Chapter 6: The International Debt Crisis
Gary Dymski* Introduction This chapter reviews recent historical experience with international debt crises, with an emphasis on how economists have answered two core questions about these episodes: why do they occur? And what should be done about them? The last three decades, a period of increasingly unregulated cross-border financial flows, witnessed numerous international debt and currency crises – among them, the 1982 Latin American debt crisis, the 1994–95 Mexican ‘tequila’ crisis, the 1997 Asian financial crisis, the 1998–99 Russian ruble/Long-Term Capital Management crisis, and the 2001–02 meltdown of the Argentine economy – even before the 2007–08 subprime crisis shook the global financial system to its foundations. International debt crisis has become a defining feature of the contemporary world economy (Eatwell and Taylor, 2000). Until the subprime crisis, international debt crisis could be defined as ruptures in market relations that arise when the sum of a borrower nation’s cross-border repayment obligations cannot be met without radically altering expenditure levels or renegotiating repayment terms. Because both parties to cross-border debt contracts are not covered by a common contract law, lenders expect that borrowers’ national governments bear residual repayment responsibility. Crossborder debt also typically involves exchange risk. If the debt contract is denominated in the lender’s currency, then the borrower takes on exchange risk, and vice versa. A currency crisis arises when overseas payment obligations cannot be met at prevailing exchange rates. Most cross-border debt contracts are written in lenders’ currencies, so international debt and currency crises often coincide. The subprime...
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