Title: The%20International%20Debt%20Crisis
1The International Debt Crisis Part II
2Emergence 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
3Debating IMF Solutions to Crisis
- Readings
- Annotated bibliography
- IMF Austerity Prescriptions could be Hazardous
- Fund Policy on Adjustment and Financing
- - IMFs Camdessus
4Defining 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
5Debt 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
6Dangers of Social Explosion
Debtor Countries - In response to contraction
and subsequent austerity Creditor
Countries - In response to contraction and
subsequent austerity
7Potential 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
8Actual 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
9After 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
10Relevant 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.
11Relevant 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
12Debate 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
13Debate 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
14The IMF Responds
- Programs do improve balance of payments
- In the long run, programs will restore conditions
of development