10/5/2020 1970: Bank Loans to

Developing Countries

SHAHBAZ WASEEM MALIK FA17-BBA-157

AQSA ZAHEER JANJUA FA17-BBA-038
AHMAD KHAWAJA FA17-BBA-021
ALINA NADEEM FA17-BBA-031
1970: Bank Loans to Developing Countries

Introduction:

Bank lending has always been one of the major sources of financing for the

developed countries. Many of the countries could not afford a bank loan from a private

bank. However, this changed in 1970’s and the banks started to give loans to the less

developed countries. This was as a result of the gains from the oil exporting developing

countries. These loans were targeted towards the developing countries such as Latin

America, Asia (middle income) countries that have a high GNP. Different countries were

lent money by these banks such as Mexico, Brazil, Venezuela and Argentina. The non-

American banks have also persuaded this path and they also started lending to the less

developed countries. After 1970s the bank lending became one of the major sources of

finance for the developing countries. These loans were usually used to cover the

balance of payment deficits and this later became a major issue in the form of debt

crisis in the following years. (discussed later in this assignment).

The banks opted for this solution to increase their financial health as they were

facing a recession in the economy. This might have helped them to grow but there were

clearly signs that this will affect them badly. These lending led to the debt crisis of

1980’s, but the reason for the crisis lies in the years 1973 to 1978.

Reasons:

The oil prices quadrupled in the year 1973 – 1974, this resulted in the growth of

the real domestic products of the countries by 6% annually. This growth rate slowed but

it was still at a 5 – 6% average. The increase in the growth rate also means that there

was increase in the corporate investments in the market. The U.S banks wanted to
1970: Bank Loans to Developing Countries

show their international presence in the market and this in turn resulted in the

emergence of the new international financial systems. This helped the US banks to

make the loans accessible to the third world countries on a very large scale.

The sharp rise in crude oil prices that began in 1973 and continued for almost a

decade accelerated this expansion in lending. (image attached).

The movement of prices due to the changes in these prices was something that

called for a way to solve the balance of payment deficits. The developing countries

needed a way to solve their problems and so that they can deal with the balance of

payment deficits. These countries started borrowing from banks and started to finance

their balance of payment deficits. On the other hand, the prices of oil raised that had

caused the deficits. Besides that, the increase in the oil prices in 1973 also was one of

the cause of bringing the world recession in the year 1974 – 1975.

The potential risks of the growing involvement of U.S. banks in less developed

countries debt were not unnoticed. Economists, government officials, and other
1970: Bank Loans to Developing Countries

observers warned of the possible dangers for both individual institutions and the

banking system as a whole. In 1977 Arthur Burns, chairman of the Federal Reserve

Board, criticized commercial banks for assuming excessive risks in their third World

lending. Congress held hearings on the less developed countries issue in 1975 and

expressed concern about the excessive concentration of Third World loans and its

related threat to the capital position of U.S. banks. A 1977 published staff report noted,

“the most immediate worry is that the stability of the U.S. banking system and by

extension the international financial system may be jeopardized by the massive balance

of payments lending that has been done by commercial banks since the oil price hike”.

References:

David C. Beek, Commercial Bank Lending to the Developing Countries, Federal Reserve Bank of New
York Quarterly Review (summer 1977)

Sachs, J., & Williamson, J. (1986). Managing the LDC debt crisis. Brookings papers on economic
activity, 1986(2), 397-440.

World Bank. (1985). International Bank Lending and the Securities Markets.

Fryer, D. W. (1987). The political geography of international lending by private banks. Transactions of

the Institute of British Geographers, 413-432.