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International Economic Crises

International Economic Crises - International Economic...

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International Economic Crises I. Two Questions a. Where do international economic crises come from? b. How can they be resolved? II. Debt Crises a. When a country cannot pay back the money that it is borrowing b. It is a crisis not only for the one who needs to pay it back but the one who is the lender too because the probably borrowed it form somebody else. Thus a debt crisis can ripple through a banking system easily (which is what is occurring right now) c. Classic example: Mexico 1982 c.i. In the 1980s Mexico was borrowing money and people were hoping on investment. Interest rates were very low because the price of oil had spiked and the oil companies in the middle east needed to invest the money they were making (recycling of petrol money)and it worked well for a while. However, in 1979 there was a second oil crisis and now for a country like Mexico, a lot more dollars needed to be spent on oil which left less money to repay loans. Investors loss confidence and stopped making more loans which drove interest rates up because there was less money out there. The Mexicans had borrowed money cheaply and was become more expensive to roll over the loan which is what they were trying to do pay off the old loans but the interest rates on the roll over loans were really higher. Now the banks in New York have borrowed lots of money and loaned it to Mexico and now have to repay it…thus in this case the concern in Washington and New York was that Citi Bank is too big to fail and if it failed there would be vastly larger reprocutions thus the Government stepped in. Baker plan…1. Repay the loans, but they are going to get the money more slowly at a cheaper interest rate…Mexican government had to accept an austerity plan by cutting spending to pay off these loans…backed by US government and backed up the IMF to loan???
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