--%>

Cause and Solution to international bank crisis

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

E

Expert

Verified

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.

   Related Questions in Financial Accounting

  • Q : Cross-border acquisitions and green

    Why host country resist cross-border acquisitions, instead of the green field investments? Explain your point of view?

  • Q : Cost accountant With Black

    Black Manufacturing Company Black Manufacturing produced a single product called the Great Beast. During the past three weeks, Lee High, the new cost accountant, had observed that production efficiency and input pr

  • Q : Accounting Treatment of Goods What are

    What are the various Accounting Treatment of Goods?

  • Q : Conglomerate expansion Evaluate the

    Evaluate the given statement: “Firm may decrease its currency exposure by diversifying across the different business lines”.

  • Q : Universities Essay topics I have a

    I have a problem with the following Essay topics illustrated below: Topic A:What is the ultimate goal of yoga practice according to Patanjali, and how do

  • Q : Future spot exchange rate Describe

    Describe about the conditions under which forward exchange rate may be an unbiased predictor of the future spot exchange rate.

  • Q : Abnormal profits Atypically large

      Atypically large proceeds made by an individual or company from commercial activity. An abnormal profit exceeds the normal chance for profit derived from labor costs and capital and considered normal profit. Abnormal profit in a business resides of monopoly and consortium profits.

  • Q : Motivations for counterparty to enter

    Specify the basic motivations for the counterparty to enter into the currency swap.

  • Q : Commercial bank problems Select the

    Select the right answer of the question. Assume that, for every 1-percentage point decline of the discount rate, commercial banks collectively borrow an additional $2 billion from Federal Reserve banks. Also suppose that reserve ratio is 20 percent. If the Fed incre

  • Q : Czc Prepare journal entry to record

    Prepare journal entry to record acquisition of four assets