Page 325 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

Unit 28 : International Debt Crisis

Based on conditions as they now appear (early 1983), only Mexico and possibly Venezuela among Notes
countries where U.S. bank loans are concentrated and there is a nontrivial chance of default will have
difficulty meeting their debt service obligations in the foreseeable future. Even these countries have
improved prospects compared to the 1981 to 1982 period in some respects.

Will Defaults Depress World Trade ?
World trade depends strategically on the continued availability of finance. As stated in OECD’s 1982
Survey, “In most DAC [Developed Assistance Committee] countries, a substantial part of bank credits
to LDCs is related to export financing.” The Survey estimates that export credits extended by the
United States and other DAC countries to non-OPEC developing countries totaled more than $100
billion at year-end 1982. DAC export credits were 20 percent of the total medium- and long-term
external indebtedness of non-OPEC developing countries. These credits define the rock-bottom
estimate of the importance of finance to trade between developed and non-OPEC developing
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countries. In a more fundamental sense, however, nearly all of the external credit provided to non-
OPEC developing nations and their residents is used to finance imports, reflecting the consideration
that current account deficits have to be financed by borrowing or direct investment. If the required
financing is not forthcoming, imports are likely to have to be cut to close the gap.
Debt repudiation by some non-OPEC developing countries would decrease lending by current
creditors to the countries that defaulted. Creditors as yet not involved in lending to these countries
could become emboldened to start lending to them, since their slates would now be free and clear of
burdensome loans. But it is unlikely that new creditors would fully take up the slack. Formal defaults
also would reduce unguaranteed lending by private creditors in developed countries to solvent
developing countries and their residents. Default risks might even be revised upwards for loans to
developed countries and their residents, which would reduce lending to those borrowers. It is almost
a certainty, then, that if there are widespread, major formal defaults, there will be less private
unguaranteed finance to lubricate the engines of international trade.
To some extent, less finance would be needed because the current account deficits of nations in default
would be reduced since they will not be paying interest. However, it seems unlikely that some shortfall
in export finance will not emerge. Unless the gap is filled by guaranteed loans, official aid, multilateral
assistance, or loans from CMEA countries (an improbable outcome), imports would have to be cut by
most nations, especially developing nations. As a corollary, exporters would have to retrench,
especially in developed countries.
Dr. Otto Emminger, former president of the German Federal Bank, told the Fifth Quadrangular
Conference of the Center for Strategic Studies in September 1982 that
a general move toward underlending would have on major effect. It would deprive
a great number of developing countries of an essential source of balance-of-
payments financing. . . . Last year the banks provided, on a net basis, $35 billion for
the financing of developing countries. That is about one-half of the total net
borrowing of these countries in this year. Now if there is too abrupt a cessation, or
decline, in this lending, there may be a financing gap that cannot easily be filled by
other institutions. And this might force a number of deficit countries to restrict
their imports very sharply.

It is clear that the effects of formal debt repudiation on international financial flows and thereby on
export and import industries through-out the free world would not be pleasant. But it is easy to
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overstate the case. Another Great Depression can be ruled out.
Will Defaults Lead to Another Great Depression ?

Discussions of the debt problems of Eastern bloc nations and LDCs are haunted by the specter of the
1930s. If the problems are not solved, so the story goes, if some of the nations are compelled (or
impelled) to repudiate their external debts, the end result will be another Great Depression, an
economic contraction on the order of magnitude suffered in the 1930s.

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