Financial Crisis

Presented by :-TEAM 3

Team 3 NAME Roll no. Abhinav Shukla (01)Pranav Prashant (32)Ronak Doshi (39)Ruchi (40)Sneha Verma (47)Subhasree Sahoo (49)Swaroop C Mohan (52)Swati Bhardwaaj (53)

Lost Decade

Latin American Debt Crisis

Introduction

Occurred in 1970s and 1980s.

Occurred when debt obligation of Latin American countries exceeded their earning capacity.

Background (1970s)

PETRO-DOLLAR RECYCLING

In 1973 oil prices quadrupled

OPEC deposited huge amounts in banks

Bank 'recycled' deposits as loans to Latin American governments.

Crisis (early 1980s)Due to American monetary policy

Interest rates rose and Dollar become stronger. Demand for their exports fell.

1975 to1982: Debt increased @ 20.4 % pa. LOAN: $70 bn (1975) $340 bn (1983) DEBT SERVICES: $12 bn (1975) $66 bn (1982)

August 1982 Mexico defaulted to service its debt

Recovery strategies:Debt Restructure (1983 to 1989)

MUDDLING THROUGH:

IMF and World bank’s rescue loans

Loans with conditionality

THE BAKER PLAN

1985 by US Treasury Secretary James Baker

Based on the assumption of illiquidity

Targeted 15 countries for $29 billion of new money

$20 billion (commercial banks) $9 billion (IMF and World Bank)

Recovery Strategies:Debt Reduction (1989)

BRADY BONDS

1989 by US Treasury Secretary Nicholas Brady

Indebted countries bought their own debt Debt buy-back and debt-equity swap

It aimed to:– decreasing the face value of debt– extending the time period of

obligations– Infusion of new money

End of Crisis

In 1991, capital inflows > outflows for the first time since the onset of the debt crisis.

Mexico was the first country to retire its Brady bonds in 2003.

Ecuador was the only one country that defaulted on Brady Bonds.

Causes of crisisWeak fiscal policies.

Oil prices sky-rocketed leaving a liquidity crunch.

Recession in World economy.

Short term loans at high rate of interest.

Interest rates increased.

Debts were used for non-productive purposes.

Contraction of export

Stronger dollar

Capital flight

Commercial banks stopped new money that created difficulty in refinancing of loans

Floating interest rates

Year loan amount(in $bn) Growth rate1970 25 1971 25 0.00%1972 30 20.00%1973 40 33.33%1974 60 50.00%1975 70 16.67%1976 80 14.29%1977 120 50.00%1978 150 25.00%1979 190 26.67%1980 220 15.79%1981 280 27.27%1982 330 17.86%1983 350 6.06%1984 370 5.71%1985 380 2.70%1986 420 10.53%1987 480 14.29%1988 450 -6.25%

 Gross Domestic Product (Average Yearly Growth)

  1965-80 1980-90 % changeArgentina 3.4 -0.4 -111.76%

Bolivia 4.4 -0.1 -102.27%Brazil 9.0 2.7 -70.00%Congo 6.2 3.6 -41.94%

Cote d'Ivoire 6.8 0.5 -92.65%Ecuador 8.8 2.0 -77.27%Mexico 6.5 1.0 -84.62%

Morocco 5.7 4.0 -29.82%Nicaragua 2.5 -2.2 -188.00%

Peru 3.9 -0.3 -107.69%Syria 9.1 2.1 -76.92%

Venezuela 3.7 1.0 -72.97%Averages 6.3 1.7 -73.02%

Argen

tina

Boliv

ia

Brazil

Congo

Cote

d'Iv

oire

Ecuad

or

Mex

ico

Mor

occo

Nic

arag

ua

Peru

Syria

Venez

uela

-4

-2

0

2

4

6

8

10

1965-80

1980-90

Conclusion

Recovery from crisis long and painful

Strong economic fundamentals matters.