The International Debt Crisis

By
Anchal Agarwal B009
Krutika Deo B027
Pallavi Gupta B040
Vijaya M B066
Discussion: What do you think the
term “International Debt Crisis”
means?
 International debt

 International Debt External debt(or foreign debt) is the total

debt a country owes to foreign creditors, complemented by
internal debt owed to domestic lenders. The debtors can be the
government, corporations or citizens of that country.

 The debt includes money owed to private, commercial

banks, other governments, or international financial institutions
such as the International Monetary Fund (IMF) and World
 Impact of International Debt

•Majorly on Developing Countries.

•They had to pay high price to service their debts.Cost is born by

people with high poverty.
•According to Oxfam International's April 1997 report,

Poor Country Debt Relief, "Debt repayments have meant

health centers without drugs and trained staff, schools
without basic teaching equipment, and the collapse of
agricultural extension services."
•Repayment made in hard Currencies
It must make sense when you look
at the facts….right?

• From 1970-2002, Africa received some $540 billion in loans and paid
back $550 billion in principal and interest. Yet Africa remains today
with a debt stock of $295 billion.

• Debt relief is conditioned on requirements that countries limit

government spending, private basic services, and/or change trade and
investment rules.

• Much of the debt is a result of "bad faith" lending including:

The practice of pushing loans on developing nations because
banks had too much money and had to lend it
… Did you know????

 The term “Third World Countries” was coined in the early

1950s to describe those countries that did not belong to either
the Western/Capitalist bloc, or the Communist/Eastern bloc of
countries who were engaged in the Cold War.

 It also suggests that the expanding split between rich and poor
nations was not as evident and obviously less prominent prior
to the 1950’s.
 OECD countries

 26 countries in the world that are not considered to be

developing / Third World countries.

 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, and have an average GNP (Gross National
Product) of $USD 18,00.
 Causes for escalation of debt
1. OPEC Oil Crisis

Inresponse to their profits, the OPEC nations had vast sums of

money to invest, and deposited it in banks in North America, Europe,
and Japan.

These banks had to find customers to borrow this cash. The world’s
developing countries became more than willing customers for loans
that had low, but floating, interest rates.

Inreality, a major reason why these countries had to borrow money

was to pay for the oil they needed, which was dramatically more costly.

When a country uses loans to pay for day-to-day needs like oil, little
capital is left over for economic development. These oil purchases,
of course, enriched the oil exporters even more.
 2. Loans, not grants

 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.
Many other countries followed suit with this form of aid.
 3. Abolition of U.S. Gold Standard

 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.

 As a result, OPEC felt that the lower value of the dollar was
costing them too much money. In response, they increased the
price of oil by 70%.

 Additional significant oil price increases occurred in 1979.

These price jumps were a big problem for a wealthy country like
Canada, but proved to be even more economically
devastating in the nations of the developing world.
 4. Spiraling Inflation

 During the 1970s and early 1980s, the world experienced

spiraling inflation that drove up interest rates. Loans that
might have been affordable when the cost of borrowing was 5%
became totally unsustainable with rates between 10 and 15%.
 5. Declining Currency Value

 To make matters worse, throughout this whole period, as the

economies of debtor nations declined, their currencies lost
value compared to hard currencies like the US dollar and the
Japanese yen.

 If the currency lost half of its value compared to US dollars (and

many lost much more than that), the debt load doubled in
terms of local currency.
 6. Falling commodity prices

 To add to the growing economic mess, the price of many of

the commodities that the developing countries relied on for
export earnings (agricultural, forestry, and mining products)
declined in the 1970s and early 1980s.

 These countries had to pay higher prices for their imports

(especially oil) with less income.
 7. Cold War

 2 major world powers of the day, the U.S and the USSR, were
playing geo-political chess.

 They made available even more money to allies of their

regimes, even if such allies were ruled by a ‘Flavor of the Day’
ruler. In many cases, these countries would have a rebellion
funded by one of the Superpowers.

 They would then get some money through the Superpowers

influence from banks in Europe and North America. Then once
they had spent the money on frivolous items while the
population starved, they would be overthrown by a rebellion
funded by the other Superpower.
Results of the International Debt Crisis

 In response to the inflation of the developing countries debts,

many nations threatened to default their loans.

 However, if this were to occur, it would put into jeopardy many

of the North American, European, and Japanese banks who
lent them the money. This would lead to an economic crisis in
the developed world.

 World Bank and the International Monetary Fund were

established to allow the developing countries to reschedule
their debts.
 Types of loans given to nations

In the year 2000….

 57% - Private loans from various financial institutions.

 27% - Bilateral loans (country-to-country)

 16% - Multilateral loans from international agencies (World

Bank, International Monetary Fund)
 What do S.A.P.’s ask developing
countries to do?

1. Devalue their currency to make imports

expensive and encourage exports.
2. Increase their exports (cash crops).
3. Limit spending on social and education (more
money for loan re-payments).
4. Increase their military spending and protection
standards.
5. Eliminate trade barriers with OECD countries.
 Ten Reasons for Developing Nations Debt

• Colonialism
• Poverty
• Lack of infrastructure
• Incapable/Untrained/Greedy leaders
• Misguided use of funds
• SAP restrictions
• Military regimes
• Uneducated workforce
• Unpayable principles
• Uncontrolled population
 The Debt Boomerang

International debt is not only a developing world problem.

It costs developed nations billions of $/year

1. Lost Jobs through lost markets

2. International epidemics through reduced health standards
3. Global warming
4. Inconsistent governments and insecurity
5. Immigration pressures (government expenditures)
What is being done to relieve the debt?

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.

 To be eligible for this initiative, nations must be willing to

implement a Structural Adjustment Plan (SAP) approved by the
World Bank or IMF.

 SAPs often require these nations to make controversial

adjustments such as restricted social spending.
 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.

Rationale:
1. The debt of these countries is ruinous.
2. The debtor nations have paid more than a fair amount for
loans forced upon them.
3. Many of the nations are paying for unfair debts that are at least
2 decades old (i.e. odious debts)

Odious debts – created by corrupt leaders (i.e. Philippines –

hundred of shoes owned by the wife of former president,
Imelda Marcos.
 Approach III – Canada

Canada is a significant creditor to many of the HIPCs. To assist in

relieving the debt of these countries, Canada has:

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.