 Presented to: Sir Fahad Anam’s Group

 Presented By: Anam’s BS Commerce (2007 – 11)

7th Semester
Group

Presentation of International Finance

Islamia University of Bahawalpur

Jinnah campus Rahim Yar Khan
Honourable members
Of Anam’s Group
BS Commerce
7st semester

Nimra Ahsan 38
Khadija Liaquat 37
Anam Bari 36
Sahar Saeed 02
Third-World Debt Crisis,
1982-1989

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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
The Third-World Debt Crisis:
1982 - 1989
High interest rate loan to Brazil, 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

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The Third-World Debt Crisis:
1982 - 1989

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The Third-World Debt Crisis:
1982 - 1989
   
Total External Total External Debt Service
Debt Debt (as a % of
  (Millions Of $US) (as a % of GNP) Exports) 1990
1990 1980 1980

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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The Third-World Debt Crisis:
1982 - 1989
   
Total External Total External Debt Service
Debt Debt (as a % of
  (Millions Of $US) (as a % of GNP) Exports) 1990
1990 1980 1980

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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The Third-World Debt Crisis:
1982 - 1989

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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

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The Third-World Debt Crisis:
1982 - 1989
Poverty as a General Motive for Borrowing
Economists, 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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The Third-World Debt Crisis:
1982 - 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

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

The Third-World Debt Crisis:

1982 - 1989
The Specific Economic Conditions of the
1970s
Effect Amount
Oil Price Increase in Excess of US Inflation
260
(1974-82 cumulative)
Real Interest Rate in Excess of 1961-80
41
Average: 1981 and 1982
Terms of Trade Loss, 1981-82 79
Export Volume Loss Caused by World
21
Recession, 1981-82
Total 401
Total Debt Increase, 1973-82 482

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The Third-World Debt Crisis:
1982 - 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.
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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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

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The Third-World Debt Crisis:
1982 - 1989
Non-productive Investments

Debt for Military Expansion

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The Third-World Debt Crisis:
1982 - 1989
The oil price factor

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The Third-World Debt Crisis:
1982 - 1989
The interest rate factor

Economic mismanagement factor

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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

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The Third-World Debt Crisis:
1982 - 1989
The Loose lending factor

Ideological Miscalculations

Political Miscalculations

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The Third-World Debt Crisis:
1982 - 1989
Bank Euphoria

Portfolio Mismanagement

Financial cycle Theory

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The Third-World Debt Crisis:
1982 - 1989
The debt problem
The gravity of the Debt Problem
Top Borrowers
Top lenders – USA
Top lenders – UK
Bank Failures

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The Third-World Debt Crisis:
1982 - 1989
The gravity of the Debt Problem

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The Third-World Debt Crisis:
1982 - 1989
Top Borrowers

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The Third-World Debt Crisis:
1982 - 1989
Top lenders – USA

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The Third-World Debt Crisis:
1982 - 1989
Top lenders – UK

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The Third-World Debt Crisis:
1982 - 1989
Bank Failures

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The Third-World Debt Crisis:
1982 - 1989
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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The Third-World Debt Crisis:
1982 - 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

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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

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The Third-World Debt Crisis:
1982 - 1989
Solutions

Repudiation
Minor adjustments in repayments
Debt reduction

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The Third-World Debt Crisis:
1982 - 1989
Handling of Crisis
In 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 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

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The Third-World Debt Crisis:
1982 - 1989
Handling of Crisis
In 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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The Third-World Debt Crisis:
1982 - 1989
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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The Third-World Debt Crisis:
1982 - 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, 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.

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

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

• 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
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
 ?
HAVE ANY
QUESTION
End of Presentation
Thank You

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