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  • 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
  • 4.  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.
  • 5.  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.
  • 6.  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.
  • 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.  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.
  • 9. 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.
  • 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. High interest rate greatly increased the cost of holding commodity stocks, resulting in large reduction of inventories, which further reduced demand of many commodities.
  • 12. 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
  • 13. A number of factors amplified the impact of theresulting recession on developing countries.In the early 1980’s the trend both in thecommodity prices and in interest rate weresimultaneously unfavorable for developingcountries, with a disastrous impact on theircurrent account deficit.
  • 14. 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
  • 15. 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.
  • 16. Agents in the International Financial Intermediation A potentially important mechanism for enhancing international liquidity is the provision of low conditionality lending by the IMF.
  • 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 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.
  • 19. 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.
  • 20. 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.
  • 21. The Management of the Latin American Debt CrisesI. 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.
  • 22. The Management of the Latin American Debt CrisesIII. 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.
  • 23. The Management of the Latin American Debt CrisesIV. 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.
  • 24. The Management of the Latin American Debt CrisesVI. 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.
  • 25. The Management of the Latin American Debt CrisesVII. Latin American countries were spending more time on the rescheduling of the debt payments than on making viable medium term development strategies.
  • 26. Evaluation of Debt rescheduling Latin American governments have not fully perceived their new bargaining strength.
  • 27. Evaluation of Debt rescheduling Latin American governments have not fully perceived their new bargaining strength.
  • 28. Latin American countries were atdisadvantage because they were consideredless creditworthy just because of theirgeographic location.In August 1982, Mexico defaulted on itsexternal bank debt. When Mexico defaulted, thehighly leveraged foreign banks pulled backfrom emerging markets in general and LatinAmerica 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
  • 29. The most important cause of the collapse ofcommodity prices in 1980-82 was therecession in the industrial countriesIn 1980’s great decline in inflation wasaccompanied 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
  • 30. A potentially important mechanism for enhancing international liquidity is the provision of low conditionality lending by the IMF.Conditionality—that is, program-relatedconditions—is intended to ensure that Fundresources are provided to members toassist them in resolving their balance ofpayments problems. INTERNATIONAL MONETARY FUND Guidelines on ConditionalityPrepared by the Legal and Policy Development and Review Departments (In consultation with other departments) Approved by Timothy F. Geithner and François Gianvitihttp://www.imf.org/External/np/pdr/cond/2002/eng/guid/092302.pdf
  • 31. Latin American governments have not fullyperceived their new bargaining strength, asbecause they were the one who had to repaydebt. The cash flows were negative tothem, making them stronger at thebargaining table.Cost that may result from an internationalsovereign default: reputationalcosts, international trade exclusioncosts, costs to the domestic economythrough the financial system, and politicalcosts to the authorities. IMF Working Paper Research Department The Costs of Sovereign Default Prepared by Eduardo Borensztein and Ugo Panizza

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