Foreign Debt

9 Key excerpts on "Foreign Debt"

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  eBook - ePub

  Latin American Economic Development

  • Javier A. Reyes, W. Charles Sawyer(Authors)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  As the data above indicates, over the 1970s and early 1980s, the external debt of Latin America increased substantially. This is not necessarily a bad thing. If the money borrowed by the governments of the region had been invested in productive assets that enhance economic growth, then a rising level of debt could be a positive thing. On the other hand, if the debt is being used to intervene in the foreign-exchange market to support an overvalued exchange rate, that is not quite so positive. In this case, a rising level of debt was buying faster economic growth in the short run at the risk of a default on the debt or lower economic growth in the future caused by a major depreciation. Like all debt, money owed by citizens, firms, or the government has to be repaid. In this case, there is one important difference. For most countries, Foreign Debt cannot be repaid in domestic currency. Repayment of Foreign Debt must be made in an acceptable foreign currency. When debt payments come due, foreign exchange must be available. In order to make timely payments on Foreign Debt, two factors become critical.

  As was covered in the previous chapter, countries have official reserve assets. These represent the stock of foreign exchange a country possesses at a point in time. In some time periods, inflows of foreign exchange will exceed outflows. In this circumstance, the stock of official reserve assets will rise. At other times, outflows may exceed inflows, and the stock will fall. Official reserve assets are important in that they represent a cushion of foreign exchange. If inflows of foreign exchange temporarily decrease or outflows increase, the country can still pay for imports or debt repayments if the level of official reserve assets is sufficiently high. However, if this level is extremely low, then a country may face the uncomfortable choice of imports versus debt repayments. There may not be enough foreign exchange for both.

  The other critical factor is the debt–export ratio

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  Sovereign Assets and Liabilities Management

  • INTERNATIONAL MONETARY FUND(Author)
  • 2000(Publication Date)
  • INTERNATIONAL MONETARY FUND

    (Publisher)

  In theory, the choice between domestic and Foreign Debt could be made on the basis of which one provides the better hedge against macroeconomic risk, such as output fluctuations or terms of trade shocks, and results in smoother consumption flows. If terms of trade losses are associated with a depreciation of the domestic currency and a rise in the price level, the decline in the real value of the debt in local currency held by foreigners will offset some of the income losses caused by the fall in the terms of trade. There would be no offset in the case of foreign currency debt. But such an association is uncertain and domestic interest rates could rise and offset the effect of the devaluation.

  Other shocks will have different implications for the economy depending on the denomination of the debt. Real interest rate shocks are more easily diversified away for foreign currency debt than for domestic debt. Foreign borrowing can provide a hedge against inflation in the creditor country or a rise in import prices, if the debtor country cannot insulate itself completely through the exchange rate, and its debt is at a fixed interest rate.

  Foreign currency debt can make a country more vulnerable to capital outflows—as the role of tesobonos in the 1994–95 Mexican crisis amply demonstrates. The degree of vulnerability depends, however, on other factors such as the current account position (which is related to private sector decisions) and the responsiveness of capital flows to changes in domestic interest rates, as well as the maturity structure of the debt. In a crisis, a government can reduce the value of its domestic debt through inflation; for Foreign Debt, default is the ultimate escape.

  From a more narrow standpoint, the choice between domestic and foreign currency debt could be made dependent on which one minimizes the variability of the budget balance. If budgetary outlays on account of foreign currency-denominated public debt are negatively correlated with other government spending or positively correlated with government revenue, debt in foreign currencies would stabilize the budget balance and avoid the negative impact on the economy of a larger deficit or of higher taxes. For the group of countries under consideration in this section, this may be much less important than for the other countries. Their economies are more resilient and their income levels high enough to sustain some fluctuations in real income. Nevertheless, those countries in the group that are heavily dependent on energy or raw material exports, like Australia and Canada, may welcome greater stability in the current account if it could be achieved through appropriate selection of currencies for foreign borrowing. If there were, for example, a robust tendency for the prices (in U.S. dollars) of their primary exports to fall when the dollar appreciates, but by more than the dollar strengthens, then borrowing in nondollar currencies would stabilize the current account of the balance of payments—in contrast with borrowing in dollars only.3

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  Globalization, Gating, and Risk Finance

  • Unurjargal Nyambuu, Charles S. Tapiero, Unurjargal Nyambuu(Authors)
  • 2017(Publication Date)
  • Wiley

    (Publisher)

  Figure 8.2 ). For example, concerns regarding the US debt that China holds in trillions of dollars (although it has been reduced to just over $1 trillion) have both political and economic implications to their dependence and to the gating of their currency’s holders. These sovereign high levels of debt have created markets of their own being traded for profit and loss with financial institutions and hedge funds specializing in trading these debts and their obligations.

  Figure 8.2

  Growth of regional external debt as share of GDP.

  Source: Data from The World Bank.

  8.3 Foreign Exchange is a Credit Bestowed to a Sovereign Entity

  Currency holders are also credit holders, granting their trust to a sovereign state to sustain the value of its currency in domestic and foreign exchanges and in meeting the terms of its debt. Its price is paid by the currency holder for the liquidity it provides as well as for the inflation of that currency. In this sense, currency is broadly associated with states’ fixed income (treasury bills) and their alternative investment in equity markets and the liquidity that the currency provides (i.e., to the extent it is negotiable). These prices reflect the needs and the means of exchange between global investors, speculators, and governments as well as the trust one has in a particular currency. For example, the US dollar reserves of China have a number of advantages, including, among others, liquidity, relative currency safety, and potentially a political power over the currency issuer.

  Paper currencies conclude a long history of money anchored in a human history of trade and credit based on a variety of means to store and exchange value. Technology and e‐finance are contributing to a change of wealth denominators, with electronic transactions and credit assuming an important role. Prior to the Renaissance, currency was defined by minted metals, granting a great deal of power to those wielding the supply of gold (e.g., Spain). The limited capacity of these currencies to provide financial liquidity has contributed to minted metals falling as the main medium of exchange. To provide such liquidity, banking families in Italy as well as traders in Holland and subsequently England introduced paper obligations as a means to trade, which in effect defined a currency and provided liquidity in the form of promissory notes (in fact credit papers). Thus, a new financial system arose based on the implicit fiduciary (credit) trust in a banking system that has provided a required liquidity and guarantees to paper money—the bank’s currency. This has been the case ever since. In the USA, at the beginning of the last century. over a thousand banks were able to print their own currency, ending with the collapse of the US financial system and the need to seek a reliable guarantor. The exchange between these currencies was embedded in a currency holder trust in the banks printing money. Today, the printer and the guarantor of a currency is the sovereign state. In the USA, this is assumed by the Federal Reserve Bank (which monitors, regulates, and manages the financial end of the economy through its financial policies) and the US government (which sets the fiscal policy of the country—defining its expenditures, its revenues through taxation, debt, etc.). Currently, however, a technological currency revolution is seeking to devise a currency which is sovereign free. Electronic and internet‐traded currencies such as bitcoins seek to be used as alternative moneys where exchanges can be made independently and free from sovereign controls.

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  External debt : Definition, Statistical Coverage and Methodology

  • International Monetary Fund(Author)
  • 1988(Publication Date)
  • INTERNATIONAL MONETARY FUND

    (Publisher)

  For accurate measurement of any economic variable it is necessary to have a clear concept of what is to be measured. The development of a concept implies establishing boundaries which include what is to be measured and exclude all else. One method of ensuring that this is done consistently is to construct a comprehensive framework which gives guidance with respect to the definition and classification of all related variables. Existing examples of such frameworks are: national accounts; flow of funds; and balance of payments.

  Unlike national accounts and balance-of-payments concepts, external debt has never been defined in a manner which has been agreed by compilers and analysts. Furthermore, the different definitions employed by international organisations and other compilers and users of data indicate that no single concept is appropriate for all uses. This points to the need for an agreed benchmark for the concept of external debt. One criterion guiding the Group’s work has been compatibility with existing well-structured systems.

  The term “debt” implies a liability, represented by a financial instrument or other formal equivalent. The United Nations’ System of National Accounts (SNA) defines financial assets and liabilities as:

  • – “the gold, currency, and other claims on (and obligations of) other parties owned by an economic agent; or the claims on (or obligations of) an economic agent owned by other parties.”

  With the exception of gold and, by convention, IMF special drawing rights (SDRs), a fundamental characteristic of financial instruments is the existence of a contractual creditor/debtor relationship, i.e., one agent’s liability is another agent’s asset. Analysis of the economic impact of financial transactions is facilitated by reference to the characteristics of the different classes of financial instrument. The SNA has identified 12 categories of financial instrument, as listed in Figure 1 .

  Figure 1 . Financial instruments

  As debt is a liability concept, the focus is on all instruments except gold and SDRs. The instruments vary widely in the nature of the liability involved, but instruments 2 to 8, unlike equity, involve a clear contractual obligation to pay a fixed or pre-determined variable amount of income and/or an amount of principal. These instruments may differ substantially in terms of maturity – ranging from demand deposits to perpetual bonds – and in negotiability, but all involve a contractual payment obligation which differs from that incurred by equity issuers. Instruments 9 and 10 may also include some items of a contractual nature, but cannot be included “en bloc” on the same footing as the earlier items. It is perhaps also worth noting, in connection with the future work outlined in Chapter III , how the pairing of instruments in Figure 1

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  U.S. Protectionism and the World Debt Crisis

  • Edward Ray(Author)
  • 1989(Publication Date)
  • Praeger

    (Publisher)

  In short, inter- national market conditions contributed substantially to the financial crisis that the major borrowers face today. THE RELATIVE BURDEN OF DEBT While there has been a good deal of discussion concerning the success of major banks in setting aside reserves to write off bad debts by developing countries, there has been less attention paid to the dilemma that those debtor countries face. One measure of the magnitude of the burden of external debts to a country is the ratio of external debt to annual export earnings. The rationale for looking at that ratio is that external debts must be repaid in foreign currency and foreign currency is earned through exporting. The greater the external debt to export revenue ratio is for a country, the greater will be the export effort needed to pay off its debt. Figure 15 illustrates the jump in the external debt to export earnings ratio for developing countries beginning in 1980. The ratio of external debt to export earnings in percentage terms rose from 110.4 percent for indebted developing countries in 1979 to a peak of 157.9 percent in 1983. Although the figure declined to 141.5 percent in 1986, that still represented a 31 percent increase over the external debt to export earnings ratio faced by indebted developing countries in 1979. For major market borrowers the debt to export earnings ratio rose from 175.2 percent in 1980 to a high mark of 254.6 percent in 1983 before declining to 214.4 percent in 1986. There are two points worth noting here. First, Figure 15 Ratio of External Debt to Exports, 1977-1986 Major Market Borrowers — Wide Solid Line Indebted Developing Countries — Long Dashed Line Countries With Recent Debt Servicing Problems — Broken Line SOURCE: Adapted from numerical data in IMF, World Economic Outlook, April 1985, Washington, D.C., Table 48, p. 266.

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  Developing Country Debt and the World Economy

  • Jeffrey D. Sachs(Author)
  • 2007(Publication Date)
  • University of Chicago Press

    (Publisher)

  Another problem is that private-sector obligations often quickly be- come public-sector obligations when a financial crisis hits, a point that we have already noted several times. Domestic firms cry for bailouts, and foreign creditors often insist as well that the central government make good on the private-sector debts. The government takeover of the debt can be partially disguised (or at least hard to measure) if the takeover comes in the form of special exchange rates for debt repay- ments, subsidized credits, or other off-budget means of bailing out private debtors. The net result of this fiscal complexity is that many countries are forced to rely heavily on inflationary finance even when the measured central government budget seems close to balance. Cardoso and Fish- low discuss, for example, the data problems in Brazil, where several years of triple digit inflation were accompanied by measured deficits near zero. The small measured deficits led some to conclude that the inflation was purely an “inertial” phenomenon. This view was tested in the ill-fated Cruzado Plan, which attempted to use a wage-price- exchange rate freeze to break the inertia. After the collapse of the Cruzado Plan, most observers now concede that large fiscal deficits are the driving force of the high Brazilian inflation. 1.4 Renegotiating the Foreign Debt The historical record, and the country experiences, speak strongly on another point. To get out of a debt crisis, countries have almost always required a sustained period of time in which the debt-servicing- burden is sharply reduced or eliminated. This financial “time out” has come about through a combination of a negotiated reduction of pay- ments (as in the case of Indonesia during 1966-71), a substantial in- crease in official lending (as in the case of Turkey during 1979-81), or an unilateral suspension of debt-servicing payments (as in the case of Bolivian commercial bank debt, 1986-87).

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  Imperialism and the Political Economy of Global South’s Debt

  • Ndongo Samba Sylla(Author)
  • 2023(Publication Date)
  • Emerald Publishing Limited

    (Publisher)

  As core countries’ government debt is denominated in their national money unit of account, their solvency is not at stake, regardless of what the rating agencies think. Rather, it is the private debt that should be of concern in their case. In the peripheral countries, private debt is just as much a problem as public debt. Their governments are at risk of insolvency because their debt is often 196 NDONGO SAMBA SYLLA denominated in foreign money units of account such as the US dollar, the euro, etc., that is, currencies they do not control. They can default on their foreign currency debt, and depending on the case, they can also default on part of the debt denominated in their national unit of account. 4 It should be clear, therefore, that the problem of the external indebtedness of the Global South governments reflects above all their subordinate economic and monetary status. For governments that are monetarily sovereign are those that do not have to issue debt instruments in a foreign currency. The differences in economic and monetary status between core and peripheral countries have been highlighted by the COVID-19 pandemic. Governments everywhere have seen their tax revenues decline as a result of the slowdown of global economic activity. However, the ability to spend to deal with the economic and health consequences has been very uneven. In the core countries, governments have been able to run large and sometimes unprecedented deficits, taking advantage of low or negative interest rates and the active support of their central banks. In 2020, OECD governments issued a record $18 trillion in market debt, almost double the amount of sovereign debt issued during the 2008 financial crisis. Eighty percent of fixed-rate sovereign bonds yielded less than 1%. Central banks in most OECD countries have been acquiring sovereign bonds on a massive scale in secondary markets.

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  International Debt Statistics 2015

  • World Bank Group(Author)
  • 2015(Publication Date)
  • World Bank

    (Publisher)

  Risks associated with short-term debt (28 percent of external debt stocks at end-2013) were mitigated by international reserves, which were at 111 percent of external debt stocks for the same period. Short-term debt is primarily trade related; when measured against developing countries’ imports, it was at 21 percent, up only slightly from 2012. Developing countries have also seen significant improvement in their external debt pay-ment servicing capacity over the past decade; a consequence of increased export earnings, debt restructuring, and outright debt relief from official and private creditors, and more recently, attractive borrowing terms in international capital markets. The debt service-to-export ratio averaged 10.5 percent in 2013, a mar-ginal increase over the 10 percent recorded in 2012, but, more importantly, it was below half the 21.1 percent at the start of the decade. US$ (billions) 0 1,000 2,000 3,000 4,000 5,000 6,000 2008 2009 2010 2011 2012 2013 Short-term external Private nonguaranteed Public and publicly guaranteed (including IMF) Figure O.1 External Debt Stock of Developing Countries, 2008–13 Source: World Bank Debtor Reporting System. Figure O.2 Net Debt Flows to Developing Countries, 2008–13 US$ (billions) 0 100 200 300 400 500 600 2008 2009 2010 2011 2012 2013 Short-term Banks and other private long -term Bonds Official creditors (including IMF) Source: World Bank Debtor Reporting System. Figure O.3 Key Debt Indicator Trends in Developing Countries, 2000–13 Percent 0 20 40 60 80 100 120 140 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Debt service to exports External debt stocks to exports External debt stocks to GNI Short-term debt to imports Sources: World Bank Debtor Reporting System and International Monetary Fund.

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  International Debt Statistics 2016

  • World Bank Group(Author)
  • 2016(Publication Date)
  • World Bank

    (Publisher)

  dollar (approximately one-third of the debt of low- and middle-income countries is denom-inated in U.S. dollars). The stock of long-term debt at end 2014 was divided some-what evenly between public and publicly guaranteed and private non-guaranteed debt. Short-term debt, as a share of total debt outstanding was 28 percent, unchanged from 2013. Net debt flows fall 18 percent as short-term debt inflows contract sharply Net debt flows totaled $464 billion in 2014, 18 percent lower than the comparable figure for 2013, driven almost entirely by a 62 percent drop in net short-term debt flows, which fell to $72 billion ($188 billion in 2013). Net debt inflows from official creditors (including the IMF) were $44 billion, up over 50 percent from their 2013 level; but as a share of total net debt inflows, it remained small. Private creditors accounted for 91 percent of net debt inflows in 2014. Long-term debt inflows from private creditors held steady at $349 billion, thanks to another record year for bond issuance and resilient commercial bank flows. Viewed from the borrower perspective, there was a noticeable change in the composition of debt inflows from private credi-tors in 2014. The sharp contraction in short-term inflows reduced their share of debt flows to 17 percent in 2014, from approximately 35 percent in 2013. With regard to long-term debt inflows, just over 50 percent went to non-guaranteed private sector borrowers in 2014 as compared with 62 percent in 2013. External debt burdens remain moderate The majority of low- and middle-income countries have seen the ratio of outstand-ing external debt to GNI and to export earnings stay relatively steady: an average of 22 percent of GNI and 79 percent of export earnings at end 2014, broadly in line with 2013 and sharply below the comparable ratios for 2000 (35 percent and 123 percent, respectively).

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