The International Debt CrisisPart II

Readings:

• “The Debt-Bomb Threat”

• “The Third World Threat to the West’s Recovery”

• “Austerity Pushes Brazil to the Brink of Social Upheaval”

• “Assaulting the Heavens: Class Struggle and the Brazilian Debt Crisis”

Emergence of the Debt Crisis

Debating IMF Solutions to Crisis

Readings:

• Annotated bibliography

• “IMF Austerity Prescriptions could be Hazardous”

• “Fund Policy on Adjustment and Financing”- IMF’s Camdessus

• Default would lead to collapse of debtor country economies – a decrease in GNP

• Increase in interest rates would lead to greater interest payment on debt, leading to increase in debt service ratio

• Less profits made available for capital investment – contraction of business investment, GNP

• Decrease in consumption to follow, as well as a decrease in investment and GNP

Defining the Debt “Bomb”

• Default on debt, leads to collapse of creditor country economies

• Decrease in debtor’s imports, leads to decrease in creditor’s exports, ultimately, a decrease in GNP

• Default on debt leads to collapse of creditor financial systems• Chain of defaults – dangerous; large banks left highly exposed;

loan loss reserves at only 12% of exposure; failure to collect – lead to decrease in prices and share values; collapse would require FED to provide money to troubled creditor banks

Debt “Bomb” - Exploding

Debtor Countries

- In response to contraction and subsequent austerity

Creditor Countries

- In response to contraction and subsequent austerity

Dangers of Social “Explosion”

Potential Solutions to Crisis

• Reschedule and roll over debt

• Debtors default; creditors write off debt

• Reduction in debt (lower interest rates, longer repayment period)

• Increase loan loss reserves

• Create secondary market for debt, let value decline

Actual Solutions to the Crisis

• Rescheduled and rolled over debt; led to more debt, often with higher interest rates

• A condition for rollover meant continuous payback ($100s of billions paid back in ’80s & ’90s)

• IMF imposed austere conditionality

• FED increased money supply somewhat – allowing interest rates to fall slightly, although rates were still high

• Decrease in interest rates for consumption and capital, partial reversal of Social Security policy

After the Explosion

• Implemented solutions allowed time to cope with social and political relations

• In 1987, Citicorp increased loan loss reserves and admitted debt would not be fully repaid

• In 1989, IMF accepted some debt reduction

• Policy shifts result of grassroots and working class antagonistic opposition to government policies

• 1974: after initial austerity led to a quadrupling of oil prices, policies reversed

• Reversal a reaction to election loss and grassroots opposition to military regime

• Result: rapid build up of Brazilian debt – lots of money for consumption. Fertile ground for crisis.

Relevant Case Study: Brazil

Policy reversal, 1979, after second oil price shock• Reaction to reemergence of labor movement• Result was a deepening of debt and continuing

difficulty in repayment• Continued crisis

1987: Debt Moratoria• Due to delay in imposition of austerity; government

fear of reaction in elections• Resulted in failure of Cruzado Plan, refusal to repay

debt

Relevant Case Study: Brazil cont.

Debate Over the IMF Continues

Critiques of conditionality & structural adjustment programs:

• Wrong people being forced to pay – not those who actually borrowed the money

• Debt repayment used as an excuse for anti-labor, anti-consumption changes in policy

Debate Over the IMF Continues

Critiques of conditionality & structural adjustment programs continued:

• Although it may make sense for one country to reduce imports and expand exports, this policy cannot be pursued by all

• Policy impossible, damages world trade – net effect is depression rather than restoration of economic growth

The IMF Responds

• Programs do improve balance of payments

• In the long run, programs will restore conditions of development