WORLD’S DEBT CRISIS

Plan
 1. External debt, its structure
 2. Indicators of debt sustainability
 3. External debt management
 4. Third world debt
 5.Ukraine’s external debt
 Epigraph
“External debt is like a third world war – a different kind of
war, one where children die instead of soldiers. Instead
of war wounded filling the hospitals, it is the sick and
underfed that overcrowd the wards, while the jobless
wander the streets in search of work. No bridges or
roads are blown up, but factories, schools and hospitals
are closed down. No rockets are fired, but wealth is
plundered. External debt is a permanent blood-letting
from the veins of Latin America that were cut open five
centuries ago.
Brazil ranks among the ten richest countries in the
world. But her veins too have been cut open, and the
creditors are sucking her dry of the precious blood
produced by the toil of our people.”
Marcos Arruda.External debt. Brazil and International Financial Crisis
Map of countries by external debt
based on 2005 CIA factbook
figures
1. External debt, its structure
 External debt
 External debt (or foreign debt) is that part
of the total debt in a country that is owed
to creditors outside the country.
 The debtors can be the government,
corporations or private households. The
debt includes money owed to private
commercial banks, other governments, or
international financial institutions such as
the IMF and World Bank.
 1.External debt
 "Gross external debt, at any given time, is the
outstanding amount of those actual current, and
not contingent, liabilities that require payment(s)
of principal and/or interest by the debtor at some
point(s) in the future and that are owed to
nonresidents by residents of an economy.“

Source: External Debt Statistics.Quide for users and compilers.

IMF,2003.
http://www.imf.org/external/pubs/ft/eds/eng/guide/
 Key elements of the definition
of external debt

1) Outstanding and Actual Current

Liabilities: For this purpose, the decisive
consideration is whether a creditor owns
a claim on the debtor.
Debt liabilities include arrears of
 principal
 interest.
 Key elements of the definition
of external debt
 (c) Residence: To qualify as external
debt, the debt liabilities must be owed by a
resident to a nonresident.
 Residence is determined by where the
debtor and creditor have their centers of
economic interest - typically, where they
are ordinarily located - and not by their
nationality.
 Key elements of the definition
of external debt
 (d) Current and Not Contingent:
Contingent liabilities are not included in
the definition of external debt.
Contingent liabilities - arrangements under
which one or more conditions must be
fulfilled before a financial transaction takes
place.
 Contingent liabilities
 are liabilities that may or may not be incurred by an
entity depending on the outcome of a future event such
as a court case. These liabilities are recorded in a
company's accounts and shown in the balance sheet
when both probable and reasonably estimable.
 A footnote to the balance sheet describes the nature and
extent of the contingent liabilities. The likelihood of loss
is described as probable, reasonably possible, or
remote. The ability to estimate a loss is described as
known, reasonably estimable, or not reasonably
estimable.
 Contingent liabilities
Examples
 outstanding lawsuits
 Accounts payable
 Legal liability
 Liquidated damages
 Tort
 Bills Discounted with bank
 Unliquidated damages
 Destruction by Flood
 product warranty
 External debt
external debt is classified into four heads
(1) public and publicly guaranteed debt,
(2) private non-guaranteed credits,
(3) central bank deposits
(4) loans due to the IMF.
 Who Do You Pay External Debt
To?
1. The official creditors
 the richest capitalist countries, mainly the United States,
Japan, Germany, France, England,Switzerland, Canada
and The Netherlands.
2. The private creditors.
private commercial banks such as Citibank, Deutsche
 Bank, AMRO, Crйdit Agricole, Union of Swiss Banks and
others.
3. Multilateral creditors
World Bank,the IMF (International Monetary Fund) and the
IDB (Inter-American Development Bank).
2.Indicators of external
debt sustainability
 External debt sustainability
 Sustainable debt is the level of debt
which allows a debtor country to meet its
current and future debt service obligations
in full, without recourse to further debt
relief or rescheduling, avoiding
accumulation of arrears, while allowing an
acceptable level of economic growth.
(UNCTAD/UNDP, 1996)
 Indicators of external debt
sustainability (debt burden ratios)
Debt Stock
 Foreign Debt/GDP
 Foreign Debt/Exports of G&S
 Government Debt/GDP
 Government Debt/Current Revenue
Debt Structure
 Foreign Short-term Debt/Foreign Debt
 Concessional Debt/Foreign Debt
 Government Foreign Debt/
 Government Debt
 Government Short-term Debt/Government Debt
 Liquidity monitoring indicators
 A second set of indicators focuses on the
short-term liquidity requirements of the
country with respect to its debt service
obligations.
These indicators are useful early-
warning signs of debt service problems,
but also highlight the impact of the
intertemporal trade-offs arising from past
borrowing decisions.
 Liquidity monitoring indicators
 Foreign Debt Service/GDP
 Foreign Debt Service/Exports
 Foreign Debt Service/Official Reserves
 Government Debt Service/GDP
 Government Debt Service/Current
Revenue
 The dynamic ratios
 More forward looking
 point out how the debt burden will evolve
over time, given the current stock of data
and average interest rate.
 show how the debt burden ratios would
change in the absence of repayments or
new disbursements, indicating the stability
of the debt burden.
 Debt dynamic ratio

(1+i)
%Δ DB = ________ - 1
(1+g)
 % Δ DB - the dynamic ratio (the percentage change in
the domestic debt burden),
 I - the average nominal interest rate on the debt stock,
 g the growth rate of nominal GDP
3. External debt
management
 Financial distress
 is a term in Corporate Finance used to
indicate a condition when promises to
creditors of a company are broken or
honored with difficulty.
 IIP- INTERNATIONAL
INVESTMENT POSITION

 A country's international investment position

(IIP) is a financial statement setting out the value
and composition of that country's external
financial assets and liabilities.

 International Investment Position = domestically

owned foreign assets - foreign owned domestic
assets.
 Debt restructuring
 a process that allows a private and public
company – or a sovereign entity – facing cash
flow problems and financial distress, to reduce
and renegotiate its delinquent debts in order to
improve or restore liquidity and rehabilitate so
that it can continue its operations.
 Companies use debt restructuring to avoid
default on existing debt or to take advantage of
a lower interest rate.
 Debt management
- Market-based debt reduction by banks
- securitization
- debt relief
 Market based reduction schemes

 debt-for-equity swaps

 the secondary market sale of debts,

 debt buy-backs

 the exchange of debts for collateralized

securities.
 Debt-for-equity swap

 A deal, when creditors generally agree to

cancel some or all of the debt in exchange
for equity in the company.
 Debt relief
 partial or total forgiveness of debt, or the
slowing or stopping of debt growth, owed
by individuals, corporations, or nations.
 4. Third world debts
http://www.unescap.org/pdd/publications/themestudy2005/ch6.pdf

Global Development Finance

http://siteresources.worldbank.org/
NEWS/Resources/gdf2010.pdf
 Developing countries' debt
external debt incurred by the governments of
Third World countries, generally in quantities
beyond the governments' political ability to
repay.
"Unpayable debt" is a term used to describe
external debt when the interest on the debt
exceeds what the country's politicians think they
can collect from taxpayers, based on the
nation's gross domestic product, thus preventing
the debt from ever being repaid.
 The causes of debt
The legacy of colonialism — for example, the
developing countries’ debt is partly the result of
the transfer to them of the debts of the
colonizing states, in billions of dollars, at very
high interest rates.

 Odious debt

 Mismanaged spending and lending by the West

in the 1960s and 70s
 Odious debt

 In international law, odious debt is a legal theory

which holds that the national debt incurred by a
regime for purposes that do not serve the best
interests of the nation, such as wars of
aggression, should not be enforceable.

 Such debts are considered by this doctrine to be

personal debts of the regime that incurred them
and not debts of the state.
 Sovereign default
 a failure by the government of a sovereign
state to pay back its debt in full.

 Latin American debt crisis (1980s)

 1994 economic crisis in Mexico
 1998 Russian financial crisis
 Argentine debt restructuring (2002)
 2010 European sovereign debt crisis
 Some figures
 Every Brazilian born in 1998 already bears on
his or her shoulders a debt burden of US$
1,374.
 The military regime managed to multiply Brazil’s
external debt by 42 in 21 years, catapulting it
from US$2.5 billion in early 1964 to US$105 in
1985. In 1984, out of every US $ 1,619 per
inhabitant that Brazil produced, US $ 781 were
pledged to the external debt
 Heavily Indebted Poor Countries
HIPC
 Heavily Indebted Poor Countries (HIPC)
are a group of 40 least developed
countries (LDC) (29 of which are in Sub-
Saharan Africa) with high levels of
poverty and debt overhang which are
eligible for special assistance from the
International Monetary Fund (IMF) and the
World Bank.
HIPC
 HIPC
 Afghanistan Ghana
 Benin
 Guinea*
Bolivia
 Burkina Faso Guinea-Bissau*
 Cameroon Guyana
 Central African Republic Haiti
 Chad* Honduras
 Republic of the Congo Liberia
 Democratic Republic of the Madagascar
Congo
 Comoros* Malawi
 Côte d'Ivoire* Mali
 Ethiopia Mauritania
 Gambia Mozambique
 HIPC
 Nicaragua
 Niger
 Rwanda
 São Tomé and Príncipe
 Senegal
 Sierra Leone
 Tanzania
 Togo*
 Uganda
 Zambia
Eritrea, Kyrgyz Republic, Somalia and Sudan are being
considered for entry into the program.
 The HIPC program
 initiated by IMF and the World Bank in 1996

 provides debt relief and low-interest loans to cancel or

reduce external debt repayments to sustainable levels.
 to be considered for the initiative, countries must face an
unsustainable debt burden which cannot be managed
with traditional means.
 Assistance is conditional on the national governments
of these countries meeting a range of economic
management and performance targets.

 HIPC's threshold requirements: the ratio of debt-to-

exports exceeded 200-250% or the ratio of debt-to-
government revenues exceeded 280%.
 Minimum requirements for participation
in the program.

1) a country must show its debt is unsustainable;

debt-to-export ratio = 150%, a debt-to-government-
revenues ratio = 250%.
2) the country must be sufficiently poor to qualify for
loans from the World Bank's International
Development Association or the IMF's Poverty
Reduction and Growth Facility (PRGF, the successor
to ESAF), which provide long-term, interest-free
loans to the world's poorest nations.
 the country must establish a track record of reforms
to help prevent future debt crises
 Funding
 total cost of providing debt relief to the 40
HIPC country is estimated to around $71
billion (in 2007 dollars).
 Half of the funding is provided by the IMF,
World Bank, and other multilateral
organizations, while the other half is
provided by the creditor countries
 In 1985, Latin America had a external debt of
US$390 billion.
 By 1996, despite the many billions repaid over
those twelve years, the debt had risen to
US$657 billion.
 In 1985 Brazil’s external debt totalled US$105
billion. Between 1985 and 1998 Brazil paid back
US$282 billion in interest and amortisation.
 In interest alone the bill was US$126 billion.
Nonetheless, by 1998 the debt had swollen to
US$243 billion.
 Jubilee 2000
 an international coalition movement in
over 40 countries called for cancellation of
third world debt by the year 2000.

 It aimed to wipe out $90bn of debt owed

by the world's poorest nations, reducing
the total to about $37bn.
 Post Jubilee movements
 Jubilee South (encompassing many
former Jubilee campaigns in Africa, Asia
and Latin America)
 Jubilee Debt Campaign,
 Jubilee Scotland and Jubilee Research in
UK;
 Jubilee USA Network;
 Jubilé 2000/CAD Mali in Mali
 Make Poverty History
 a campaign in a number of countries, including Australia
, Canada, Denmark, Finland, Ireland, New Zealand,
Nigeria, Northern Ireland, Norway, Romania , the United
Arab Emirates and the United Kingdom .
Global Call to Action Against
Poverty
 The Global Call to Action Against
Poverty (GCAP)
 is a growing worldwide alliance consisting of national
coalitions (or platforms) of campaigns to end poverty.

 Globally it is made up of more than 1900 member

organizations

 It claims to have involved some 38 million people in

actions in 2005 in over 75 countries and 23 million
people in 2006 (so far) in over 85 countries, but it has yet
to prove itself as a sustainable and broad-based global
movement.
 The demands:
 www.whiteband.org

 Public accountability, just governance and

the fulfillment of human rights
 Trade justice
 A major increase in the quantity and
quality of aid and financing for
development
 Debt cancellation
 Eurodad
 (European Network on Debt and
Development) is a network of 58 non-
governmental organisations from 19
European countries.
 this network researches and works on
issues related to debt, development
finance and poverty reduction.
 Eurodad’s stated aims
 push for development policies that support pro-
poor and democratically-defined sustainable
development strategies.
 support the empowerment of Southern people to
chart their own path towards development and
ending poverty.
 seek a lasting and sustainable solution to the
debt crisis, appropriate development financing,
and a stable international financial system
conducive to development.
 Eurodad
 has existed since 1990 and is registered
as a non-profit organisation in both the
Netherlands and Belgium.
 funded by its members (about one-third of
its budget) and by the Dutch Ministry of
Foreign Affairs, Swedish International
Development Cooperation Agency and UK
Department for International Development.
 Sources of Foreign Exchange to
Pay External Debt
• Exports – Foreign Exchange: payment of
debt + payment of imports =
insufficient;
• Attracting External Investment: more
liabilities to pay, increasing remittances of
profits and dividends;
• New Loans: before, to invest in
development later, to pay interest = more
indebtedness in a vicious circle.
 Original Sin
 metaphor in economics literature,
proposed by Barry Eichengreen, Ricardo
Hausmann, and Ugo Panizza in a series of
papers to refer a situation in which
 "most countries are not able to borrow
abroad in their domestic currency”.
 Emerging market debt (EMD)
 bonds issued by less developed countries
 is primarily issued by sovereign issuers.
 have a lower credit rating than other
sovereign debt
 Countries issuing EMD
 Argentina
 Brazil
 Bulgaria
 Chile
 China
 Colombia
 Cote d'Ivoire
 Dominican Republic
 Ecuador
 Egypt
 El Salvador
 Fiji
 Ghana
 Hungary
 Indonesia
 Iraq
 Lebanon
 Malaysia
 Mexico
 Morocco
 Nigeria
 Pakistan
 Panama
 Peru
 Philippines
 Russia
 Serbia
 Seychelles
 South Africa
 Tunisia
 Turkey
 Ukraine
 Uruguay
 Venezuela
 Vietnam
 POLICY RECOMMENDATIONS
to make debt finance a positive source of
financing for development.
(a) the country level;
(b) the bilateral level;
(c) the regional level;
(d) the global level.
 1. COUNTRY LEVEL
• Maintain macroeconomic stability on a sustainable basis with due
attention to monetary, fiscal and exchange rate policy coherence
and consistency. In particular, pay careful attention to growing
public sector fiscal deficits.

• Deregulate and liberalize markets carefully to improve productivity

and, for those that have yet to liberalize, sequence the steps
required for capital market liberalization appropriately.

• Develop the financial system, including domestic bond markets

and, in particular, the government bond market, by creating an
environment conducive to the promotion of long-term investments.
In this regard, development of the derivative market will be also
needed in emerging markets for risk management.
Country level recommendations
• Avoid excessive dependence on external short-term borrowing and
secure long-term financing.

• Effectively monitor the flows of capital, particularly short-term

private capital.

• Discourage the flow of speculative short-term capital in various ways,

using a different tax structure and caps or maturity restrictions on
certain types of debt in periods of excessive short-term discouraged
capital flows.

• Maintain adequate foreign reserves to provide effective insurance

against external uncertainties. Effectively manage the foreign
reserves portfolio, paying attention to the movements of major
currencies to minimize the foreign exchange risks.
Country level recommendations
 • Continuously explore opportunities to reduce
the burden of expensive debt via early
retirement (prepayment) and refinancing of
existing high-cost debt that can be retired without
additional costs, such as penalties, provided that
this does not adversely affect the maturity
profile.

• Efficiently use foreign aid for development

purposes to minimize the cost of capital.
• Monitor debt on a regular basis, using appropriate tools, such as
early warning systems and debt sustainability analysis, to ensure
that the debt burden remains at sustainable levels.

• Ensure the availability of computerized data on debt, both external

and domestic, both public and private, as well as the contingent
liabilities of the public sector by creating effective institutional
frameworks for the comprehensive and timely flow of information.

• Ensure greater transparency in debt data in line with international

standards, such as those found in External Debt Statistics: Guide
for Compilers and Users.

• Adhere to good governance principles in contracting debt and

using borrowed funds.

• Promote stronger institutional arrangements for, and strengthen

coordination of, debt management.
 REGIONAL LEVEL

• Improve the existing frameworks and

arrangements to provide support for countries
facing difficulties in raising capital on
international markets.

• Enhance the development of regional bond

markets through increased standardization of
issuance and settlement procedures.

- Enhance technical assistance in debt

management.
 Glossary
 HIPC Initiative - Initiative for heavily
indebted poor countries
 IIP International investment position
 Odious debt
 Souvereign debt
 Debt relief
 Financial distress
 Restructuring
 Debt-to-equity swap