chapter 7 International Lending and Financial Crises

二、International lending to developing countries
The surge in international lending, 1974~1982
– The rich oil-exporting nations had a high short-run propensity to save out of their extra income. – pessimism in industrialized countries. – resistance to FDI, – Herding behavior
Why? • Much of the foreign borrowing was by banks and other financial institutions. • Government regulation and supervision were weak. • The external balance of the countries showed some problems: Thailand’s current account deficit rose to 8% of GDP in 1996.
• Resolve:
– In Dec. the Currency was allowed to depreciate. – Borrow up to $50 billion, mostly from the U.S. government and the IMF.
The Asian crisis, 1997
一、International financial capital flows
The key categories: Private lending and investing
Long term
• Direct investment • Loans • Portfolio investment
The Mexican crisis, 1994~1995
Why? • High inflation rate • Current account deficit increased to 8% of GDP in 1994 • Banking system was rather weak, with inadequate bank supervision and regulation by the government. • The year 1994 was an election year with some turmoil. • Beginning in early 1994, the government replaced peso-denominated government debt with short-term dollar-indexed government debt called tesobonos.
Short term
Official lending and investing
Gains and losses from Well-Behaved International Lending • Assumption:
– The world is stable and predictable; – Borrowers fully honor their commitments to repay;
Figure 1 Net Financial Flows to Developing Countries, 1981-2009 ($ Billions)
Figure 21.3 Developing Countries’ External Debt Outstanding,wk.baidu.com1970-2009 ($ Billions)
• In Jan. 1999, ended its pegged exchange rate, the real depreciated, • The situation did not escalate into a full crisis. • It has sound and well regulated banking system • By April 1999, it can issue new bonds to foreign investors.
Huang zhiyong
Nanjing University of Finance & Economics hzy196896@sina.com Tel：84028241
Chapter 7: International
Lending and Financial Crises
In this chapter we will take a close look at the causes and effects of lending and portfolio investment. International lending can bring major benefits of two types. First it represents inter-temporal trade. Second, it allows lenders and investors to diversify their investments more broadly.
• In August 1998, announced drastic measures:
– unilaterally ―restructured‖ its rubledenominated debt. – Placed a 90-day moratorium on payments of many foreign currency obligations of banks and other private firms – Allowed the ruble to depreciate by shifting to a floating exchange rate.
The Brazilian crisis, 1999
• The fallout from the Russian crisis, • The conditions:
– A large current account deficit – High domestic interest rates – Crawling exchange rate – In November 1998, the IMF organized a package of $41 billion，but it failed to enact the fiscal reforms – Capital outflows increased
The Turkish crisis, 2001
• The fiscal deficit remained high, and the current account deficit widened to about 5% of GDP • November brought the first signs of new trouble, and foreign lenders began to pull back.
Argentina’s crisis, 2001-2002
• Beginning in 1997 the peso experienced a real appreciation, • Its fiscal situation had been one of its weak points all along. • In early 2002 the government surrendered the fixed exchange rate, and the peso lost 75% of its value in the first six months of the year. • The government defaulted on its debt. • The peso depreciation caused huge losses in the banks——the mismatch of currency and terms • The crisis spread to its neighbors：Uruguay\ Brazil
• Resolve:
– 1982~1984 at the beginning – 1985~1988 Baker Plan – 1989~, The Brady Plan
The resurgence of capital flows in the 1990s
• the Brady Plan led investors to believe that the previous crisis was being resolved. • Low U.S. interest rates again. • The developing countries were becoming more attractive places to lend as governments reformed their policies. • Individual investors were looking for new forms of portfolio investments
Figure 7.2 Exchange Rates, Asian Currencies
Figure： Exchange Rates, Asian Countries, 1994-2011
The Russian crisis, 1998
• A large fiscal budget deficit • In mid-1998, lenders balked at buying still more Russian government debt, • In July 1998, IMF organized a lending package of $23 billion. And the first loan of $5 billion
• Figure 7.1 shows the normal effects of allowing free international lending and borrowing.
Figure 7.1 Well-Behaved International Lending
Taxes on international lending
The Debt Crisis Of 1982
• In August 1982, Mexico declared that it was unable to service its large foreign debt. • Mainly reasons:
– Debt condition – Interest rates increased sharply in the United States. – Developing countries’ exports declined – Error economic policies – Overlending and Overborrowing
• If Japan has market power to restrict its foreign lending and exploits this power by imposing a tax of 2 percent per year on the value of assets held abroad by residents of Japan. • If America also has market power to restrict its borrowing and imposes the 2 percent tax on the same international assets.