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Unit 28 : International Debt Crisis

• The external debts of non-OPEC developing countries grew only moderately before the Notes
quadrupling of oil prices in late 1973 and early 1974. At the end of 1973, their medium-and

long-term indebtedness was about $100 billion. After 1973, as Chairman Willard C. Butcher of
the Chase Manhattan Bank observed, “the pace of lending accelerated with the world’s major
banks playing the leading role.” By the end of 1982, non-OPEC developing countries’ medium-
and long-term indebtedness was $520 billion.
• The credit appetites of non-OPEC developing nations did not decline as the current account
surpluses of OPEC members fell in 1978 and again after 1980. As David P. Dod of the Federal
Reserve Board’s Division of International Finance pointed out (Federal Reserve Bulletin, September
1981) : “An increase in public-sector and private borrowing combined has been necessary in
view of economic policies in developing countries that have contributed to higher, sustained
deficits in the current account of their balance of payments.” The underlying policies were
extremely rapid money growth and huge budget deficits continuing year after year. These
policies produced inflation. With exchange rates fixed or at least sticky, inflation reduced exports
and increased imports, and thus acted to increase current account deficits.
• The OECD put it this way in its 1982 Survey : “It appears in retrospect that certain developing
countries have borrowed unwisely (as indeed have some other borrowers), using some of the
resources to finance consumption and investments of dubious value, rather than to strengthen
their productive potential.” They were able to do so because creditors, primarily banks, did not
constrain their lending by adhering to normal prudent standards. Rather, “overeagerness by
banks to lend has sometimes allowed borrowing governments to delay necessary adjustments.”
• The OECD data show that U.S. and other free world bank medium-and long-term loans other
than export credits were $182 billion, or 35 percent of the grand total, and that more than 20
percent of all loans were at “concessional” rates and terms. From an analytical standpoint, the
importance of the first fact is that exposure of the free world’s banking system to defaults by
Eastern bloc nations and LDCs is much less than their total indebtedness; excluding export
credits, it was $182 billion at year-end 1982. The importance of the second fact is that the burden
of the external debts of developing countries cannot be gauged by looking only at the size of
their debts.
• The OECD 1982 Survey estimates that debt service payments of developing countries on their
medium- and long-term external debts reached $131 billion during 1982, with interest payments
accounting for $60 billion and amortization for $71 billion. For non-OPEC developing countries,
interest payments were $50 billion and amortization $49 billion. Debt service payments by
these countries to banks totalled $48 billion.
• 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.”
28.5 Key-Words

1. Credit appetite : The phrase 'risk appetite' is a buzz phrase in search of a single clear
meaning. It means different things - often not very clearly - to different
people, when they have any concept for it at all. Credit risk appetite is
expressed both in terms of credit risk economic equity and in terms of
the impact of credit risk on earnings volatility.
Credit risk appetite is set by the board and is described and reported
through a suite of metrics derived from a combination of accounting
and credit portfolio model parameters which in turn use the various
credit risk rating systems as inputs. These metrics are supplemented
by a variety of policies, sector caps and limits to manage concentration
risk at an acceptable level.

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