International Banking

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International Debt Crisis 

 

The debt crisis of the 1980s affected all the countries. The international financial markets were severally affected when a number of developing countries found that they were unable to meet the payment amounting to several hundred billion dollars to major banks around the world. As countries trade with each other, economies are integrated. The stagnant economies in Europe and the United States had an adverse affect on many Less Developed Countries (LDC) economies. These country’s were highly dependent on their exports business on these two economies. in addition, due to the oil glut at that time, the oil exporting LDC’s were also generating less revenue. 


The strengthening of the dollar during the early 1980s adversely affected the debt problems of the LDCs as most of the loans provided to LDCs were denominated in US dollars. 


The interst rates in 1981 were also at their peak, exceeding 20% in 1981 infact the increased market interest rates, alogwith the strengthening of the US dollar, resulted in the effective interest rates on previous loans to be 30% or more. 


 Thus the international debt crisis reflected a combination of external shocks including deterioration of terms of trade and a sharp rise in US dollar interest rates and domestic imbalances such as large fiscal deficit and currency overvaluation.

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