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CHAPTER V: BALANCE OF PAYMENTS DEFICIT AND ROLES OF LONDON – PARIS CLUB DEBT 1. 2. 3. 4. Nature of Balance of Payment Recent BOP Figure Roles of IFIs in Debt Crisis Roles of official development assistance 12/21/2010 B02013 - BALANCE OF PAYMENTS DEFICIT AND ROLES OF LONDON – PARIS CLUB DEBT 1 Preface • In 1970s, LDC’s debt significant increases Why? What? Who? How much? 12/21/2010 B02013 - BALANCE OF PAYMENTS DEFICIT AND ROLES OF LONDON – PARIS CLUB DEBT 2 1. Nature of Balance of Payment • Define – BOP deficit is the emergence or increase payment of foreign account, including services fee incurred. • Nature – 1970-1989: BOP deficit of LDC Increase from 64,8 billion to 1,283 billion USD – Why? 12/21/2010 B02013 - BALANCE OF PAYMENTS DEFICIT AND ROLES OF LONDON – PARIS CLUB DEBT 3 2. Recent BOP Figure • Pre 1970 • 1970 - 1989 12/21/2010 B02013 - BALANCE OF PAYMENTS DEFICIT AND ROLES OF LONDON – PARIS CLUB DEBT 4 3. Roles of IFIs in Debt Crisis 3.1 Root of Debt Crisis • Services are not provided at the end of schedule • Reconstructed debt still hasn’t meet deadline. • Debtor declares bankruptcy or unable to pay (*) 12/21/2010 B02013 - BALANCE OF PAYMENTS DEFICIT AND ROLES OF LONDON – PARIS CLUB DEBT 5 3. Roles of IFIs in Debt Crisis 3.1 Root of Debt Crisis (cont.) Let i= current interest rate, DS = Debt Service Repayment; P = Base capital plus Loan Interest; D = debt has to pay (1) NRT = Net Resource Transfer, L = net loan, hence (2) From (1) and (2) 12/21/2010 B02013 - BALANCE OF PAYMENTS DEFICIT AND ROLES OF LONDON – PARIS CLUB DEBT 6 3. Roles of IFIs in Debt Crisis • 3.1 Root of Debt Crisis (cont.) If C = cost of a country - The country will not bankrupt if - The country will likely declare bankrupt if We can reduce this risk by either  DS (Reconstruct Debt, reduce interest in D,..)  C   L (re-enter the loan) 12/21/2010 B02013 - BALANCE OF PAYMENTS DEFICIT AND ROLES OF LONDON – PARIS CLUB DEBT 7 3. Roles of IFIs in Debt Crisis 3.2 Roles of International Financial Institutions - IFIs - WB (World Bank) - IMF (International Money Fund) - Paris & London Financial Club - They are the major player in debt reconstructing 12/21/2010 B02013 - BALANCE OF PAYMENTS DEFICIT AND ROLES OF LONDON – PARIS CLUB DEBT 8 3. Roles of IFIs in Debt Crisis 3.2.1 Roles of WB and IMF - There are 5 issues - Criteria for ratings - Benefits that HIPC brings 12/21/2010 B02013 - BALANCE OF PAYMENTS DEFICIT AND ROLES OF LONDON – PARIS CLUB DEBT 9 3. Roles of IFIs in Debt Crisis 3.2.2 Roles of London & Paris Club  The London club is a group of representative commercial banks  The Paris club is a group of representative lender, includes US and G7 - Unofficial rules and infrastructure - Special consideration (disaster…) 12/21/2010 B02013 - BALANCE OF PAYMENTS DEFICIT AND ROLES OF LONDON – PARIS CLUB DEBT 10