Professional Documents
Culture Documents
A
PRESENTATION
BY
THE STELLERS
MBA- 15/ C
ORIGINS
1. In the 1960s and 1970s many Latin American countries, notably Brazil,
countries had soaring economies at the time so the creditors were happy to
continue to provide loans. Between 1975 and 1982, Latin American debt to
heightened borrowing led Latin America to quadruple its external debt from
$75 billion in 1975 to more than $315 billion in 1983, or 50 percent of the
region's gross domestic product (GDP). Debt service (interest payments and
the repayment of principal) grew even faster, reaching $66 billion in 1982,
2. When the world economy went into recession in the 1970s and 80s,
and oil prices skyrocketed, it created a breaking point for most countries in
liquidity crunch. Petroleum exporting countries – flush with cash after the
harder for borrowing countries to pay back their debts. While the
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dangerous accumulation of foreign debt occurred over a number of years,
the debt crisis began when the international capital markets became aware
that Latin America would not be able to pay back its loans. This occurred in
that Mexico would no longer be able to service its debt. In the wake of
loans that previously would have been refinanced were now due immediately.
the debt crisis neither to the high level of indebtedness nor to the
disorganization of the continent's economy. They say that the cause of the
crisis was leverage limits such as U.S. government banking regulations which
forbid its banks from lending over ten times the amount of their capital, a
regulation that, when the inflation eroded their lending limits, forced them
encouraged by the IMF, though there are exceptions such as Chile and Costa
thereby raising the real interest rate. Real GDP growth rate for the region
was only 2.3 percent between 1980 and 1985, but in per capita terms Latin
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5. The debt crisis is one of the elements which contributed to the
have enduring effects, including the USD 2.94 trillion of Latin American and
emerging markets debt traded worldwide that year. The following is a list of
external debt for Latin America based on a March 2006 report by The
World Factbook.
External Debt
Rank Country - Entity Date of information
(million US$)
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39 Chile 44,800 31 October 2005 est.
5
110 Costa Rica 3,633 30 June 2005 est.
7. Let's begin with a brief overview of the debt crisis and the measures
gave rise to the debt crisis. During that period, the price of oil
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b. Decreased Exports and High Interest Rates in the Early
Loans.
countries.
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("money center") banks, had dangerously low levels of capital
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included drastic reductions in government spending in order to
debt.
not materialize and, to the extent it did, the new lending merely
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In light of what appeared to be an intractable problem,
be repaid.
Strategies.
policy towards the debt crisis. Given the persistently high levels
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buybacks; (ii) exchange of existing debt for "discount bonds"
carry the same face value as the old loans but carry a below-
that exceeded outflows for the first time since the onset of
the debt crisis. This led some observers to proclaim that the
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debt crisis was over for major Latin American debtor countries.
measures intended to reduce domestic demand for goods and services (IMF
between IMF and Bank programs often blurred in practice, however, because
Overheated Economies.
than exports), which the IMF believed was one of the major
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state employees' wages or laying off state employees, reducing
DEVELOPMENT
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9. A great number of observers criticized the IMF and the World Bank
for their handling of the debt crisis. Indeed, the criticisms of that crisis
resemble much of what we have heard about the Asian financial crisis: the
countries while "bailing out" foreign players such as banks and investors.
wide gap between the rich and the poor widened further. The
development."
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Post-crisis studies of the impact of SSAPs have helped
increased the gap between the rich and the poor in developing
in poverty.
10. As one might expect, other studies have shown that SSAPs are not as
detrimental as critics have claimed. Some have pointed out that the impact
detrimental across developing countries. Others have shown that the plight
by making them less expensive and may indirectly increase the income of the
rural poor. Still other studies have shown that avoiding adjustment or
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THE DEBT CRISES AND NEO-LIBERALISM
11. Today, the developing countries are more than $2 trillion in debt to
the big bankers in the U.S., Europe and Japan. Of course, over the years
interest payments alone. But the debt keeps mounting and the bankers keep
Some background information on the debt crisis and the program of "neo-
12. By the 1980's, the developing countries were $700 billion in debt to
U.S., European and Japanese bankers. This mountain of debt, combined with
economic recession and a dramatic drop in prices for raw materials (the main
bankers with the danger that countries could no longer make their
13. In this situation, the Reagan administration - with the help of the
International Monetary Fund (IMF) and the World Bank - came forward with
market" and increase economic growth in the developing countries, the real
the transfer of wealth from the developing countries to the big U.S. and
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debt and 2) increase the direct imperialist take-over of the economic
new loans, the debtor countries were required to put their budgets and
economies under the supervision of the IMF and the World Bank. The
e. currency devaluations.
15. During the 1980's, more than 70 debtor countries (including Brazil,
South Korea, Egypt, Morocco, Senegal, Ghana, etc.) were forced to accept
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Structural Adjustment Loans. The sovereignty of these countries was
thoroughly undermined and their economies brought under the direct control
16. Rather than eliminating the crises and accelerating economic growth,
as the public relations men for the "free market" had advertised, this
countries and imposed untold hardship on the peoples. In Latin America, for
example, GNP per capita decreased by 10% during the 1980's while the
number of people living below the official poverty line increased from 130
living in poverty has jumped to 300 million, nearly 50% of the population.
17. But while economic growth stagnated and poverty increased, the
Miller, a former director of the World Bank. "Not since the conquistadores
plundered Latin America has the world experienced a [financial] flow in the
countries paid $178 billion in interest and amortization on debt to U.S. and
European commercial banks. By 1997 (before the Asian financial crisis), the
Africa pay four times more in servicing their foreign debt than they spend
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on health care and education combined. In addition, the neo-liberal
the economy in many developing countries and led to the massive take-over
1,155) were privatized between 1982 and the early 1990's. Foreign,
telecommunications, airlines, banking, mining, steel and even parts of the oil
the Mexican workers by firing state employees, breaking unions and tearing
has led to a 60% fall in average real wages over the last 15 years.
19. Similarly in Chile between 1975 and 1989, the Pinochet government
and real estate. The vast majority of these enterprises went to foreign
with the international banks and monopolies. In nearly every case, the
Chile's national steel industry, valued at $700 million was sold for $72
million; government-owned sugar refineries worth $81 million went for $34
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20. In short, a mountain of debt has been forced onto the backs of the
working people throughout the world. Every year, the U.S. and other
21. In country after country, people are rising against this international
the workers and people are organizing themselves politically and taking the
field against international imperialism and the capitalist system. They are
guarantees the economic and human rights of the people and which returns
struggles the workers and people are advancing towards the goals of national
CONCLUSIONS
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22. This paper has analysed information problems between investment
banks and investors during sovereign debt crises, by studying the structure
price sovereign default risk well before crises emerge and even
find that the former on average is only slightly higher than the
latter (385 bp vs. 319 bp) and well lower than the primary
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b. Second, investment banks’ behaviour differs depending on the
crises countries.
24. The major policy implication that follows from this research is that
This information has been neglected during past sovereign bond crises, while
crisis, and one perhaps more relevant than standard indicators such as
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