Chapter 21
International Lending and Financial Crises International capital movements can bring major gains both to the lending or investing countries and to the borrowing countries, through intertemporal trade and through portfolio diversification for the lenders/investors. But international lending and borrowing sometimes is not well-behaved—financial crises are recurrent. This chapter examines both the gains from well-behaved lending and borrowing and what we know about international financial crises.
Knowledge Points
International capital movements can bring major gains both to the lending or investing countries and to the borrowing countries, through intertemporal trade and through portfolio diversification for the lenders/investors. But international lending and borrowing sometimes is not well-behaved—financial crises are recurrent.
International lending and borrowing often is well-behaved, but not always. The chapter next examines financial crises in developing countries during 1982 to 2002. Following defaults in the 1930s, lending from industrialized countries to developing countries was low for four decades. Such lending dramatically increased in the 1970s for four reasons.
We now are paying more attention to finding ways to reduce the likelihood or frequency of financial crises in developing countries. Some proposals for improved practices in borrowing countries, including better macroeconomic policies, better disclosure of information and data, avoiding government short-term borrowing denominated in foreign currencies, and better regulation of banks, enjoy widespread support.
International capital movements can bring major gains both to the lending or investing countries and to the borrowing countries, through intertemporal trade and through portfolio diversification for the lenders/investors. But international lending and borrowing sometimes is not well-behaved—financial crises are recurrent.
International Lending and Financial Crises
International Lending and Financial Crises
6. With free international lending Japan lends 1,800 (= 6,000 − 4,200) to America, at point T. If Japan and America each impose a 2 percent tax on international lending, the total tax is 4 percent. The gap WZ restores equilibrium, and the amount lent internationally declines to 600 (= 6,000 − 5,400). The interest rate in Japan (and the one received net of taxes by Japan’s international lenders) is 3 percent and the interest rate in America (and the one paid including taxes by America’s international borrowers) is 7 percent.
Cases
Crisis struck in 1982, when first Mexico and then many other developing countries declared that they could not repay. The crisis was brought on by rising interest rates in the United States, which raised the cost of servicing the loans, and declining export earnings for the debtor developing countries, as the industrialized countries endured a deep recession.
Crisis struck in 1982, when first Mexico and then many other developing countries declared that they could not repay. The crisis was brought on by rising interest rates in the United States, which raised the cost of servicing the loans, and declining export earnings for the debtor developing countries, as the industrialized countries endured a deep recession. This debt crisis wore on through the 1980s. Beginning in 1989, the Brady Plan led to reductions in debt and conversion to bonds. By 1994, the 1980s debt crisis was finally over.
Argentina pegged its peso to the U.S. dollar and succeeded in ending its hyperinflation in the early 1990s. However, the peso experienced an increase in its real effective exchange rate value, and an extended recession began in 1998. The fiscal deficit widened, and the IMF stopped lending to it in late 2001. In early 2002 the government ended the pegged exchange rate and the peso lost three-fourths of its value relative to the U.S.
Argentina pegged its peso to the U.S. dollar and succeeded in ending its hyperinflation in the early 1990s. However, the peso experienced an increase in its real effective exchange rate value, and an extended recession began in 1998. The fiscal deficit widened, and the IMF stopped lending to it in late 2001. In early 2002 the government ended the pegged exchange rate and the peso lost three-fourths of its value relative to the U.S. dollar. The banking system largely ceased to function and the economy went into a severe recession. After a few months delay Argentina’s crisis spread to neighboring countries, especially Uruguay.
Financial crises also hit industrialized countries, and the chapter concludes with an examination of the global financial and economic crisis. The crisis began in the United States, which had experienced a credit boom and a bubble in house prices. As the house price bubble began to deflate in 2006, an increasing number of mortgages went into default.
Financial crises also hit industrialized countries, and the chapter concludes with an examination of the global financial and economic crisis. The crisis began in the United States, which had experienced a credit boom and a bubble in house prices. As the house price bubble began to deflate in 2006, an increasing number of mortgages went into default. In August 2007 problems at BNP Paribas signaled the depth of losses on securities backed by these mortgages. Furthermore, financial institutions became reluctant to lend to each other, because potential lenders became worried that the borrowing institutions may hold dodgy assets that made it more likely that they could not service their debts in the future. With the failure of Lehman Brothers in September 2008, short-term financial markets and lending among financial institutions froze, and the crisis entered a much worse phase. The U.S. Fed
The first explanation is overlending and overborrowing. This can occur when the government borrows and guarantees private borrowing, and lenders view this as low risk. The box on “The Special Case of Sovereign Debt” uses a benefit-cost analysis to show when a sovereign debtor would default. The Asian crisis showed that overlending and overborrowing could occur with private borrowers as well, especially if rising stock and land prices show high returns until the bubble bursts.
The first explanation is overlending and overborrowing. This can occur when the government borrows and guarantees private borrowing, and lenders view this as low risk. The box on “The Special Case of Sovereign Debt” uses a benefit-cost analysis to show when a sovereign debtor would default. The Asian crisis showed that overlending and overborrowing could occur with private borrowers as well, especially if rising stock and land prices show high returns until the bubble bursts. The second explanation is exogenous shocks—for instance, a decline in export prices or a rise in foreign (often U.S.) interest rates—that make it more difficult for the borrower to service its debt. The third is exchange rate risk. This can be acute if private borrowers use liabilities denominated in foreign currency to fund assets denominated in local currency, betting that the exchange rate value of the local curr
Exercises
________ refer(s) to purchasing shares in a foreign enterprise largely owned and controlled by the investor.
正确答案：B | Direct investment
难度：1 Easy Bloom's：Remember
Official lending and investing are usually done by
正确答案：C | governments or multilateral institutions.
难度：1 Easy Bloom's：Remember
From pre-World War II years to the early 1980s, which one of the following countries was the principal lender in the world?
正确答案：A | The United States
难度：1 Easy Bloom's：Remember
The largest net international lenders since 1980 have been
正确答案：D | Japan and Germany.
难度：1 Easy Bloom's：Remember
From the early 1980s through today, the largest net borrower in the world has been
正确答案：A | the United States.
难度：1 Easy Bloom's：Remember
Since 2000, developing countries received large net capital inflows in the form of
正确答案：A | foreign direct investments.
难度：1 Easy Bloom's：Remember
Which of the following is a major benefit of international lending?
正确答案：D | It allows some lenders to shift their lending to foreign borrowers who are willing to pay higher interest rates on the loans..
难度：2 Medium Bloom's：Understand
If international financial transactions are prohibited
正确答案：C | lenders in the richer countries will probably earn low rates of return.
难度：2 Medium Bloom's：Understand
Borrowers in wealthy countries that have few domestic investment opportunities would gain if
正确答案：B | capital flows between nations are prohibited.
难度：2 Medium Bloom's：Understand
Assume that investment opportunities are less in high-wealth countries and more in low-wealth countries. Now, if all barriers to international financial transactions are removed, borrowers in ________ countries lose and lenders in ________ countries gain.
正确答案：C | high-wealth; high-wealth
难度：2 Medium Bloom's：Understand
International financial freedom
正确答案：A | maximizes world product.
难度：1 Easy Bloom's：Remember
By restricting foreign lending, a country with sufficient market power can
正确答案：D | bid up the rate that foreign borrowers have to pay.
难度：1 Easy Bloom's：Remember
Manual Preview
International Lending and Financial Crises
International capital movements can bring major gains both to the lending or investing countries and to the borrowing countries, through intertemporal trade and through portfolio diversification for the lenders/investors. But international lending and borrowing sometimes is not well-behaved—financial crises are recurrent. This chapter examines both the gains from well-behaved lending and borrowing and what we know about international financial crises.
We begin with the economic analysis of international capital flows that focuses on the stock of wealth of two countries and how that wealth can be lent or invested in the two countries. With no international lending, the country that has much wealth relative to its domestic investment opportunities will have a lower rate of return or interest rate. Freeing international capital flows permits the low-rate country to lend to the high-rate country. As the world shifts to an equilibrium with free capital movements, both countries gain. As usual, however, within each country there are groups that gain and groups that lose from the international lending.
We can also use this analysis to show that either nation could gain by imposing a small tax on the international capital flows, because it could shift the pre-tax foreign interest rate in its favor. Either country could seek to impose a nationally optimal tax, but this works well only if the other country does not impose a comparable tax.
Slide Outline
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