International Debt CrisisMoney for Nothing?

International Debt Crisis Developing nations owe huge amounts of money to

developed countries The debt load is probably the single greatest impediment to

reaching economic “takeoff” in a stable country Debt service – paying just the interest – makes up a large

part of developing countries budgets, often requiring more money than is spent on education or healthcare

International Debt Crisis Debt is held by three main types of lenders – private lenders

like commercial banks, bilateral lenders which are other governments and international agencies like the World Bank and the International Monetary Fund

Private lenders are careful about where they loan their money and invest mainly in nations that are already at the “takeoff” stage of development or right on the cusp

Very poor nations, ones that are still reaching for any form of development or economic success have to rely on nation to nation loans or money from the international agencies

International Debt Crisis – How It Happened

Loans replaced Grants

In 1957 the United States decided that all foreign aid would change from grants of money to loans

Other countries followed suit The loans were often given with below market interest rates

but they now had to be repaid, causing a financial shift for nations trying to find their feet

International Debt Crisis – How It Happened

Abolition of the U.S. Gold Standard

In the 1970’s the U.S. abandoned the “gold standard” This caused lots of financial uncertainty and the price of oil in

particular skyrocketed This escalation in the price of a basic economic commodity

was economically devastating for many emergent countries

International Debt Crisis – How It Happened

Explosion of PetroDollars

Because the price of oil went up so much the oil producing nations had lots of cash

They invested it in banks in developed nations These banks loaned it to developing countries at low floating

interest The money wasn’t used for development however, it was

often mainly used to buy basic needs like oil, thus making the members of OPEC even richer

International Debt Crisis – How It Happened

Spiralling Inflation

During the late 70’s and 80’s the entire world went into an inflationary period

To combat the out of control inflation that was harming many economies nations raised interest rates dramatically

This was a disaster for developing nations What may have been barely affordable when interest rates

were 5% became an impossible burden when those rates climbed to 10, 15 or even 20%

International Debt Crisis – How It Happened

Declining Currency Value

During the period of spiralling inflation the developing nations currencies lost significant ground to the “hard” currencies that loans are made in

This meant that servicing costs went up even futher, sometimes as much as doubling

International Debt Crisis – How It Happened

Falling Commodity Prices

As a final insult, the main exports of most developing nations – raw materials or agricultural products – declined in value during the same period

This loss of revenue led to buying essentials (like oil) with even less internal revenue, resulting in more borrowing

Commodity prices would remain in a slump for almost 20 years

International Debt Crisis – How It Happened By the mid 1980’s many developing nations were at the end

of their financial rope These countries were no longer even able to pay the interest

on their loans, let alone the principal When large debtor nations like Mexico, Argentina and Brazil

threatened to default, lenders became very concerned Because large banks had loaned so much money to

developing nations any default would cause serious financial pain but a number of defaults could result in a banking system collapse that would plunge the world into a financial crisis unlike any before

International Debt Crisis – How It Happened The only answer to the problem was to loan even more

money to developing nations so they could pay their current debt

This support was done in the form of restructuring existing debt to be paid off over a much longer period and by lending more capital at very low rates

Much of the lending was done through international agencies like the World Bank and the IMF and it came with strings

International Debt Crisis – How It Happened In order to obtain restructured debt or access new funds

countries had to accept several conditions Developing nations had to devalue their currency They had to increase exports, often by environmentally unfriendly practices or

by unsustainable resource extraction They had to restrict their social and educational infrastructure funding They were unable to use foreign currency to import critical needs like food and

medicine

As a result of this many countries that were about to reach “takeoff” regressed significantly

Those nations are only now beginning to recover to their late 1970’s levels