1. Chapter 26: International Lending and Financial Crises
Topics in chapter 26:
Private and official lending and investment
Gains and losses from “well-behaved” international lending
Taxes on international lending
International lending to developing countries
Financial crises

2. Types of lending and investing
Private Lending and Investing
Long term
Direct investment
Loans
Portfolio investment
Short term
Official lending and investing (e.g. IMF or World Bank)

3. Intertemporal Production Possibility Curves

4. Well behaved lending
International lending may be justified in many circumstances
What do we mean by well behaved lending ?
Temporary balance of payments problems
Lending to finance profitable investment projects
World welfare will increase (see figure 26.1)

5. Lending to developing countries
Not always “well behaved”
Often used to finance consumption and public sector financial deficits
Started in the 70s and 80s when “petro dollars” had to be recycled

6. Developing Countries External Debt

7. Developing Countries External Debt

8. Long term debt - 1998 (billion US $) - by country

9. Short term debt to reserves

10. Currency crises and banking crises

11. Debt crisis of the 1980s
In the world economy suffered a steep concession
In 1979, the US Federal Reserve adopted a tough anti-inflationary policy which helped push the world economy into recession by 1981
Developing countries had extensive dollar denominated debts, and there was an immediate and spectacular rise in the interest burden debtor countries had to pay

12. Debt crisis of the 1980s
In August 1982, Mexico announced that its central bank had run out of foreign reserves and it could no longer meet payments on its $ 80 billion foreign debt
Seeing that the same could happen in Argentina, Brazil and Chile, banks in the industrialised countries started to cut off new credits and demanding repayment on earlier loans

13. Liquidity was a problem too

14. The Asian Crisis in 1997 and 1998

15. The Russian crisis in 1998 Roubles per dollar

16. Crises are bad for you

17. Why do crises occur ? Waves of overlending and overborrowing
Exogenous international shocks
Exchange rate risk
Fickle international short-term lending
Global contagion

18. Global contagion Think back at the Asian crisis in 1997 and 1998
Why did it spread so much
Analogy - a virus infection
Did the virus spread to the air-conditioning system - infecting everybody
Did one person carry it with him or her - infecting just those near him or her ?

19. Rescue packages - IMF

20. What is the problem ?
”Whatever you do, don`t call the IMF” Professor Jeffrey Sachs, Harvard University, lecture IfW, Kiel, 17. May, 1999
Makes the crisis larger than necessary ?
Too harsh conditions on borrowers ?
Prescribes the same medicine, regardless of the decease ?
Adjustment with a human face?
Modul 13

21. IMF - not the ideal rescue ?