The%20International%20Debt%20Crisis - PowerPoint PPT Presentation

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The%20International%20Debt%20Crisis

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Title: PowerPoint Presentation Author: dacias Last modified by: Harry Cleaver Created Date: 3/26/2005 2:06:35 AM Document presentation format: On-screen Show – PowerPoint PPT presentation

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Title: 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
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