The International Debt Crisis Part II

1. The International Debt Crisis Part II

2. Emergence of the Debt Crisis 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”

3. Debating IMF Solutions to Crisis • Readings: • Annotated bibliography • “IMF Austerity Prescriptions could be Hazardous” • “Fund Policy on Adjustment and Financing” • - IMF’s Camdessus

4. Defining the Debt “Bomb” • 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

5. Debt “Bomb” - Exploding • 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

6. Dangers of Social “Explosion” Debtor Countries - In response to contraction and subsequent austerity Creditor Countries - In response to contraction and subsequent austerity

7. 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

8. 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

9. 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

10. Relevant Case Study: Brazil • 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.

11. Relevant Case Study: Brazilcont. • 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

12. 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

13. 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

14. The IMF Responds • Programs do improve balance of payments • In the long run, programs will restore conditions of development