Page 316 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance Hitesh Jhanji, Lovely Professional University

Notes
Unit 28 : International Debt Crisis

CONTENTS
Objectives
Introduction
28.1 Evolution and Size of the Problem
28.2 The External Indebtness of Developing Countries
28.3 Ability of LDCs to Meet Debt Service Obligations
28.4 Summary
28.5 Key-Words
28.6 Review Questions
28.7 Further Readings

Objectives

After reading this Unit students will be able to:
• Know the Evolution and Size of the Problem.
• Explain the External Indebtness of Developing Countries.
• Describe the Ability of LDCs to Meet Debt Service Obligations.
Introduction

Until the summer of 1982, the external debt problems of Eastern bloc and less developed countries
(LDCs) were regarded as benign, or were ignored, by nearly all international financial and economic
analysts and policy makers. Now, most observers share the conviction that these problems pose a
current threat to the free world’s financial and economic health and stability and must be dealt with
quickly and forcefully. This study focuses on the present crisis. Longer term issues raised by the
external indebtedness of Eastern bloc nations and LDCs will be dealt with in later studies.
By all accounts, the external debts of Eastern bloc nations and LDCs are enormous. Government
officials, financiers, economists, and the news media are urging that these countries be given help to
cope. In opening hearings on “International Financial Markets and Related Problems” before the
Committee on Banking, Finance, and Urban Affairs of the House of Representatives on 21 December
1982, Chairman St. Germain referred to this call for help as the “conventional wisdom.” He said,
“These hearings . . . come against a backdrop of news reports about impending requests for an
enormous new funding of the International Monetary Fund. The conventional wisdom suggests that
the Congress should quickly and quietly vote the new funds, accept the Administration’s and the
Federal Reserve’s rationale, and ask questions later—if at all.” But, should the United States help
these countries ? If so, how ? These are the current policy questions. My purpose is to clarify the
issues involved and to provide guidance to the public and to policy makers who must resolve them.
From 1973 to 1982, Eastern bloc nations and LDCs and their residents greatly increased their
borrowings from lenders in the United States and other developed free world countries. Few worried
as the external debts of these countries and their residents mounted. Now, however, their debts are
viewed ominously. They are regarded as serious threats to world trade, political moderation in LDCs,
and to the financial and economic health and stability of the United States and other developed free
world nations.
Concern is growing over whether some Eastern bloc nations and LDCs will be able to service their
debts. Defaults have been avoided to date only because the United States and other developed free
world countries and the Bank for International Settlements (BIS) have provided emergency “bridge”

310 LOVELY PROFESSIONAL UNIVERSITY