The International Debt Crisis Part II

Readings: “The Debt-Bomb Threat” “The Third World Threat to the West’s Recovery” “Austerity Pushes Brazil to the Brink of Social Upheaval” “Assaulting the Heavens: Class Struggle and the Brazilian Debt Crisis” Emergence of the Debt Crisis

Debating IMF Solutions to Crisis Readings: Annotated bibliography “IMF Austerity Prescriptions could be Hazardous” “Fund Policy on Adjustment and Financing” - IMF’s Camdessus

Default would lead to collapse of debtor country economies – a decrease in GNP Increase in interest rates would lead to greater interest payment on debt, leading to increase in debt service ratio Less profits made available for capital investment – contraction of business investment, GNP Decrease in consumption to follow, as well as a decrease in investment and GNP Defining the Debt “Bomb”

Default on debt, leads to collapse of creditor country economies Decrease in debtor’s imports, leads to decrease in creditor’s exports, ultimately, a decrease in GNP Default on debt leads to collapse of creditor financial systems Chain of defaults – dangerous; large banks left highly exposed; loan loss reserves at only 12% of exposure; failure to collect – lead to decrease in prices and share values; collapse would require FED to provide money to troubled creditor banks Debt “Bomb” - Exploding

Debtor Countries - In response to contraction and subsequent austerity Creditor Countries - In response to contraction and subsequent austerity Dangers of Social “Explosion”

Potential Solutions to Crisis Reschedule and roll over debt Debtors default; creditors write off debt Reduction in debt (lower interest rates, longer repayment period) Increase loan loss reserves Create secondary market for debt, let value decline

Actual Solutions to the Crisis Rescheduled and rolled over debt; led to more debt, often with higher interest rates A condition for rollover meant continuous payback ($100s of billions paid back in ’80s & ’90s) IMF imposed austere conditionality FED increased money supply somewhat – allowing interest rates to fall slightly, although rates were still high Decrease in interest rates for consumption and capital, partial reversal of Social Security policy

After the Explosion Implemented solutions allowed time to cope with social and political relations In 1987, Citicorp increased loan loss reserves and admitted debt would not be fully repaid In 1989, IMF accepted some debt reduction

Policy shifts result of grassroots and working class antagonistic opposition to government policies 1974: after initial austerity led to a quadrupling of oil prices, policies reversed Reversal a reaction to election loss and grassroots opposition to military regime Result: rapid build up of Brazilian debt – lots of money for consumption. Fertile ground for crisis. Relevant Case Study: Brazil

Policy reversal, 1979, after second oil price shock Reaction to reemergence of labor movement Result was a deepening of debt and continuing difficulty in repayment Continued crisis 1987: Debt Moratoria Due to delay in imposition of austerity; government fear of reaction in elections Resulted in failure of Cruzado Plan, refusal to repay debt Relevant Case Study: Brazil cont.

Debate Over the IMF Continues Critiques of conditionality & structural adjustment programs: Wrong people being forced to pay – not those who actually borrowed the money Debt repayment used as an excuse for anti-labor, anti-consumption changes in policy

Debate Over the IMF Continues Critiques of conditionality & structural adjustment programs continued: Although it may make sense for one country to reduce imports and expand exports, this policy cannot be pursued by all Policy impossible, damages world trade – net effect is depression rather than restoration of economic growth

The IMF Responds Programs do improve balance of payments In the long run, programs will restore conditions of development