Cause and Solution to international bank crisis

Question

Discuss briefly the cause and the solution(s) to international bank crisis including less developed countries.

Answer 1

International debt crisis began on 20August 1982, when Mexico has asked more than the 100 U.S. and foreign banks to forgive its $68 billion in loans.  Very soon Argentina, Brazil and more than 20 other developing countries has announced similar problems in making debt service over their bank loans.  At the height of crisis, Third World countries owed $1.2 trillion!

The international debt crisis had oil as its source.  Early in 1970’s Organization of Petroleum Exporting Countries (OPEC) became dominant supplier of the oil globally.  During this time period, OPEC raised oil prices significantly and amassed a remarkable supply of the U.S. dollars, which was the currency usually demanded as the payment from oil importing countries.

OPEC has deposited billions in Eurodollar deposits; by the year 1976 deposits has amounted to nearly $100 billion.  Euro banks were faced with massive problem of lending these funds to generate interest income in order to pay the interest on deposits. Third World countries were too eager in order to support the equally eager Euro bankers in accepting Eurodollar loans which would be used for the economic development and for the payment of oil imports. High oil prices were supported by high interest rates, unemployment, and inflation throughout the 1979-1981 periods.  Very soon, afterward, oil prices collapsed and crisis was on.
These days, most of the debtor nations and creditor banks would agree that the international debt crisis is successfully over.  U.S. Treasury Secretary Nicholas F. Brady of Bush Administration is largely credited with developing tactics in the spring of 1989 for resolving the problem.  Three vital factors were necessary to move from debt management stage, employed over the years 1982-1988 in order to keep the crisis in check and to debt resolution.  Firstly, banks had to realize that the face value of debt could not be repaid on the schedule.  Secondly, it was essential to lengthen the debt maturities and to use the market instruments to collateralize the debt.  Thirdly, LDCs are required to un-wrap their markets to private investment if the economic development was to happen. Debt-for-equity swaps helped to pave the way for improve in the private investment in LDCs.  Though, fiscal and monetary reforms in developing countries and recent privatization trend of state owned industry were also imperative factors.