Slide 1Slide 2Dimensions of LDC debt burdenReasons for debt-crisis (1980’s)Asian Crisis of 1997Basic Transfer EquationSlide 7Six FactorsChapter 13Balance of Payments – Deficits and DebtDebt Crisis of 1980’s•Find information on current account and capital account (IMF or Wikipedia)•External debt is accumulated whenoDomestic saving rates are lowoCurrent account deficits are highoImports of capital are needed for industrialization•Debt servicing costs are highDimensions of LDC debt burden•Debt to GDP ratioDebt-service ratio (as a % of exports)1970 13.31980 24.41990 37.82000 37.32005 28.71970 13.51980 13.21990 9.42000 23.02005 14.9Reasons for debt-crisis (1980’s)•Oil-prices high during 1974-1979•Growth rates in DC fell affecting outward looking policies (export) of LDC’s•Fear of painful stabilization policy – avoided IMF•Heavy borrowings from commercial banks and private sector lenders•External debt of LDC’s doubled from $180 billion (1975) to $406 billion (1979)•40% of the debt was non-concessional•Countries affected – Brazil, Argentina, Mexico – IMF Stabilization ProgramAsian Crisis of 1997•Property bubble•Banks failed•Currency values fell by 33%•IMF bailout of South Korea, Thailand, Indonesia ,and PhilippinesBasic Transfer EquationFN = dD (13.1)Where, FN = net capital inflowD = total accumulated foreign debtd = rate of increase of total debtBT = dD = rD = (d – r) DBT = Basic TransferrD = total interest paymentsThus, basic transfer is simply the net capital inflow minus interest paymentsBT will be positive if d > rBT will be negative if r > dBasic Transfer Equation•In the early stages of debt accumulation,oLDC’s D and d are high oMost of the debt come from official sources like IMF, so r is low and BT is positive•In this stage accumulation of debt will not pose any serious threat as there is positive capital flow which can be used for productive development project earning rate of return higher that interest rate (r)•In the later stageoD is too large, d slowly fallsoMost debt comes from commercial banks and private sector lenders, r is high and BT is negativeSix FactorsIn the later stage, d is low and r is high for the following reasons1. Very large D, d declines as amortization rises2. Switch from official to private sector lenders, resulting in high r3. Adverse terms of trade and balance of payment deficits4. Global recession, oil-shock5. Loss of confidence in currency of LDC’s6. Capital flightThus, debt crisis becomes