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STEPHENY GRIFFITH-JONES
                             OSVALDO SUNKEL




  SHAAD ALVI (3697)
 NAZISH NAEEM (3687)
SEHRISH MEHMOOD(3661)
LATIN AMERICAN DEBT CRISES
                  (BACKGROUND)
   In the 1960s and 1970s many Latin American
    countries, borrowed huge sums of money
    from       international    creditors    for
    industrialization; especially infrastructure
    programs.

   This heightened borrowing led Latin
    America to quadruple its external debt from
    $75 billion in 1975 to more than $315
    billion in 1983.
DEBT AND DEVELOPMENT CRISES IN LATIN
              AMERICA
                                 STEPHENY GRIFFITH-JONES
                                        OSVALDO SUNKEL


   Internal/External causes of Crises




 How the cost of debt burden should be
                 shared




           Debt Crises Management
Siep
   The internal and external causes were largely
    integrated or intimately linked to one
    another.

   The    Latin     American   Economy      was
    ‘transnationalized’.

   Capital flight is believed to be an important
    contributory factor for Latin America Debt
    and Development Crises.
   The transnationalization of production and
    consumptions patterns was accompanied in
    the late 1970’s and early 1980’s by a sharp
    increase in the transnationalization of private
    wealth and assets.

   It was an interaction between unfavorable and
    unstable circumstances in the international
    market and the development strategies and
    policies of Latin American Governments
    which made this crises significant larger.
   Asian middle income countries that unlike
    Latin American countries followed a policy of
    targeted state intervention and selective
    regulation of international trade and capital
    flow absorbed the shocks of this crises more
    successfully.

   Latin   American     countries were    at
    disadvantage because they were considered
    less creditworthy just because of their
    geographic location.
   Asian middle income countries that unlike
    Latin American countries followed a policy of
    targeted state intervention and selective
    regulation of international trade and capital
    flow absorbed the shocks of this crises more
    successfully.

   Latin   American     countries were    at
    disadvantage because they were considered
    less creditworthy just because of their
    geographic location.
   The External factor contributing to the Latin
    American Crises are linked to the severity to
    the recession that occurred in the
    industrialized countries between 1980 and
    1982.

   In the late 1970’s, overall macroeconomic
    policy in industrial countries was greatly
    tighten, to achieve ‘disinflation’. There was
    greater emphasis on monetary policy to
    achieve this target.
A number of factors amplified the impact of the
     resulting recession on developing countries.

I.   The Value of Commodity exports fell sharply.

     The most important cause of the collapse of
     commodity       prices in 1980-82 was the
     recession in the industrial countries.
A number of factors amplified the impact of the
     resulting recession on developing countries.

I.   The Value of Commodity exports fell sharply.

     The most important cause of the collapse of
     commodity       prices in 1980-82 was the
     recession in the industrial countries.
A number of factors amplified the impact of the
     resulting recession on developing countries.

I.   The Value of Commodity exports fell sharply.

     The most important cause of the collapse of
     commodity       prices in 1980-82 was the
     recession in the industrial countries.

      High interest rate greatly increased the cost of
      holding commodity stocks, resulting in large
      reduction of inventories, which further reduced
      demand of many commodities.
A number of factors amplified the impact of the
      resulting recession on developing countries.

II.   The sharp escalation of interest rate increased
      dramatically the cost of the accumulated debt.

      A high proportion of the Debt had been
      contracted at a variable rate

      Latin America’s gross remittance for interest
      payments rose at a spectacular rate, from
      around US $ 6.9 billion in 1977 to over US $39
      billion in 1982
A number of factors amplified the impact of the
resulting recession on developing countries.

In the early 1980’s the trend both in the
commodity prices and in interest rate were
simultaneously unfavorable for developing
countries, with a disastrous impact on their
current account deficit.
A number of factors amplified the impact of the
       resulting recession on developing countries.

III.   There was a large decline in bank lending to
       the Latin American countries.
       For Banks the credit risk in such lending was
       very high.

       The growing inability of many major debtor
       countries to service their debt in 1982, and the
       obvious     need      to    reschedule     those
       debts, discouraged new loans to them, making
       the debt crises even worse
A number of factors amplified the impact of the
      resulting recession on developing countries.

IV.     Rise in the Dollar exchange rate increased the
        effective cost to most countries of the interest
        and amortization payment on their external
        debt.
Agents in the International Financial
                   Intermediation

   A potentially important mechanism for
    enhancing    international  liquidity  is  the
    provision of low conditionality lending by the
    IMF.
Agents in the International Financial
                   Intermediation

   A potentially important mechanism for
    enhancing    international  liquidity  is  the
    provision of low conditionality lending by the
    IMF.
Agents in the International Financial
                   Intermediation

   The IMF’s Compensatory Financing Facility (CFF)
    was developed in 1963 with a stated objective
    to maintain unaffected import capacity, in the
    face of export fluctuations caused by external
    events.
National Causes of Latin American Crises


   Large increase in the foreign debt that occurred
    during the 1970’s.


   Deregulation of the financial and trade systems.


   The increase in imports during particular years
    (1970’s), increased future dependence of the
    economy on the higher level of imported inputs.
The Management of the Latin American Debt Crises

   Latin American Debt servicing difficulty caused
    serious concerns amongst the international
    Banks, as they feared that such difficulty could
    threaten their profitability and even their
    existence.

   Banks reacted by restricting credit to countries
    already experiencing debt crises

   The contraction of credit made debt servicing
    even more difficult for the borrowers.
The Management of the Latin American Debt Crises


I.         The IMF played a key role in assembling rescue
           packages, which included credit tranche,
           rescheduling    of   maturing     debt,    and
           arrangement of new finance from Banks.

     II.   The new finance from private Banks has to a
           large extent been granted on an ‘involuntary’
           basis.
The Management of the Latin American Debt Crises


III.   Private Banks formed steering committees , for
       the purpose of negotiating with the debtor
       government.

       These steering committees – cartel of Banks –
       conducted negotiations on rescheduling of
       loans, reached tentative agreement with the
       government on the subject, and in collaboration
       with the IMF and their central Banks, offered
       package deals.
The Management of the Latin American Debt Crises


IV.   Creditors negotiate as a block while debtors
      negotiate individually.


V.    The complexity of the task, and the difficulties
      in reaching agreement, have in a number of
      cases implied that agreement is delayed beyond
      the targeted time, making the situation further
      complicated, demanding special bridging loans.
The Management of the Latin American Debt Crises


VI.   The complexity of negotiation demanded
      ‘short-leash’ year-by-year approach. This
      approach implied the consolidation of debt
      corresponding to only one year of payments.
      Multi-year rescheduling first ratified        in
      1985, between Mexico and its creditors.

       Later it was granted to other large debtors who
       were seen by creditors to have ‘behaved well’ in
       their previous adjustment efforts.
The Management of the Latin American Debt Crises


VII.   Latin American countries were spending more
       time on the rescheduling of the debt payments
       than on making viable medium term
       development strategies.
Evaluation of Debt rescheduling


   Latin American governments have not fully
    perceived their new bargaining strength.
Evaluation of Debt rescheduling


   Latin American governments have not fully
    perceived their new bargaining strength.
Siep
Latin   American     countries were    at
disadvantage because they were considered
less creditworthy just because of their
geographic location.

In August 1982, Mexico defaulted on its
external bank debt. When Mexico defaulted, the
highly leveraged foreign banks pulled back
from emerging markets in general and Latin
America in particular.

          THE ROLE OF LATIN AMERICAN BANKS IN THE
                  REGION’S CURRENCY CRISES
                    Carroll Howard GRIFFIN*
            http://www.rebs.ro/articles/pdfs/9.pdf
The most important cause of the collapse of
commodity prices in 1980-82 was the
recession in the industrial countries


In 1980’s great decline in inflation was
accompanied by very high interest rates.

     Interest Rates, Inflation, and Federal Reserve Policy Since 1980
                               Peter N. Ireland
                  Journal of Money, Credit and Banking
            Vol. 32, No. 3, Part 1 (Aug., 2000), pp. 417-434
                 Published by: Ohio State University Press
           Stable URL: http://www.jstor.org/stable/2601173
A potentially important mechanism for
 enhancing international liquidity is the
 provision of low conditionality lending by the
 IMF.
Conditionality—that is, program-related
conditions—is intended to ensure that Fund
resources are provided to members to
assist them in resolving their balance of
payments problems.

                   INTERNATIONAL MONETARY FUND
                      Guidelines on Conditionality
Prepared by the Legal and Policy Development and Review Departments
               (In consultation with other departments)
        Approved by Timothy F. Geithner and François Gianviti
http://www.imf.org/External/np/pdr/cond/2002/eng/guid/092302.pdf
Latin American governments have not fully
perceived their new bargaining strength, as
because they were the one who had to repay
debt. The cash flows were negative to
them, making them stronger at the
bargaining table.

Cost that may result from an international
sovereign default: reputational
costs, international trade exclusion
costs, costs to the domestic economy
through the financial system, and political
costs to the authorities.
                      IMF Working Paper
                     Research Department
                The Costs of Sovereign Default
       Prepared by Eduardo Borensztein and Ugo Panizza

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Siep

  • 1. STEPHENY GRIFFITH-JONES OSVALDO SUNKEL SHAAD ALVI (3697) NAZISH NAEEM (3687) SEHRISH MEHMOOD(3661)
  • 2. LATIN AMERICAN DEBT CRISES (BACKGROUND)  In the 1960s and 1970s many Latin American countries, borrowed huge sums of money from international creditors for industrialization; especially infrastructure programs.  This heightened borrowing led Latin America to quadruple its external debt from $75 billion in 1975 to more than $315 billion in 1983.
  • 3. DEBT AND DEVELOPMENT CRISES IN LATIN AMERICA STEPHENY GRIFFITH-JONES OSVALDO SUNKEL Internal/External causes of Crises How the cost of debt burden should be shared Debt Crises Management
  • 5. The internal and external causes were largely integrated or intimately linked to one another.  The Latin American Economy was ‘transnationalized’.  Capital flight is believed to be an important contributory factor for Latin America Debt and Development Crises.
  • 6. The transnationalization of production and consumptions patterns was accompanied in the late 1970’s and early 1980’s by a sharp increase in the transnationalization of private wealth and assets.  It was an interaction between unfavorable and unstable circumstances in the international market and the development strategies and policies of Latin American Governments which made this crises significant larger.
  • 7. Asian middle income countries that unlike Latin American countries followed a policy of targeted state intervention and selective regulation of international trade and capital flow absorbed the shocks of this crises more successfully.  Latin American countries were at disadvantage because they were considered less creditworthy just because of their geographic location.
  • 8. Asian middle income countries that unlike Latin American countries followed a policy of targeted state intervention and selective regulation of international trade and capital flow absorbed the shocks of this crises more successfully.  Latin American countries were at disadvantage because they were considered less creditworthy just because of their geographic location.
  • 9. The External factor contributing to the Latin American Crises are linked to the severity to the recession that occurred in the industrialized countries between 1980 and 1982.  In the late 1970’s, overall macroeconomic policy in industrial countries was greatly tighten, to achieve ‘disinflation’. There was greater emphasis on monetary policy to achieve this target.
  • 10. A number of factors amplified the impact of the resulting recession on developing countries. I. The Value of Commodity exports fell sharply. The most important cause of the collapse of commodity prices in 1980-82 was the recession in the industrial countries.
  • 11. A number of factors amplified the impact of the resulting recession on developing countries. I. The Value of Commodity exports fell sharply. The most important cause of the collapse of commodity prices in 1980-82 was the recession in the industrial countries.
  • 12. A number of factors amplified the impact of the resulting recession on developing countries. I. The Value of Commodity exports fell sharply. The most important cause of the collapse of commodity prices in 1980-82 was the recession in the industrial countries. High interest rate greatly increased the cost of holding commodity stocks, resulting in large reduction of inventories, which further reduced demand of many commodities.
  • 13. A number of factors amplified the impact of the resulting recession on developing countries. II. The sharp escalation of interest rate increased dramatically the cost of the accumulated debt. A high proportion of the Debt had been contracted at a variable rate Latin America’s gross remittance for interest payments rose at a spectacular rate, from around US $ 6.9 billion in 1977 to over US $39 billion in 1982
  • 14. A number of factors amplified the impact of the resulting recession on developing countries. In the early 1980’s the trend both in the commodity prices and in interest rate were simultaneously unfavorable for developing countries, with a disastrous impact on their current account deficit.
  • 15. A number of factors amplified the impact of the resulting recession on developing countries. III. There was a large decline in bank lending to the Latin American countries. For Banks the credit risk in such lending was very high. The growing inability of many major debtor countries to service their debt in 1982, and the obvious need to reschedule those debts, discouraged new loans to them, making the debt crises even worse
  • 16. A number of factors amplified the impact of the resulting recession on developing countries. IV. Rise in the Dollar exchange rate increased the effective cost to most countries of the interest and amortization payment on their external debt.
  • 17. Agents in the International Financial Intermediation  A potentially important mechanism for enhancing international liquidity is the provision of low conditionality lending by the IMF.
  • 18. Agents in the International Financial Intermediation  A potentially important mechanism for enhancing international liquidity is the provision of low conditionality lending by the IMF.
  • 19. Agents in the International Financial Intermediation  The IMF’s Compensatory Financing Facility (CFF) was developed in 1963 with a stated objective to maintain unaffected import capacity, in the face of export fluctuations caused by external events.
  • 20. National Causes of Latin American Crises  Large increase in the foreign debt that occurred during the 1970’s.  Deregulation of the financial and trade systems.  The increase in imports during particular years (1970’s), increased future dependence of the economy on the higher level of imported inputs.
  • 21. The Management of the Latin American Debt Crises  Latin American Debt servicing difficulty caused serious concerns amongst the international Banks, as they feared that such difficulty could threaten their profitability and even their existence.  Banks reacted by restricting credit to countries already experiencing debt crises  The contraction of credit made debt servicing even more difficult for the borrowers.
  • 22. The Management of the Latin American Debt Crises I. The IMF played a key role in assembling rescue packages, which included credit tranche, rescheduling of maturing debt, and arrangement of new finance from Banks. II. The new finance from private Banks has to a large extent been granted on an ‘involuntary’ basis.
  • 23. The Management of the Latin American Debt Crises III. Private Banks formed steering committees , for the purpose of negotiating with the debtor government. These steering committees – cartel of Banks – conducted negotiations on rescheduling of loans, reached tentative agreement with the government on the subject, and in collaboration with the IMF and their central Banks, offered package deals.
  • 24. The Management of the Latin American Debt Crises IV. Creditors negotiate as a block while debtors negotiate individually. V. The complexity of the task, and the difficulties in reaching agreement, have in a number of cases implied that agreement is delayed beyond the targeted time, making the situation further complicated, demanding special bridging loans.
  • 25. The Management of the Latin American Debt Crises VI. The complexity of negotiation demanded ‘short-leash’ year-by-year approach. This approach implied the consolidation of debt corresponding to only one year of payments. Multi-year rescheduling first ratified in 1985, between Mexico and its creditors. Later it was granted to other large debtors who were seen by creditors to have ‘behaved well’ in their previous adjustment efforts.
  • 26. The Management of the Latin American Debt Crises VII. Latin American countries were spending more time on the rescheduling of the debt payments than on making viable medium term development strategies.
  • 27. Evaluation of Debt rescheduling  Latin American governments have not fully perceived their new bargaining strength.
  • 28. Evaluation of Debt rescheduling  Latin American governments have not fully perceived their new bargaining strength.
  • 30. Latin American countries were at disadvantage because they were considered less creditworthy just because of their geographic location. In August 1982, Mexico defaulted on its external bank debt. When Mexico defaulted, the highly leveraged foreign banks pulled back from emerging markets in general and Latin America in particular. THE ROLE OF LATIN AMERICAN BANKS IN THE REGION’S CURRENCY CRISES Carroll Howard GRIFFIN* http://www.rebs.ro/articles/pdfs/9.pdf
  • 31. The most important cause of the collapse of commodity prices in 1980-82 was the recession in the industrial countries In 1980’s great decline in inflation was accompanied by very high interest rates. Interest Rates, Inflation, and Federal Reserve Policy Since 1980 Peter N. Ireland Journal of Money, Credit and Banking Vol. 32, No. 3, Part 1 (Aug., 2000), pp. 417-434 Published by: Ohio State University Press Stable URL: http://www.jstor.org/stable/2601173
  • 32. A potentially important mechanism for enhancing international liquidity is the provision of low conditionality lending by the IMF. Conditionality—that is, program-related conditions—is intended to ensure that Fund resources are provided to members to assist them in resolving their balance of payments problems. INTERNATIONAL MONETARY FUND Guidelines on Conditionality Prepared by the Legal and Policy Development and Review Departments (In consultation with other departments) Approved by Timothy F. Geithner and François Gianviti http://www.imf.org/External/np/pdr/cond/2002/eng/guid/092302.pdf
  • 33. Latin American governments have not fully perceived their new bargaining strength, as because they were the one who had to repay debt. The cash flows were negative to them, making them stronger at the bargaining table. Cost that may result from an international sovereign default: reputational costs, international trade exclusion costs, costs to the domestic economy through the financial system, and political costs to the authorities. IMF Working Paper Research Department The Costs of Sovereign Default Prepared by Eduardo Borensztein and Ugo Panizza