Syllabus A. Role Of The Senior Financial Adviser A4. Management of international trade and finance

A4e. The global debt problem 8 / 11

Syllabus A4e)

Discuss the role of the international financial markets with respect to the management of global debt

The global debt problem

This problem arose following the oil price increases in the 1970s, when the OPEC countries invested their large surpluses with banks in the western world.

The banks then lent substantial sums to the less developed countries (LDCs) believing the default risk to be low.

The oil price rises fuelled inflation and interest rates increased, forcing most of the world’s economies into recession.

High interest rates and reduced exports placed LDCs in a situation where they could no longer pay interest or repay loans.

These problems made economic conditions in many LDCs extremely difficult, affecting the position of multinationals and making international banks less willing to lend.

Methods of dealing with such excessive debt burdens have been:

  1. A programme of debt write-offs by banks and other lenders.

  2. Rescheduling existing debt repayments.

  3. Re-selling debt at a discount to recoup capital.

  4. Provision of additional loans where the debt problem is regarded as temporary.

  5. Drastic changes in the economic policies of the LDC imposed and monitored by the IMF.