International Debt Crisis Money 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