causes of external debt

There are various indicators for determining a sustainable level of external debt. The debt includes money owed to private commercial banks, foreign governments, or international financial institutions such as the International Monetary Fund (IMF) and World Bank. principal".[1]. The other source of domestic financing is central bank credit. Were it not for financing from these sources, which was growing rapidly and with ever-shorter maturities, an external debt crisis of the proportions experienced could not have developed.

The easiest guide is to look at the level of external debt to GDP.

Equally, there could be over-confidence in lenders to lend money in short-term without evaluation of possible problems. External loan (or foreign debt) is the total debt which the residents of a country owe to foreign creditors; its complement is internal debt which is owed to domestic lenders.

In 1983 Argentina would have needed to earmark 54 percent of its exports of goods and services to pay the interest on its external debt; Brazil would have required 40 percent; Mexico, 35 percent; and Chile and Peru, about 33 percent. Countries in regional areas may suffer from a regional downgrade in credit assessment. Domestic credit for the public sector basically has two main sources: the central bank and the private sector. [7] High external debt is believed to be harmful for the economy.[8].

If a country is struggling to meet interest payments, they may be tempted to borrow to meet debt interest payments, but then the problem can spiral and magnify. Commentdocument.getElementById("comment").setAttribute( "id", "a88ebf2bc6b362e21c3420ae6757f83e" );document.getElementById("a1fff4cb6f").setAttribute( "id", "comment" ); Cracking Economics

This can only be met with: Because of the problem associated with rising external debt, there has been pressure for developed countries to cancel outstanding debt by developing economies. These factors precipitated the crisis and certainly aggravated it, but, important though they were (and continue to be), they did not produce the crisis. Examples of liquidity monitoring indicators include the, The final indicators are more forward-looking, as they point out how the debt burden will evolve over time, given the current stock of data and average interest rate.

Generally speaking, a fiscal deficit can be financed in one of two ways, external credit (borrowing abroad or use of international reserves), and domestic credit. The argument is that debt cancellation can make a significant contribution to improving economic development because it frees up resources to invest in the recipient country – rather than send abroad in debt interest payments. Even if the assumption is made that debt principal is not normally repaid, but refinanced, the situation would still be very serious. If the availability of the external financing is not contingent on the economic feasibility of specific investment projects, and, consequently, if the risk factor is not sufficiently taken into account, it is highly probable that some irrecoverable loans will be granted. The increase in international bank financing of the public sectors took place on the assumption that the loans involved little, if any, commercial or exchange risk, as a result of which commercial banks did not pay sufficient attention to the global risk represented by the quality of the debtor countries’ economic policies as a whole. Second, the public sectors of the countries in question had neither the needed taxing capacity nor the domestic savings required to service the external financing offered to them. It is assumed that external liabilities cannot be greater than the amount of the deficit less the losses in reserves. The excess liquidity will inevitably lead to higher inflation, increased external borrowing or greater losses of international reserves, or a combination of both. The debtors can be the government, corporations or citizens of that country. Copyright © 2010-2019.

And what were the comparative effects of the different means of financing? For instance, in 1983 the stock of external debt was equivalent to 120 percent of GDP in Costa Rica, 103 percent in Chile, 76 percent in Peru, 66 percent in Argentina, 63 percent in Uruguay, 47 percent in Venezuela, and 44 percent in both Mexico and Brazil. Excessive confidence in borrowing to promote economic growth and development.

At times, indeed, borrowing financed consumption rather than investment. [5], External-debt-sustainability analysis is generally conducted in the context of medium-term scenarios.

Statistical data for the countries under study tend to lend support to the linkages outlined above: the fiscal deficits of most countries had, as their counterparts, first an expansion of domestic credit followed by a series of mounting deficits in the current account of the balance of payments; these deficits, in turn, were the counterpart of the external debt or of losses of international reserves. In the case of Latin America, however, external liabilities exceeded estimated external financing needs.

This ignored the danger of a possible total and instantaneous suspension of external commercial financing.

Other changes of no less importance were also occurring. At the same time, the growing international bank financing of the countries’ private sectors was also carried out on the assumption that the operation involved no risk for the public sectors of the debtor countries. In its latest Annual Report, the Bank for International Settlements estimates that capital flight from Latin America between 1978 and 1983 amounted to possibly $50 billion.

As it happened, they coincided with a situation that was already precarious. In other words, if there is additional financing, total absorption can exceed income, but the mere availability of financing does not guarantee the economic use of funds.

A decline in commodity prices which leads to a decline in the. But it was not only the principal lender that had changed; the average maturity of loans had shortened to the point where in early 1982 some 25 percent of these countries’ debt was short term (that is, with an initial maturity of less than one year).

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