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MAY 1 0 1985
I.O.U. INTERNATIONAL
DATELINE MEXICO CITY, September 1, 1982
As OPEC profits mounted, much of
the money returned to western banks
in the form of petrodollars. (Surplus
OPEC profits that were deposited in
western banks were called "petrodollars.") Bankers suddenly found themselves with a vast pool from which to
make loans.
The President of Mexico nationalizes the
country's banks and imposes foreign exchange controls. Mexico is struggling to
pay the interest on its estimated $80 billion foreign debt.
DATELINE BRASILIA, December 1,
1982
The President of the United States makes
his first stop on a tour of Latin America.
He exchanges toasts with the President of
Brazil and announces that the United
States will help put together a $1.23 billion emergency loan package for Brazil.
Brazil's foreign exchange is nearly depleted, and it owes foreign creditors more
than $80 billion.
DATELINE WASHING TON, D .C.,
December 3, 1982
The Bureau of Labor Statistics reports
that the U.S . jobless rate hit 10.8%.
Close to 12 million men and women are
out of work. Another 1.6 million are classified as "discouraged workers" who have
given up looking for work. "Discouraged
workers" are not included in the Bureau's
jobless index .
The American economy has fallen on
hard times. Business failures are up,
and industrial activity is down. Rust
and crabgrass are taking over vacant
factory sites. People who once produced steel and high-quality durable
goods for the entire world now stand in
unemployment lines and wonder if the
idle factories will ever reopen. America
is grappling with the most severe economic downturn since the Great Depression.
The global economic outlook is even
more disquieting . Several countries
have borrowed heavily from American
and European banks in order to finance
economic development. Now they are
hard-pressed to repay the loans . Mexico and Brazil, for example, both owe
foreign banks more than $80 billion,
and both countries teeter on the verge
of default.
The prospect that a major debtor nation may default on its loan commitmen ts sends shivers through the
world's fina n cial centers. Ta lk of
emergency loans and "bailout" plans is
on the increase.
Such talk confounds many recession-shocked Americans . Few express
any enthusiasm for the recent $1.23 billion emergency loan to Brazil. Why,
they ask, should the United States bail
out a foreign country or a big bank at a
time when nearly 12 million Americans
languish on unemployment?
This question, like so many of the
other questions that surround international debt, does not lend itself to simple answers. The issues are complex,
and the answers are sometimes frustrating .
During the mid -1970s, an unexpected shock jolted the international
financial community. The Organization of Petroleum Exporting Countries
(OPEC) asserted itself and oil prices
soared. Wealth flowed from the industrialized nations into the treasuries of
petroleum producing countries.
A flurry of international banking
activity ensued . Lenders aggressively
courted potential borrowers, and loan
officers journeyed to far-flung destinations in pursuit of new business.
Many of the new loans were made to
governments or to nationalized industries that were guaranteed by governments. A relatively small portion of the
money went to finance specific projects. Much of it was ultimately used to
finance the growing deficits of countries that were hard hit by rising oil
prices. This represented somewhat of a
departure from past lending patterns .
Prior to the rapid influx of petrodollars, the World Bank and the International Monetary Fund (IMF) made
most of the loans to governments of
developing countries (see inset). Commercial lenders generally preferred to
deal with private corporations that borrowed money for specific projects.
Loans to governments of developing
countries were considered risky.
As petrodollar deposits increased,
however, so did the competition
among private lenders. Bankers vied
with one another to make new loans,
not only in such "safe" countries as
Canada and Australia but also in countries that presented a greater degree of
risk and uncertainty. Brazil and Mexico
soon topped the list of debtor countries.
!Continued on page two)
Federal Reserve Bank of Boston Vol. 9, No. 1 - January 1983
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{Continued from page one)
For centuries, Brazil was a land of
unfulfilled promise. Cynical Brazilians
often quipped that, "Brazil is rich, but
Brazilians are poor. "
Things began to change after a military government took power in 1964,
and Brazil embarked on an ambitious
program of economic expansion. Much
of the money to finance that expansion
came from large commercial banks in
the United States and Europe. Lenders
were attracted by Brazil's economic
potential and political stability . In a relatively short period of time, Brazil became a major exporter of steel, footwear, textiles, and agricultural products.
Rising oil prices threatened to end
the economic progress, but the Brazilian government took steps to make the
country less dependent on imported
oil. (Alcohol produced from Brazil's
abundant sugar crop now provides fuel
for many Brazilian cars.) Economic expansion continued, and increased export earnings helped Brazil to secure
more loans from foreign banks. It
looked as if the Brazilian economy
would recover from the oil price shock.
Then recession struck the United
States and Europe. The American and
European economies slowed down
and so did the demand for Brazilian
exports. The sharp drop in exports led
to a corresponding drop in Brazil's
foreign exchange earnings. (Foreign
exchange is generally defined as anything that is acceptable to discharge
debts between one country and
another. U.S. dollars, German marks,
Swiss francs, and Japanese yen are all
examples of foreign exchange. Most
developing countries need foreign exchange in order to repay foreign debt
and purchase vital imports .)
Rising interest rates dealt the Brazilian economy yet another blow. As the
worldwide recession deepened, Brazil
had to borrow more money just to roll
over its existing debt. The new shortterm loans carried ever higher interest
rates . The cost of servicing Brazil's foreign debt skyrocketed, and its export
earnings continued to plunge. By the
end of 1982, Brazil owed foreign creditors more than $80 billion, and its foreign exchange accounts were nearly
depleted .
Mexico, too, owes foreign creditors
more than $80 billion. The Mexicans
began to borrow heavily after they
struck oil during the mid-1970s . They
hoped to repay the loans with money
earned from oil exports.
Then worldwide recession slowed
the demand for Mexican oil, and Mex2
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ico's foreign exchange earnings plummeted. Mexico is now struggling just to
pay the interest on its growing foreign
debt .
Mexico and Brazil are both strapped
for cash. They need to increase exports
and thereby earn more foreign exchange. But that won't happen as long
as the United States and Europe remain
mired in recession . In the meantime,
Mexico, Brazil, and a growing list of
o ther debtor nations must borrow
short-term at high rates just to service
their existing debt.
--
Lenders and borrowers both have
a stake in maintaining international financial stability.
As international debt mounts, so
does concern among lenders. Some
wonder if they will ever be repaid .
Others wonder how much longer they
will be in a position to continue lending. In either case, if private lenders
suddenly tighten their purse strings,
the added strain could push weak debtor countries closer to default.
Against this background, official lenders such as the International Monetary Fund, the Bank for International
Settlements (BIS), the World Bank, and
even the U.S. Treasury are taking steps
to keep borrowing countries liquid. In
December 1982, the U.S. Treasury lent
Brazil $1.23 billion, and the Bank for
International Settlements agreed to
provide Brazil with a $1.2 billion
"bridge" loan. (Nearly half of the
money for the BIS loan came from the
U.S. Treasury.) These short-term loans
helped Brazil to meet its day-to-day
financial obligations while the IMF considered Brazil's request for longer-term
financing. The international financial
community also banded together during the autumn of 1982 to save Mexico
from default.
Loans of this type provide debtor nations with vital financial assistance, but
they sometimes create thorny political
problems as well. Mexico, for example,
will probably have to lower its expectations for economic growth and agree to
cut government subsidies of food, fuel,
and transportation in order to qualify
for a loan from the IMF. Such measures
are bound to be unpopular with Mex-
ican voters . Indeed, the Fund's insistence upon financial orthodoxy has
helped to create a perception among
developing countries that IMF lending
practices represent a form of financial
domination by the wealthy industrialized nations .
Expanded official lending (see inset)
has also created sensitive political
issues for the governments of wealthier
nations. They must decide how much
additional responsibility they are willing to assume for the current state of
international finances . The United
States already contributes more to the
International Monetary Fund than any
other nation . Any increase in the U.S.
commitment to the IMF would have to
pass Congress, and Congress might be
hard-pressed to approve such an increase.
For a variety of reasons, Americans
seem less willing to take on additional
international commitments . Some
view increased U.S. assistance to debtor nations as yet another bailout of
foreign countries. Others see it as a
bailout of improvident big banks. The
majority are simply far more concerned
about high interest rates and record
U.S. unemployment.
The world, however, is a far more
complicated place than it once was.
The Atlantic and the Pacific no longer
buffer America from the problems of
other countries. Default by a major
debtor nation could have a profound
impact on the United States. One in six
U.S. jobs depends on exports, and
about'one-third of U.S . corporate profits comes from overseas. In December
1982, the Secretary of the U.S. Treasury
told Congress that failure to help debtor countries, "could mean a loss of exports, a drain on international economies, and there is a chance that the
countries' political arrangements could
change dramatically."
Likewise, if a major bank were to
suffer a financial reversal due to default
by a debtor nation, the consequences
would not be borne solely by the bank
and its shareholders. A significant loss
by one lender could prompt other
lenders to suddenly pull back on international lending. Such action could in
tum undermine the position of other
debtor countries. Large scale international losses by a major lender could
also affect the willingness of lenders to
extend credit to domestic borrowers.
In short, the web of world credit ties
the fortunes of lending countries to the
fate of borrowing countries. Lenders
and borrowers both have a stake in
maintaining international financial stability.
FOLLOW-UP
1) John Maynard Keynes observed
that, "If you owe your bank manager a thousand pounds, you are at
his mercy; if you owe him a million
pounds, he is at your mercy." How
does Keynes' observation relate to
the current international debt situation?
2) In the words of a prominent U.S.
banker, "Countries don't go bankrupt." How does this statement relate to the current international debt
situation?
3) If a major debtor nation defaults on
Joan commitments to a large American bank, what role, if any, should
the United States government
assume?
THE OFFICIAL LENDERS
The In tern a tional Monetary
Fund (IMF), the World Bank, and
the Bank for International Settlements (BIS) are multi-lateral institutions that help to maintain international financial stability. The
World Bank and the IMF are based
in Washington, D.C. The Bank for
International Settlements is located in Basel, Switzerland.
In general, the World Bank
makes long-term loans for specific
development projects, while the
IMF helps its 146 member countries finance temporary balanceof-payments deficits. The Bank for
International Settlements is often
called "a central bank for central
banks ." The BIS usually makes
short-term emergency loans to developing countries.
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Federal Reserve Bank of St. Louis
Fed Update
Charge Policy
Effective January 1, 1983, the Federal
Reserve Bank of Boston instituted a
charge policy for certain educational
materials listed below. All requests for
these materials require payment in
advance . Include a check made payable
to the "Federal Reserve Bank of
Boston. "
If your request includes other titles
that do not carry a charge, we will process that portion of the request.
State the total number of copies
needed, but be sure to send payment
only for the priced copies.
Title
Quantity
Price
Introducing Economics
Copies 1 - 9
Copy 10 & above
No charge
50ยข each
Historical Beginnings
Single copy
Copy 2 & above
No charge
$1.00 each
16mm Film Rentals
$10.00 rental fee per film per booking
Send your order and check (payable to the "Federal Reserve Bank of Boston")
to: Joanne Vance
Public Services, T-3
Federal Reserve Bank of Boston
Boston, MA 02106
"AAMARP at the Fed," an exhibition
of paintings, drawings, prints, photographs, fiber works, and mixed media
imagery sponsored by the AfricanAmerican Master Artists-in-Residency
Program of Northeastern University,
will be on view in the Federal Reserve
Bank of Boston gallery from January 11
- February 18, 1983.
The exhibition is free and open to the
public. Public viewing hours are Monday through Friday, from 10:00 a.m.
until 4:00 p .m. The display area is located on the ground floor of the Federal
Reserve Bank building at 600 Atlantic
Avenue, across from South Station.
3
Multi-Media
Directory of Home Economics Materials Printed in Spanish, pub-
FOCUSIRG
lished by Texas Agricultural Service
Olf!BI
As the title suggests, this 63-page
directory lists a wide variety of home
economics materials printed in Spanish. The listing covers six major categories: 1) foods and nutrition, 2) family
life education, 3) family resource management, 4) clothing, 5) health and
safety, and 6) housing and home furnishings. For more information, please
contact Texas Agricultural Extension
Service, Room 213, Special Services
Building, The Texas A & M University
System, College Station, Texas 77843 .
Focusing on the Fed, published by the
Credit Guide, published by the Federal
Board of Governors of the Federal Reserve System
Reserve Bank of Chicago
Credit Guide presents basic guide-
lines for obtaining and using consumer
credit. It discusses how a lender assesses a borrower's creditworthiness, and
it describes the type of information
contained in a credit record. In addition, the publication outlines the safeguards and responsibilities provided
under several pieces of consumer credit legislation. Copies of Credit Guide
are available, free of charge, from the
Public Information Center, Federal Reserve Bank of Chicago, P.O. Box 834,
Chicago, Illinois 60690.
11D
Focusing on the Fed provides students in grades 7-12 with a look at the
Federal Reserve System. This teaching
unit complements The Fed: Our Central Bank, a 19-minute color film.
Focusing on the Fed uses four activities to help students understand : 1)
how the Fed is organized; 2) the role
the Fed plays in assuring a wellmanaged supply of money and credi t;
3) the tools the Fed uses to manage the
nation's money supply; and 4) how the
Federal Reserve and various federal
groups work together to curb inflationary pressures and promote a stable
economy. The unit also includes a wall
chart and four master sheets that enable teachers to reproduce program
activities. To order Focusing on the Fed
and The Fed: Our Central Bank, please
write to Publications, the Public Services Dept., Federal Reserve Bank of
Boston, Boston, MA 02106 or call (617)
973-3459.
New England Update
The Federal Reserve Bank n ear you
CONNECTICUT
Comptroller of the
Currency
Consu m er Affairs
Federal Deposit Insurance
The Center for Economic Education/
Central Connecticut State College will
host the second evening of its "Distinguished Speakers Series" on Monday,
February 7. The speaker is Lester C.
Thurow, author of Zero Sum Society.
His topic is "Economic Survival in the
'80s."
On Monday, April 4, Lindley H.
Clark, Economic News Editor of the
Wall Street Journa l, will speak on
"Reordering America's Priorities ."
Frank E. Morris, President of the
Federal Reserve Bank of Boston, was
the series' inaugural speaker. On October 17, 1982, Mr . Morris discussed
"Economic Issues - Election '82."
For more information on the "Distinguished Speakers Series" please
contact the Center for Economic Education, Marcus White Hall, Room 117,
Central Connecticut State College,
New Britain, CT 06050.
the LEDGER
Editor: Robert Jabaily
Graphics Arts Designer: Ernie Norville
Adm inistration
D ivisio n of Consumer
Affairs
Wash ington . D .C . 20456
Commission
D ivision of Credit
Practices
Washington , O .C . 20580
Federal Home Loan Bank Board
Office of Consumer Affairs
1700 G Street, N .W .
Washin gton , O.C. 20552
4
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This newsletter is published periodically as
a public service by the Federal Reserve Bank
of Boston. Tl,e reporting of news about
economic educa tion programs and
materials should not be construed as a
specific endorsement by the Bank. Further,
the material contained herein does not
necessarily reflect the views of the Federal
Photography: Wilson Snow
Johannah Miller
Reserve Bank of Boston or the Board of
Governors. Copies of tl,is newsletter and a
catalogue of other educational materials
and research publications may be obtained
free of charge by writing: Bank and Public
Information Center, Federal Reserve Bank
of Boston . Boston , MA 02106 , or by
calling: (617) 973-3459.
@FedFRASER