Developments have confirmed at least three postulates: risk is a fundamental factor in market equilibrium; all private external credit involves a certain amount of risk for the public sector of the borrowing country; and private credit to the public sector involves certain risks for the lender. Countries cannot suspend their imports or reduce them below a minimum consistent with the effective operation of their economies. The specialization that characterized the external financing of Latin American countries, simply put, was as follows: The countries obtained development credits and long-term loans from multilateral entities and official agencies of the industrial countries (for the financing of capital goods exports). But this does not mean that this type of financing was the cause of the crisis. If these general conclusions lead to a single recommendation, it is that countries must view their external financing policies in the framework of their global macroeconomic policies, and that, within such a framework, adequate financial programming must assure a minimum of consistency between objectives, resources, and instruments. The dynamic ratios show how the debt-burden ratios would change in the absence of repayments or new disbursements, indicating the stability of the debt burden. Other changes of no less importance were also occurring. The external factors underlying the debt crisis may be classified into three groups. Growing levels of debt can discourage foreign and private investment because of concerns that the debt is becoming unsustainable. Thus, given the imbalance created between the growth of external debt and domestic capital accumulation, a debt crisis was virtually inevitable. The excess liquidity will inevitably lead to higher inflation, increased external borrowing or greater losses of international reserves, or a combination of both. It is true that a large part of these increases represented rising interest rates in international markets, but interest rates were also rising for other borrowing countries (i.e., some East Asian countries) that followed different economic strategies and used the external financing to create and expand export industries. The debtors can be the government, corporations or citizens of that country. And this brings us to the second set of causes of Latin America’s external debt problem, namely, financing by international commercial banks. 03 Jun. The surprising fact is that in most of the cases the increased inflow of external funds was accompanied by a drop in domestic savings as a percentage of GDP. Countries with foreign debt have to meet the interest payments on the debt. There are no precise rules for when external debt becomes a problem. Unexpected devaluation in the exchange rate, which increases the real value of debt interest payments denominated in dollars. Countries in regional areas may suffer from a regional downgrade in credit assessment. Because of the problem associated with rising external debt, there has been pressure for developed countries to cancel outstanding debt by developing economies. Click the OK button, to accept cookies on this website. Statistical data for the countries under study tend to lend support to the linkages outlined above: the fiscal deficits of most countries had, as their counterparts, first an expansion of domestic credit followed by a series of mounting deficits in the current account of the balance of payments; these deficits, in turn, were the counterpart of the external debt or of losses of international reserves. debt crisis affects the majority of a set of 34 low-income African countries. If the public is not willing to demand or hold the additional liquidity, it will proceed to “mop it up” by exchanging domestic financial assets for real assets—domestic or imported—or for external financial assets. Opting for financing from the private financial system has important consequences—an upward pressure on interest rates as the government attempts to place its securities and, as a corollary of this, a decline in private investment as projects yielding less than the now higher interest rate cease to be profitable (the phenomenon known as “crowding out”). Domestic credit for the public sector basically has two main sources: the central bank and the private sector. On the one hand, the commercial banks saw that they could not go on lending large amounts for ever-shorter periods. This set of indicators also covers the structure of the outstanding debt, including: A second set of indicators focuses on the short-term liquidity requirements of the country with respect to its debt service obligations. Funding purchase of imports. For example, many Sub-Saharan African countries experienced rising external debt ratios, and this made investors reluctant to lend at cheap rates. Second, the public sectors of the countries in question had neither the needed taxing capacity nor the domestic savings required to service the external financing offered to them. First, countries do not have an unlimited capacity to absorb external financing and to make proper use of all the funds they may be granted at a given moment. Even if the assumption is made that debt principal is not normally repaid, but refinanced, the situation would still be very serious. It is now clear that all the protagonists were mistaken in their perception of the risk involved. The total external debt of these countries, about $70 billion, is less than Mexico An increasing proportion of the loans was no longer linked to the economic feasibility of investment projects. As a result, the ratio of external debt-service to exports of goods and services rose steeply. Most of them were being extended to public sectors for the purpose of financing fiscal deficits or investment programs in which the lender was no longer a direct participant in the project risk. 1 Apart from members of Although interest rates may initially tend not to rise because of the unanticipated excess liquidity, the public will soon realize that the situation is not sustainable. On the contrary, it will take many years before most of the countries return to a normal situation in which markets resume their role as principal regulators of financial flows and international trade. The argument is that debt cancellation can make a significant contribution to improving economic development because it frees up resources to invest in the recipient country – rather than send abroad in debt interest payments. A decline in commodity prices which leads to a decline in the. These factors precipitated the crisis and certainly aggravated it, but, important though they were (and continue to be), they did not produce the crisis. A country’s level of debt in Net Present Value to either 150 percent of exports or 250 percent of government, Gold reserves / foreign currency reserves. Loan proceeds were not always well invested or used to generate foreign exchange or supplement domestic savings. On the other hand, there will be higher inflation in the first case and lower inflation and greater economic efficiency in the second. The second category of credit was not government-guaranteed and pertained to commercial transactions between private sectors. First, following the emergence of external imbalances that required internal adjustment measures, countries sought to avoid reducing total public and private expenditure to the level of available resources; and second, loans from international commercial banks and other lenders—both public and private—expanded at an extremely rapid rate. By the end of 1981, liabilities to international banks accounted for 63 percent of the total external debt of the 20 major borrowing countries. The second group includes factors of a more permanent nature, in contrast to the transient ones mentioned above, and involves what economists call real, as against purely monetary, factors. External Relations Dept. Excessive confidence in borrowing to promote economic growth and development. For example, conflict or global recession which hits demand and GDP. You are welcome to ask any questions on Economics. Commentdocument.getElementById("comment").setAttribute( "id", "a88ebf2bc6b362e21c3420ae6757f83e" );document.getElementById("a1fff4cb6f").setAttribute( "id", "comment" ); Cracking Economics – A visual guide What this financing did was to facilitate the postponement of the measures that, in any event, would have had to be taken to adjust the economies in question to the deterioration in their terms of trade, as well as to the strictly monetary developments that occurred in 1979 and thereafter. The thrust of the foregoing analysis is that the countries in question did not follow the correct policies to take advantage of the increase in external financing made available to them. External Debt Public debt levels have been rising across regions, but it is more of a concern in Sub-Saharan Africa. international symposium on Government Debt in Democracies: Causes, Effects, and Limits which was part of the project that took place at the Berlin-Brandenburg Acad- emy of Sciences and Humanities (BBAW) in late fall 2012. On the other hand, short-term credit, connected mainly with commercial transactions, was provided by suppliers or by international commercial banks. This problem of high interest rates is a delicate one, not only because of its effect on investment or, more accurately, on the distribution of investment between the public and private sectors, but also because high interest rates tend to become a difficult political problem as the monetary authorities are pressured to lower them. While other factors also contributed to the inconsistency of economic policies, the primary factor was a level of public—as well as private—expenditures that exceeded currently available resources or resources that could have been regarded as stable in the medium term. Equally, there could be over-confidence in lenders to lend money in short-term without evaluation of possible problems. Nevertheless, in the case of Latin America, even though the gravity of the debt problems was not uniform among all countries, it seems abundantly clear that we have been faced with an unprecedented crisis, regardless of the indicator used. But—and this is of fundamental importance—there is a close and inseparable interdependence between internal and external credit: in the final analysis, the former determines the pattern of external financing.

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