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The past approach to the international debt crisis has been traditionally based on conventional banking principle in which debt had to be paid back in fuH and in time. International lending was a function of the perceived credit standing of debtor country and the return on investment (ROI). If debtor country run into difficulties and had problems with service payments - it was generally assumed that the debt-related expenditures were mismanaged. With economic stability and firm financial rules - the debt crisis was supposed to disappear after application of appropriate adjustment measures. However in the world of inconsistent lending criteria greater uncertainty and increased volatility of expectations - the problem has continued to get worse. At the beginning of the 1990s a number of countries are more indebted than at any other time in the past. Until mid 1980s extern al debt economics has been rather a disembodied concept for most economists and business leaders. The main reason for this neglect of one of the most important macroeconomic categories was difficulty of distinguishing terminologically and methodologically the domestic determinants of national expenditures from the external ones. Then there were conceptual problems in distinguishing the functional determinants of macroeconomic liquidity from external and domestic determinants of macro-economic solvency. Moreover many studies of the debt crisis were one-sided. Usually debt was seen as a 'white-black' phenomenon with debtor countries accusing creditor countries for causing the crisis and vice versa.

Inhaltsverzeichnis

Frontmatter

An Overview of the Theoretical Aspects of Foreign Debt

Frontmatter

1. Measuring External Debt

Abstract
The growing indebtness of the developing countries as well as the rapid expansion of external lending in the OECD countries have increased the importance attached to reliable and timely international statistical data on this subject. Exact data were needed not only to confirm the depth of the crisis, but primarily because only precise data could show the quantitative magnitude of international debt, the most affected countries as well as structural and strategic issues in hedging against debt exposure. It became clear that with a growing number of rescheduling and restructuring agreements — the pressure for continuous statistical coverage will increase and the provision of statistics on external debt will grow rapidly.
Chris Czerkawski

2. Macroeconomics of External Debt

Abstract
Of central concern to macroeconomic analysis is the concept of the current account and the gross national product. According to the expenditure-income concept of the GNP a country’s foreign transactions (current account balance) display deficit if imports exceed its exports and a surplus when its exports exceed its imports. The GNP equation is therefore crucial for understanding the current account relationship with the changes in output and employment. The current account is also important because it measures the volume and directions of international borrowing. If a country imports more than it exports it has to finance its deficit through domestic budget deficit or external borrowing.
Chris Czerkawski

3. Creditworthiness and Country Risk

Abstract
Rapid growth of external indebtness has focused attention on the problem of external creditworthiness or debt servicing capacity. External creditworthiness is the total amount of external loans, which debtor country can borrow and pay back in the agreed time from its future currency earnings. The use of borrowed funds is important, as investment which stimulate exports or substitute for imports will create an additional source of debt service, which will not be available from consumption.
Chris Czerkawski

4. Economics of Default

Abstract
The problem of default has been known from the very begining of the international financial system. The interwar financial defaults and post was financial crises have been formalized in a number of models which were a basis for the financial theory of panics (1). In contrast to the prewar defaults, when creditors included mainly private bondholders — in the current debt crisis it is creditor banks that are affected by debt-servicing problems of the developing countries. Creditor banks’ defaults depend now on the probability of default in developing countries and on the legal framework of defaulted loans in their countries. The most important differences between pre-war and post-war defaults may be summarised as follows: 1. There is an institution of international financial intermediation (IMF) which was absent from pre-war arrangements; 2. Commercial bank lending at managed floating rate replaced fixed-rate bond loans; 3. The rate of return of lending (spreads) have been generally below risk premiums expected by the pre-war bond holder; 4. The creditworthiness of private and public debtors depends on each other because of the practice of government guarantees on private debt. There is also a relationship between an ability to draw short-term and long-term credits, and between domestic and external indebtness (2).
Chris Czerkawski

5. Optimal and Non-Optimal Debt

Abstract
External debt economics involves decisions which would lead to the best (optimal) objective. This means a need to formulate these factors which optimise (i.e. maximise or minimise) the value of the objective function. From debtor country’s point of view the ultimate objective is to measure its returns on investment financed by external borrowing. This requires that debtor achieve one of two objectives: 1. Whatever the country’s output rate, return on investment (ROI) will have to be achieved at the minimum total cost (interest and principal), or; 2. Any given total external borrowing that finances productive inputs will have to achieve the maximum level of output. From creditor country’s point of view, the ultimate objective is to maximise its returns on external lending. This requires that creditor achieve one of two objectives: 1. Any given external lending will have to produce the maximum rate of return (interest rate) or; 2. With a minimum rate of return (interest rate), creditor must minimise the amount of credits extended to foreign debtors.
Chris Czerkawski

Policy Responses to the International Debt Crisis

Frontmatter

6. Analytical Issues in the Current External Debt Strategy

Abstract
In the first five chapters of this study I have presented a review of selected theoretical aspects of external borrowing, which was a natural starting point for further discussion. In the following chapters I shall proceed to the empirical side of the international debt crisis — the policy responses. The emphasis will be put on the specific features of the current debt crisis and on the techniques and strategies for resolving the debt crisis. These chapters form a logic extension of the external debt economics and enable to derive a number of policy-oriented conclusions.
Chris Czerkawski

7. Debt Relief Techniques

Abstract
The conceptual framework for resolving the international debt crisis ranges from letting the ‘free’ market operate (‘doing nothing’ approach) to the complete restructuring of the international monetary system. There are many other alternatives which try to address the problem from different viewpoints. Two practical issues arise in association with the new debt strategy: 1. Who will bear the losses arising form the bad debts?; 2. What reforms are necessary to reduce the probability of a similiar situation repeating itself in the future?
Chris Czerkawski

8. In Search for a New Debt Strategy — Plans for Reform of International Lending and Contingency Proposals

Abstract
The proposals discussed in this chapter are based on a different assumption from these in the previous one. While the former are based on a presumption that orderly servicing of debt would depend on adoption of specific techniques; the former ones believe that debt crisis has already become unmanageable. Regardless of economic recovery and specific ‘technical’ measures — the only way to defuse the international debt crisis is to reduce its real burden through coordinated plans and contingency proposals.
Chris Czerkawski

9. Managing the International Debt Crisis — Components of the New Debt Strategy

Abstract
The sufficient condition for the failure of the current ad-hoc approach was economic instability coupled with excessive costs of endless rescheduling and restructuring negotiations. However the strongest argument for the new international debt strategy may be of political nature. In the absence of the agreed framework of rules governing new lending and repayment of old debts, there is a potential scope for inevitable differences in national interests. The differences between creditor countries on one sided and debtor countries on the other, provided example of how economic relations could be disrupted by inadequate legal framework. The lack of symmetric rules implied that there were unjustified advantages and disadvantages on the two sides. The rationale for preferential treatment in external borrowing created a need for building as much symmetry as possible.
Chris Czerkawski

Backmatter

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