INTERNATIONAL DEBT.   Term Paper ID:19664 Click to get this paper

Essay Subject: Problems & solutions. Debtor & creditor nations, banks, Brady Plan, debt reduction vs. forgiveness.... More...

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Paper Abstract: Problems & solutions. Debtor & creditor nations, banks, Brady Plan, debt reduction vs. forgiveness. Paper Introduction: INTRODUCTION The problem of international debt financing reached the crisis level in the late 1980s and the first two years of this young decade; however, efforts by the United States government and several international financial entities have proved effective in lessening the threat posed to international financial markets. The cooperation of major American banking institutions was essential for the success of the international strategies, since these American banks held much of the outstanding debt particularly debt issued to Latin American nations. This paper will first investigate the international debt problem, including examination of its effect on banks in the United States, then the focus will shift to analysis of the measures enacted to begin the process of solving the crisis, Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. Notably, sub-Saharan Africa is interrible condition, with a debt of $116 billion. Lendinginstitutions took a significant loss, but their existence was preserved. banks to "reduce" their loans to debtor nations, theadministration "forgave" some debts owed to the U.S. Thus, while Latin American nations such as Peru and Brazilremain dormant under a mound of foreign debt, the governments of Chile,Argentina, and, most impressively, Mexico have been able to move towardbecoming participating members of the new global economy. "The Onset of Big-Debt Blues," U.S. Other Brazilians note, however, thatforeign debt, now at over $12 billion, is only one of a number of problemswith the suffering Brazilian economy. Notably, a bank umbrella group, the Institute forInternational Finance, issued a report demanding new government loanguarantees and concessions in tax and regulatory areas in exchange fortheir cooperation. However, concerns quicklyarose that these international financial institutions might be acting toohastily. "Cooling Down the World Debt Bomb," Fortune, 2 May1991, pp. banks to engage to some measure in a program of debtforgiveness. Forinstance, Poland was forgiven half of its "official" debt, although not allof it was owed to the U.S. In March 1989, U.S Treasury Secretary Nicholas Bradyunveiled what would come to be known as the "Brady Plan." This initiativecan be seen as the federal government's official entrance into what wascoming to be seen as the beginning of the end of the vicious cycle ofloaning more money to pay interest on loans that were hopelessly drainingdebtor nations of their very ability to repay the debt. Some sovereigns suggested that their taxpayers were actuallybailing out the banks, and analysts expressed opinions that the World Bankcould lose its AAA rating in the capital markets if it was overly committedto the debt reduction scheme.13 Indeed, political motivations whirled about the growing debtreduction scene like a Texas twister. As the Brady Plan indicates, Brady wiselydid not share this view; however, Brady's initiatives were not withoutcriticism. at 82.14Egan, "The Onset of Big-Debt Blues," U.S. government.15 This plan of debt forgiveness wasattacked by banking interests, such as the aforementioned Institute forInternational Finance (IIF), and political conservatives, like PatrickBuchanan. Some changes and variations have occurred.3Ibid.4Robbins, "We Cry For You, Argentina," U.S. Similarlyleft out of the growth period were the Eastern Europe/Communist blocnations and sub-Saharan, i.e. Just as the new economy isn't limited to the Western hemisphere,neither is the international debt issue. And, Mexico, the greatest beneficiary of the Brady Plan, has completelyoverhauled its economic system, much to the delight of U.S. "World Bank: Brady Plan Extensions Carry Danger,"Washington Post, 19 December 199 , D2.__________ "Gracias, Señor Brady," The Economist, 13 May 1989, pp. Note that these reserve figures continued to rise, with BankersTrust, for example, reaching 78%; see O'Reilly, 124.1 Bartlett, 8.11Mossberg, 7.12"Gracias, Senor Brady," The Economist, 13 May 1989, p. By 1989, the uncertainty regarding the internationaldebt situation had been lessened sufficiently so that banks were "no longermortally threatened".7 By this time, banks with international loanportfolios had already begun to add reserves and capital to cover loansthat were obviously becoming more likely to be lost in default. Reorganization is proceeding in Eastern Europe which asa whole owes about $134 billion to foreign creditors; its main debtors areHungary ($22 billion), Poland ($48 billion), and the now-defunct SovietUnion ($57 billion).6 Hungary may be better positioned because of wiserinvestments, but Poland has shown a great willingness for reform. Morgan increased itsreserves to 1 % coverage of its doubtful international loans, the bank waseffectively stating that it was not accepting Brady's invitation to offernew money to debtor nations and would in fact make no new loans in thisarena. News & World Report, 24July 1989, p. /32%), and J.P. From 1965 to 198 , Brazil enjoyed 6.3% percent annual per capita incomegrowth. THE INTERNATIONAL DEBT PROBLEM The debtors. CONCLUSION During the 197 s and 198 s, developing nations came to be smotheredby their foreign debt. government's position was becoming more clear that itwould ask U.S. For instance, the IMF prepared to release funds to debtor nationswhich undertook appropriate economic reforms even if the nations had notcompleted negotiating with their bank creditors. The cooperation of major American bankinginstitutions was essential for the success of the international strategies,since these American banks held much of the outstanding debt particularlydebt issued to Latin American nations. "Most of its 44 countrieshaven't got a prayer of catching up any time soon - they are paying onlyhalf the interest due on loans".5 Increasing the despair of the region isthe trouble that some countries seem to be having reorganizing theireconomic systems. 9.16Ibid.17Ibid.18Buchanan, "Don't Bail out the Bankrupts of Socialism," Los AngelesTimes, 28 April 1991, M5.19Ibid.2 Egan, 22.21Rowen, "World Bank: Brady Plan Extensions Carry Danger," WashingtonPost, 19 December 199 , D2.22O'Reilly, 124. The creditors. Creating the reserve account doesnot suggest that the bank no longer seeks to collect on the loan. "Debt Forgiveness Worries Bankers," Christian Science Monitor, 3 May 1991, p. Thus, unstable democracieslike Mexico, Argentina, and the Philippines needed to be supported whilenations such as Poland and Hungary, who were moving toward democraticsystems and market economies, also required bolstering.14 This is wherethe U.S. "Big Latin Debtors Find That Lacking Austerity, ReliefIs Not Coming Soon," New York Times, 26 July 1989, A6.Buchanan, Patrick J. "Don't Bail Out the Bankrupts of Socialism,"Los Angeles Times, 28 April 1991, M5.Egan, Jack. Also byearly 1989, the U.S. Some Brazilians argue that the high cost of servicing the foreigndebt stifled their domestic economy. Brady's predecessor at the Treasury Department, James Baker, hadthought that economic growth alone would eventually lessen theinternational debt situation. Endnotes1O'Reilly, "Cooling Down the World Debt Bomb," Fortune, 2 May 1991,p. "Third World Debt Crisis Reshapes American Banks," NewYork Times, 24 September 1989, E3.Brooke, James. Subsequently, the World Bank and the IMF came to act insome discordance, although the IMF was quick to re-establish its leadershipstatus. Treasury bonds issued pursuant to the Brady Plancame to be called. 81.13Ibid. This paper will first investigatethe international debt problem, including examination of its effect onbanks in the United States, then the focus will shift to analysis of themeasures enacted to begin the process of solving the crisis, including theeffect of these plans on U.S. One flaw was that the Plan raised expectations that the bankwrite-offs would be in some relationship to the discounted market value ofthe loans. banks include reduction of the banks' stock prices, ageneral distraction of management, and lessened maneuverability incompeting in international markets.1 SOLVING THE INTERNATIONAL DEBT PROBLEM As mentioned previously, by early 1989, the Bush administration'sintent to urge major banks to follow a program of voluntary debt reductionwas becoming more clear. 2 -22.Francis, David R. 123.2Brooke, "Big Latin Debtors Find That Lacking Austerity, Relief Is NotComing Soon," New York Times, 26 July 1989, A6. 9.Mossberg, Walter S. /1 %).9 In order to secure themassive amounts of equity required for the reserve set-asides banks havehad to sell assets, issue new stock, and drop business activities thatweren't sufficiently profitable. The IIF argued that "more and more debtors are made to believeby the governments of the industrial nations that it is the norm not toservice your international debt".16Conceding that debt forgiveness for "the poorest nations of Africa andAsia" was reasonable, the IIF attacked the forgiving of $3 billion worth ofdebt to Poland and $7 billion to Egypt, both nations the IIF considered"middle-income countries".17 Buchanan noted that, although the Americanpopulus might generally feel that Poland deserved some relief, Bushessentially transferred the $3 billion onto the debt of the U.S., thustaking from the wealth of future generations of Americans. non-oil-producing, Africa. The goal is to reduce the uncertainty that would be causedshareholders and potential investors. For example, the Brady Plan conspicuously did not contain debt-for-equity exchanges; yet, Chile reached agreement with its creditors allowingthem equity interests in Chilean businesses, reducing its bank debt by 4 %between 1985 and 1991. 22.5O'Reilly, 124.6Ibid.7Mossberg, "Major Banks Vow to Fight Any Effort To Force Third World DebtForgiveness," Wall Street Journal, 12 January 1989, A16.8Bartlett, "Third World Debt Crisis Reshapes American Banks," New YorkTimes, 24 September 1989, E3.9Ibid. Additional factors include capitalflight exceeding $1 billion annually and public sector shortcomings.Indeed, two Brazilian economists put the blame on "1 % annual inflation,spreading government regulation, falling tax revenues, rising governmentdeficits, in short 'a complete collapse of government'".2 The continuingdisorganization of the Brazilian government is the major reason that Brazilis not able to participate in the measures being diplomatically offered toease the debt burden. After beginning to become debt-dependent in 198 , the rate slowedto 1%. 123-124.Robbins, Carol Anne. 81-82.----------------------- 13 Latin America accounts for the largest portion of theinternational debt malaise. Equally clear was the concern that such strategycaused the banks. 21.15Francis, "Debt Forgiveness Worries Bankers," Christian Science Monitor, 3 May 1991, p. One of the key elements of the BradyPlan was that its aid provisions would only be offered to nations that hadsufficiently reformed their economy (read political system) so that theeconomic aid would be efficiently used. But ifthe loss eventually arises, the reserve account need only be drawn down,with no resultant impact on earnings.8 The following list of major American banks with their loans todeveloping nations and corresponding reserves and coverage percentagessuggests the scope of the financial importance of the set-aside accounts[all figures as of September 1989 and in billions]: BankAmerica($8.9/2.6/3 %), Manufacturers Hanover (7.4/2.46/33%), Chase Manhattan(6.4/3. Works CitedBartlett, Sarah. These economic reforms generallymeant a move toward free-market capitalism. "Major Banks Vow to Fight Any Effort To Force ThirdWorld Debt Forgiveness," Wall Street Journal, 12 January 1989, A16.O'Reilly, Brian. 22.Rowen, Hobart. Essentially, the banks were recognizing that much oftheir loans were going to be lost, and asking the government to make itsstrategy as painless as possible, arguing that future defaults would costAmerican taxpayers more than the sweet deals given the banks.11 The Brady Plan. TheWorld Bank also noted that poor Third World nations were only receivingminimal amounts of private bank lending.21 When J.P. One major U.S. Morgan, two ofArgentina's largest creditors completed a debt-equity swap giving the bankssubstantial shares of Argentine telephone companies.22 Other countries,including Bolivia, have offered to buy their debt back at discounted rates. wasbeginning to consider extending Brady Plan debt reductions for Brazil andArgentina, the World Bank and IMF expressed concern that their increasedexposure resultant of the negotiations would have a dangerous effect. many of the biggest lenders were major U.S. bank, ManufacturersHanover, even sold part of its ownership to Dai-Ichi Kangyo, Japan'slargest bank, in order to secure enough capital for its reserve accounts.Other effects on U.S. banks. banks.Realizing that reform measures were desperately needed, a program of debtforgiveness and economic reform was instituted internationally. banks. News & WorldReport, 24 July 1989, p. Treasury. News & World Report,24 July 1989, pp. Morgan (2.8/3. Peru is similarly thwarted by an ineffective bureaucracy, but alsocites unproductive investments in copper mining and irrigation for sugarand cotton cultivations.3 Argentina, like Peru, has suffered a significantstandard of living decrease. TheRussian economy however is more precarious, yet American bankers aren'tparticularly concerned since they are only owed less than $2 million. "We Cry for You, Argentina," U.S. government adopted another strategy, beyond the Brady Plan, to aidailing nations. The Brady Plangave debtor nations four options: a loans-for-bonds trade in which banksexchanged their loans at a discount for bonds carrying lower interest ratesbut whose principal is guaranteed by an American zero-coupon bond; anotherloans-for-bonds switch in which the principal remained unchanged but theinterest rate was cut in half; a "new-money facility" that allowed banks tocollect all interest due but required them to issue new loans equivalent toa agreed upon percentage of those payments; and, an interest capitalizationplan that allowed banks to add to the principal a percentage of interestpayments due.12 After the announcement of the Brady Plan provisions, the World Bankand the International Monetary Fund (IMF) established a debt-relief fund ofabout $2 billion which, in part, was used to guarantee the "Brady bonds,"as the zero-coupon U.S. Industrialnations did not simply ignore the concerns and needs of Second and ThirdWorld countries - the international debt of over one trillion dollarstestifies to that - rather, the funds loaned to the nations went to financean array of unprofitable projects including Amazon highways withoutdestinations and highly automated steel mills in Africa that have no nearbymarket to support their production.1 Brazil, which along with Peru, remains in the worst debt situation inLatin America, provides a good example of the pervasiveness of the problem. Similarly, Citicorp and J.P. The numerical figures used throughout this paper were currentas of their source. /46%), Chemical Banking (4.5/1.25/27%), Bankers Trust(3.11/1. one document suggested that the $176billion paid in servicing between 1972 and 1988 should effectively beregarded as payment in full, surmising that that figure was sufficientprofit to foreign institutions. Setting aside a special reserve against potential loan losses isbasically an accounting decision allowing the bank to take a one-time lossinitially rather than extend the losses over a period of many financialquarters. INTRODUCTION The problem of international debt financing reached the crisis levelin the late 198 s and the first two years of this young decade; however,efforts by the United States government and several international financialentities have proved effective in lessening the threat posed tointernational financial markets. Yet, the market motivated by the Brady Plan developed its owndeals. As opposed to debt reduction, this controversial concurrent strategycalled for debt forgiveness. When taking office in July of 1989, PresidentMenem declared simply, "Argentina has broken down".4 But, Menem was ableto promote a united effort that has been able to partake of the debt reformopportunities. News & World Report, 24July 1989, p. He furthersuggested that "global socialism" was taking place as "the wealth of theWestern democracies is siphoned off, squandered, lost - Fabian Socialism ona world scale".18 Buchanan called for a halt of the financing ofsocialism, so that these nations would be forced to trim corruption-riddenbureaucracies and privatize state enterprise and would thus "awaken to findthemselves on the road to true economic reform".19 Although not accordingto Buchanan's plan, a similar road to reform did occur. But, without the requested incentives for the billions ofdollars of write-offs, banks were slow to drop loans that were largelybeing repaid, though often tardily.2 Also, by late 199 when the U.S. During the global economic expansion of thepast two decades, Latin American nations generally were lost. In the manner that the federal governmentpersuaded U.S. This analogy is particularlyappropriate when the broader ideals of Texas-native George Bush andAmerican Business are considered. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.