Nikhil.ppt.idc

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4 The International Debt Crisis Presented By-; Ms. Vidyotma Mishra Mr. Nikhil Gadia

Who are these so called Developed Countries? : 

There are only 26 countries in the world that are not considered to be developing / Third World countries. These countries are the members of the OECD (Organization for Economic Cooperation and Development). They contain 20% of the world’s population, control 80% of the world’s wealth. Who are these so called Developed Countries?

OECD Countries : 

1. Australia 8. France 15. Luxembourg 21. Spain 2. Austria 9. Germany 16. Mexico 22.Sweden 3. Belgium 10. Greece 17. Netherlands 23. Switzerland 4. Canada 11. Ireland 18. New Zealan 24. United Kingdom 5. Czech 12. Iceland 19. Norway 25. United States Republic 13. Italy 20. Portugal 26. Turkey 6. Denmark 7. Finland OECD Countries

“Share the Wealth”: Chair demonstration : 

10 chairs, 10 volunteers. Each chair represents 10% of the world’s wealth. 80% of the world’s population controls only 20% of wealth. 8 students try to sit in 2 chairs. 2 students get to stretch out on the remaining 8 chairs. “Share the Wealth”: Chair demonstration

Factors of International Debt Crisis : 

Factors of International Debt Crisis

Cont…. : 

Problems of mobilizing the huge Euro-dollar deposits for global growth called the problem of “oil dollar recycling”. Oil payment Oil payment Cont…. DEVELOPING COUNTRIES OPEC DEVELOPED COUNTRIES INTERNATIONAL COMMERCIAL BANKS Syndicated loan Dollar deposits

Loans not grant : 

In 1957, the U.S. decided that, instead of providing grants, it would provide low-interest loans as a form of aid to developing countries. The rationale for this decision was that these investments would generate sufficient wealth to than pay for themselves. Loans not grant

3. Abolition of U.S. Gold Standard : 

Abolition of Breton wood system. In the 1970s, the United States went off the gold standard. This meant that the value of the dollar was no longer tied directly to the value of gold, and created a great deal of uncertainty in world financial markets. Lower value of dollar causes too much cost for OPEC country. Increase price of oil by 70%. 3. Abolition of U.S. Gold Standard

Oil Prices Non-OPEC : 

Oil Prices Non-OPEC

4. “The Trojan Horse” Spiraling Inflation : 

Rise in the general level of prices. Interest rate of the loan raised from 5% to 10-15%. 4. “The Trojan Horse” Spiraling Inflation

5. Declining Currency Value : 

Currencies of developing countries lost values. Debt load doubled. 5. Declining Currency Value

6. Falling commodity prices : 

The Recession reduced the demand for the LDC’s products and the export earnings needed to service their bank debt. The interest payments/export ratio reached 50% for some of these countries in 1982 so export’s were needed to maintain up-to-date interest payments, leaving less than half of the export earnings to finance essential imports and to repay principal on their bank loans. Had to pay higher prices for their imports with less income. 6. Falling commodity prices

7. Cold War : 

Two major world power were playing geopolitical chess. They made available even more money to allies of their regimes. These countries would have a rebellion funded by one of the Superpowers. 7. Cold War

Onset of the Crisis : 

Onset of the Crisis DEVELOPING COUNTRIES IMF,WB DEVELOPED COUNTRIES INTERNATIONAL COMMERCIAL BANK Financial rescue with conditionality Loans and contribution Loans stopped demanding repayment

Onset of the Crisis : 

In 1982 Mexico, Brazil , Argentina with 25 LDC’s announced that it was unable to meet its regular scheduled payments to international creditors. A worldwide recession that reduced the demand for oil put downward pressure on oil prices and on OPEC’s revenues. Onset of the Crisis

Baker Plan : 

In 1985, US Treasury secretary James Baker initiated the Baker plan in which adjustment was combined with debt rescheduling & new money. Fifteen highly indebted countries were designated as candidates. Assumption was that the problem was illiquidity so delaying the repayment will solve the problem. Baker Plan

Contd………… : 

But even then also indebted countries could not pay back & the BOP situation was even worse than before. The problem was not illiquidity but insolvency. Contd…………

Brady Plan : 

In 1989 Nicholas Brady launched the Brady plan. 3 options were available under this plan: Reduce face value of debt Extend term of obligations Infusion of new money Brady Plan

Results of the International Debt Crisis : 

Many nations threatened to default their loans. This would put into jeopardy many of the North American, European, and Japanese banks who lent them the money and This would lead to an economic crisis in the developed world. For this reason, organizations such as the World Bank and the International Monetary Fund were established to allow the developing countries to reschedule their debts. Results of the International Debt Crisis

Slide 20: 

International Monetary Fund (IMF) developed loan initiatives which are coupled with S.A.P. (Structured Adjustment Plan) criteria.

What do S.A.P.’s ask developing countries to do? : 

Devalue their currency to make imports expensive and encourage exports. Increase their exports (cash crops). Limit spending on social and education (more money for loan re-payments). Eliminate trade barriers with OECD countries. What do S.A.P.’s ask developing countries to do?

Steps taken to Relieve the Debts -; : 

Steps taken to Relieve the Debts -;

Slide 23: 

Approach I – Highly Indebted Poor Countries (HIPCs) An initiative by the World Bank and International Monetary Fund to reduce the debt of the 41 poorest nations in the world. However: To be eligible for this initiative, nations must be willing to implement a Structural Adjustment Plan (SAP) approved by the World Bank or IMF.

Approach II: Jubilee 2000 / Jubilee+ Campaign : 

An initiative to mark the new millennium by forgiving the debt owed by the 50 poorest countries of the world. Approach II: Jubilee 2000 / Jubilee+ Campaign

Approach III – Canada : 

Canada is a significant creditor to many of the HIPCs. To assist in relieving the debt of these countries, Canada had: 1. Forgiven bilateral international debt 2. Provided relief in lieu of forms of government development assistance 3. Cancelled debts 4. Encouraged other members of the IMF & World Bank to make HIPC initiatives more generous. Approach III – Canada

Approach III – Canada : 

Canada is a significant creditor to many of the HIPCs. To assist in relieving the debt of these countries, Canada had: 1. Forgiven bilateral international debt 2. Provided relief in lieu of forms of government development assistance 3. Cancelled debts 4. Encouraged other members of the IMF & World Bank to make HIPC initiatives more generous. Approach III – Canada