ROle of IMF - Notes - 05_10.docx

ROle of IMF - Notes - 05_10.docx - External debt Balance of...

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- External debt: Balance of payment < 0 (Another country is being damaged by default). This is different from public debt, it might only be to its own citizens (Tax collection – Government expenditures – transfers < 0). This is a deficit that must be financed with public debt (govern issues bonds to collect money). If these bonds are purchases by the citizens, it has nothing to do with external debt. If a foreign country purchases it, it is connected to external debt. IMF intervenes when there is a problem with the balance of payment. - Suppose we have a country A (GDP < C + I + G, IMP > EXP it doesn’t have production to fulfill its needs = foreign debt) that needs more money that it can use. So, it asks for money B to receive some of this money. This occurs at time t. At time t + 10, the debt has to be returned with an interest, A pays B back (either you squeeze down production, public expenditure or increase GDP). If A goes default, there might be a problem for B (IMF should intervene). Another important issue is that we don’t have too isolated countries. It might be that country B is financially linked to other countries (C,D,E) and these links might have very different characteristics. Not paying B might propagate to those countries. The amount of international financial links have increased quite dramatically (2008 crisis). By diversifying their financial relationships, they have reduced their individual exposure. Even if a country have a net negative position, it might also have purchased assets from another country. - Suppose you have a large company in the middle of the web (USA, for example). It has a diversified web with financial relationships with other countries. This configuration where you have a big center and smaller nodes is called star (typical after WW2, no high systemic risk). There is only one country that can have a systemic effect (USA). If one of the countries default, it hits the center but it does not propagate it so much.
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