Latin American Debt Crisi (Ppt)

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Financia l Crisis

Presented by :-TEAM 3

Team 3NAME 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 policyInterest rates rose and Dollar become stronger. Demand for their exports fell.

1975 to1982: Debtincreased @ 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 banks 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 CrisisIn 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

Contraction of export Stronger dollar Capital flight Commercial banks stopped new money

that created difficulty in refinancing of loans

Floating interest rates

Year 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

loan amount(in $bn) 25 25 30 40 60 70 80 120 150 190 220 280 330 350 370 380 420 480 450

Growth rate 0.00% 20.00% 33.33% 50.00% 16.67% 14.29% 50.00% 25.00% 26.67% 15.79% 27.27% 17.86% 6.06% 5.71% 2.70% 10.53% 14.29% -6.25%

Gross Domestic Product(Average Yearly Growth) Argentina Bolivia Brazil Congo Coted'Ivoire Ecuador Mexico Morocco Nicaragua Peru Syria Venezuela Averages 1965-80 3.4 4.4 9.0 6.2 6.8 8.8 6.5 5.7 2.5 3.9 9.1 3.7 6.3 1980-90 -0.4 -0.1 2.7 3.6 0.5 2.0 1.0 4.0 -2.2 -0.3 2.1 1.0 1.7 % change -111.76% -102.27% -70.00% -41.94% -92.65% -77.27% -84.62% -29.82% -188.00% -107.69% -76.92% -72.97% -73.02%

Conclusion Recovery from crisis long and painful Strong economic fundamentals matters.