The%20International%20Debt%20Crisis

1
The International Debt Crisis Part II
2
Emergence of the Debt Crisis

• Readings
• The Debt-Bomb Threat
• The Third World Threat to the Wests Recovery
• Austerity Pushes Brazil to the Brink of Social
  Upheaval
• Assaulting the Heavens Class Struggle and the
  Brazilian Debt Crisis

3
Debating IMF Solutions to Crisis

• Readings
• Annotated bibliography
• IMF Austerity Prescriptions could be Hazardous
• Fund Policy on Adjustment and Financing
• - IMFs Camdessus

4
Defining the Debt Bomb

• Default would lead to collapse of debtor country
  economies a decrease in GNP
• Increase in interest rates would lead to greater
  interest payment on debt, leading to increase in
  debt service ratio
• Less profits made available for capital
  investment contraction of business investment,
  GNP
• Decrease in consumption to follow, as well as a
  decrease in investment and GNP

5
Debt Bomb - Exploding

• Default on debt, leads to collapse of creditor
  country economies
• Decrease in debtors imports, leads to decrease
  in creditors exports, ultimately, a decrease in
  GNP
• Default on debt leads to collapse of creditor
  financial systems
• Chain of defaults dangerous large banks left
  highly exposed loan loss reserves at only 12 of
  exposure failure to collect lead to decrease
  in prices and share values collapse would
  require FED to provide money to troubled creditor
  banks

6
Dangers of Social Explosion
Debtor Countries - In response to contraction
and subsequent austerity Creditor
Countries - In response to contraction and
subsequent austerity
7
Potential Solutions to Crisis

• Reschedule and roll over debt
• Debtors default creditors write off debt
• Reduction in debt (lower interest rates, longer
  repayment period)
• Increase loan loss reserves
• Create secondary market for debt, let value
  decline

8
Actual Solutions to the Crisis

• Rescheduled and rolled over debt led to more
  debt, often with higher interest rates
• A condition for rollover meant continuous payback
  (100s of billions paid back in 80s 90s)
• IMF imposed austere conditionality
• FED increased money supply somewhat allowing
  interest rates to fall slightly, although rates
  were still high
• Decrease in interest rates for consumption and
  capital, partial reversal of Social Security
  policy

9
After the Explosion

• Implemented solutions allowed time to cope with
  social and political relations
• In 1987, Citicorp increased loan loss reserves
  and admitted debt would not be fully repaid
• In 1989, IMF accepted some debt reduction

10
Relevant Case Study Brazil

• Policy shifts result of grassroots and working
  class antagonistic opposition to government
  policies
• 1974 after initial austerity led to a
  quadrupling of oil prices, policies reversed
• Reversal a reaction to election loss and
  grassroots opposition to military regime
• Result rapid build up of Brazilian debt lots
  of money for consumption. Fertile ground for
  crisis.

11
Relevant Case Study Brazil cont.

• Policy reversal, 1979, after second oil price
  shock
• Reaction to reemergence of labor movement
• Result was a deepening of debt and continuing
  difficulty in repayment
• Continued crisis
• 1987 Debt Moratoria
• Due to delay in imposition of austerity
  government fear of reaction in elections
• Resulted in failure of Cruzado Plan, refusal to
  repay debt

12
Debate Over the IMF Continues

• Critiques of conditionality structural
  adjustment programs
• Wrong people being forced to pay not those who
  actually borrowed the money
• Debt repayment used as an excuse for anti-labor,
  anti-consumption changes in policy

13
Debate Over the IMF Continues

• Critiques of conditionality structural
  adjustment programs continued
• Although it may make sense for one country to
  reduce imports and expand exports, this policy
  cannot be pursued by all
• Policy impossible, damages world trade net
  effect is depression rather than restoration of
  economic growth

14
The IMF Responds

• Programs do improve balance of payments
• In the long run, programs will restore conditions
  of development