crisis
1950-60s• Period of decolonization resulting in a growing Third World
consciousness.
• Owing to nationalist movements, economic growth and development figured prominently on the government agenda of these countries.
• General trend favoring government-led development (such as import-substituting industrialization).
• Development finance was sourced through FDI (to a greater extent) and loans (to a lesser extent).
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1970s• A maturing international financial system gave rise to the
phenomenon of eurodollars and petrodollars.
• Eurodollars: Basically, currencies that are held off-shore.
• Petrodollars: As the name suggests, funds arising from the oil industry.
• 1973: OPEC Quadruples Oil Prices
• This occurred during a time when the international economy was booming.
• International financial markets expanded, and banks ended up with more money than they knew what to do with.
A History of Recurrent Crisis
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1970s• Third World countries became attractive borrowers for
these surplus funds.
• They needed the money to finance their export and manufacturing sectors.
• The economies in these countries were apparently on the rise, backed by seemingly coherent development plans.
• In borrowing, these countries offered in exchange for favorable terms a sovereign guarantee of repayment.
• Thus, development finance shifted to a greater amount of commercial bank loans (at variable interest rates).
A History of Recurrent Crisis
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1970s• 1979: Second Oil Price Shock
• Debtor nations throughout the intervening period generally kept their currencies overvalued, resulting in capital flight as the years progressed.
• US reaction this time was to contract the money supply in order to combat inflation, causing interest rates to rise.
• Northern economies responded by becoming more protectionist in order to keep their own economies (and constituents) secure.
• Debtor nations resorted to debt refinancing.
A History of Recurrent Crisis
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1980s
A History of Recurrent Crisis• 1982: Mexico announces a moratorium on the payments of
interest for its sovereign debts.
• Concern of creditor countries: what if other nations do the same thing?
• US Government steps in to provide short term financing to the Mexican government.
• The IMF steps in to provide needed funds (subject to strict conditionalities) and to broker deals with other lending institutions using moral suasion.
• 1989: Brady Plan is put forward.
• Attempt at debt alleviation by debt swaps via “Brady Bonds”.
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1990s
A History of Recurrent Crisis• 1994: Financial crisis in Mexico (a.k.a. Tequila Crisis)
• Following successful economic reforms, large amounts of capital began flowing into Mexico.
• However, these funds did not lead to economic growth but were used to finance the country’s large trade deficit.
• 1996: Creditors adopt the Highly Indebted Poor Countries Initiative.
• Structural adjustment and policy reforms in exchange for debt write-offs.
• June 2, 1997: Thailand devalues the Bhat, marking the beginning of the Asian Financial Crisis.
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2000s
A History of Recurrent Crisis
• 2000: There is a renewed push for debt cancellation under the Jubilee 2000 Initiative.
• December 24, 2001: Argentina defaults on more than $130 billion in external debt.
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Analysis• Third World Debt presents a problem on many fronts:
• The amount of funds used by debtor nations to finance their debts could be put to other good uses.
• The possibility of default by a large debtor nation can throw the entire financial system into disarray.
• Owing to the large amounts of debt accruing to Third World countries, the phenomenon presents a significant challenge to the integrity and legitimacy of the entire system.
• Although debtor countries should bear much of the responsibility for the problem, this does not preclude creditors’ themselves taking some initiative to resolve it.
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Sidebar: Potential Solutions
Debt refinancing.
Debt restructuring.
Debt swaps.
Debt moratorium.
Debt forgiveness.
Debt cancellation.
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Analysis (continued)• The persistence of the problem demonstrates the leverage
of creditor countries in the international economy.
• Creditors’ worries revolve around the prospect of en masse default.
• Debtors’ worries revolve around the impact that default may have on their future access to finances.
• As not all debtors are created equal, smaller debtors have more to gain from defaulting than larger ones.
• Facing the prospect of collective default, creditors can (and have) play(ed) debtors against each other to prevent such an occurrence.
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Analysis (still continuing)
• The nature of the problem is changing.
• Whereas before, the problem largely revolved around the inability of countries to service their debts, this is now made all the more volatile in the face of short-term, rapid flows of capital in and out of economies.
• It is becoming clear that the sheer amount of debt facing the South may amount to a perennial “debt trap” they cannot get out of (it it is not already the case).
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