Debt Crisis
History of Debt Crisis
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The origin of the debt crisis started when many countries gained independence
from colonial rule in the 1940s, 1950s and 1960s.
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Newly elected leaders like Nehru in India and Nkrumah in Ghana came to power
with bold visions.
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Many began working with their ministers to devise schemes to promote the
growth of local industries. Unlike in the past, where national economic policies
had been dictated by colonial priorities, the leaders of newly independent
countries had an opportunity to devise growth strategies solely for the benefit of
their countries’ people.
Strike One: The Cold War
After gaining independence, these leaders were approached by banks and
governments in wealthy countries offering them loans at generously discounted
interest rates. Most of the lenders didn’t have the interests of citizens in borrower
countries in mind; they borrowed until repayment became difficult .
Strike Two: The oil crisis
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In 1973, major oil-producing countries hiked their prices, made huge sums of
money, and deposited those sums in dollars in western banks.
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Other economic changes, such as the end of the pegging of the US dollar to
gold, flooded markets with cheap money.
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Interest rates plummeted, starting off a domino effect. To stop the slide and avoid
an international crisis, banks decided to lend more money quickly and lavishly to
poor countries without much thought about how the money would be used or if
borrowers had the ability to repay. Poor countries took on even more debt: the
value of poor country debt spiraled from around $70.2 billion in 1970 to $579.6
billion in 1980.
Strike Three: Financial shift
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From the late-1970s onwards, poor countries were delivered a triple blow from
world markets: an unprecedented rise in interest rates, led by the US as a result
of the fiscal conservatism of newly elected President Reagan; ensuing deflation
that caused a dramatic slump in the price of commodities (like coffee and copper)
on which poor countries’ incomes depended; and another huge increase in the
price of oil.
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The trap was sprung – poor countries were earning less than ever for their
exports and paying more than ever on their loans and on what they needed to
import. They had to borrow more money just to pay off the interest. That cycle
has continued ever.
The debt crisis emerges

Up to the early 1980s, banks had been recklessly lending to poor countries in the
belief that they were a safe bet: whatever their problems, countries didn’t go
bankrupt. In 1982, Mexico threatened to do just that by defaulting on its debts.

The entire global financial system looked exposed, and rich countries and
institutions had to do something about it.
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But their efforts – whether in bilateral discussions, ad hoc schemes such as the
internationally agreed Heavily Indebted Poor Countries (HIPC) scheme
launched in the mid-1990s by World bank and IMF) were all aimed at protecting
both creditors and the financial system, rather than fundamentally resolving the
debt crisis for poor countries.
The situation today
A practical case of Swaziland in SACU

Swaziland faces a fiscal crisis, driven by a large decline in Southern African
Customs Union (SACU) revenues and one of the largest government wage bills
in Sub-Saharan Africa

The Swaziland government has responded to the crisis by adopting a Fiscal
Adjustment Roadmap (FAR) in October 2010, while taking immediate actions as
well.

The Swaziland economy continues to underperform compared to other SACU
members, reflecting both the impact of the global economic crisis and a lack of
competitiveness.

The shortfall in SACU revenue and one of the highest government wage bills in
Africa have triggered a fiscal crisis, with the government incurring domestic
arrears.

The prevalence of HIV/AIDS strains human capital and substantially reduces
potential output. Swaziland remains the most affected country by HIV/AIDS in the
world.
By lowering life expectancy at birth to 31 years and increasing absenteeism due
to sickness, HIV/AIDS deters human capital accumulation and reduces
productivity growth.
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It also poses constrains on growth in labor intensive sectors, such as textile
and agriculture, while placing a burden on household and public finances.
Swaziland adopted a Fiscal Adjustment Roadmap (FAR) in
October 2010 as measures to bring the deficit down to
sustainable levels by:
 Introducing a VAT and a capital gains tax
 Strengthened the revenue administration to fight tax evasion more effectively
 A freeze on the wage bill for the next three years
 Cuts in expenditures on goods and services
Countries with major Growth Deficit (Estimates for 2013)
Country
Growth Deficit Estimates
Greece
-10.5
Egypt
-8.6
Portugal
-8.5
Spain
-8.3
Japan
-8.0
Ireland
-7.3
UK
-7.0
Venezuela
-6.6
USA
-3.8
France
-3.4
Italy
-3.1
Source: The Economist
the Washington Times
The followings are some of the measures (debt relief) countries take to reduce or
cancel each others’ debts:
 Debt restructuring – A process that allows a private or public company – or a
sovereign entity – facing cash flow problems and financial distress, to reduce and
renegotiate its delinquent debts in order to improve or restore liquidity and
rehabilitate so that it can continue its operations.
 Debt-for-equity swap – in this case a company's creditors generally agree to
cancel some or all of the debt in exchange for equity in the company.
 Informal debt repayment agreements – Informal agreements concluded
between debtors and creditors to repay the debt. Payment by this method relies
on the co-operation of the creditor and the enforcement officer
 Debt release or forgiveness – Countries can use debt forgiveness instrument to
write off all or a portion of a debtor’s (other countries) outstanding debt.
 Debt cancellation – this started in 1966 when industrialized nations cancelled
debts in many poor countries through two vehicles: Heavily Indebted Poor
Countries (HIPC) and the Multilateral Debt Relief Initiative (MDRI) schemes.
Homework
NB: Read further the debt crisis in LDCs with emphasis on Lesotho
Causes of Debts Crisis in Sub-Sahara Countries
The arguments should include the following:
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The oil price crises of 1973 and 1980
Excessive borrowing to compensate for the rising oil prices
Falling export revenues due to slack demand in consumer countries
Imprudent lending by commercial banks in Europe due to the “petrodollar glut”
Sharp rises in interest rates
Rising value of the US$
Protectionists policies by the industrialized countries
Lack of restraint on the part of the African governments
Unwise investments
High levels of consumption vis-a-vis available resources
Excessively overvalued domestic currencies (pegged to either US$ of pound
sterling)
Insular commercial policies
Growing budget and current account deficits