Why do we have international financial crises? How do these crises influence economy and politics in each country?

AN ASSESSMENT OF THE IPE STRUCTURES THAT ALLOW FREE FLOW OF MONEY AND FINANCE

The Beginnings of the Issue of International Debt

The Washington Consensus

From Debt to Financial Crisis: The Mexican Crisis, 1994-5 The Asian Crisis, 1998 The Argentina Crisis, 2001-2 The Global Financial Crisis, 2007

Debt and Development

Debt and Political Stability

Debt and Economic Stability

1970s: Increasing volume of international debt › Increasing financial capabilities in the

Northern countries › High inflation and high interest rates in the

South › Exponential growth of debt and new

problems

1980s: Commercial banks with debt faced a crisis and had to decide between two alternatives› Provide additional loans and incur the risk

of default of new as well as older loans› Reject the request for additional funds and

cause default

1985: The Baker Plan› Creation of a $ 20 billion new loans for the

debtor countries with the help of Japan and other countries and private banks (Aim: To fix their economies to get the debts back).

› Increased demand reduced the prices of the exported goods of the debtor states

› Several negotiations over the issue of international debt

1989: The Brady Plan› The US refinances debts of Latin American

countries. The lenders would contribute by

Interest rate cuts Payment rescheduling Partial forgiveness

The lenders would exchange their debt with the US government securities

DISCUSS: Why did the US refinance the debt of Latin American countries?

In the 1980s IMF and World Bank became more concerned with international debt payments

The IMF became a major lender The IMF assistance was contingent on

debtors agreeing to implement structural adjustment policies,

austerity measures as currency devaluation, price stabilization, fiscal austerity, tariff liberalization

DISCUSS: What are the political costs of IMF policies for the debtor governments?

An external shock shifting expectations concerning future profits in some significant way

A sharp shift in actions and expectations caused by new information

Insiders begin to sell off their holdings and the crisis starts

The international spread of the crisis

The stage where the boom is fed by an increase in liquidity

The purpose of buying becomes to sell and take a capital gain as the price rises higher and higher

There is concern that the strength of the market may be fragile

http://www.pbs.org/wgbh/commandingheights/shared/video/wmp/mini_p03_07_220.html

http://www.pbs.org/wgbh/commandingheights/shared/video/wmp/mini_p03_11_220.htmlhttp://www.pbs.org/wgbh/commandingheights/shared/video/wmp/mini_p03_12_220.html

http://www.pbs.org/wnet/wideangle/episodes/the-empty-atm/interview-joseph-stiglitz/3069/

http://www.pbs.org/wnet/wideangle/episodes/the-empty-atm/interview-joseph-stiglitz/3069/

Many HIPCs suffer from odius debt or obligations incurred by a former corrupt regime that leaves a new government owing billions to outside agencies.

Debt relief for the poorest nations is one of the most pressing international economic policy issues today.

Beginning in the early 1980s, the stock of international debt became so large that many developing nations could no longer make all of their debt service payments.

DISCUSSION: Should the Northern countries forgive the debt of the HIPCs (the question of moral hazards)?