Causes of the International Debt Crisis

In the last century, developing countries were seriously troubled by debt, and serious debt crises broke out in many countries. But many people don't understand the reasons for the debt crisis. Even the entire international community has exerted tremendous pressure. In response to this question, the editor of Legal Savior Network has compiled the following content to answer your question. I hope it will be helpful to you.

Reasons for the outbreak of the international debt crisis

1. Expansion of foreign debt

If foreign debt is regarded as a source of construction funds, an appropriate borrowing scale needs to be determined. Because capital accumulation mainly relies on domestic savings, foreign capital can only play a supporting role; moreover, excessive borrowing without corresponding domestic funds and other conditions will not improve the macroeconomic benefits as it should, which may Debt crisis due to heavy debt burden. Nowadays, the international community generally regards the debt service ratio as the standard for controlling debt. Because the repayment of foreign debt ultimately depends on a country's ability to earn foreign exchange through exports, the scale of foreign debt borrowing must be subject to future repayment capabilities, that is, the ability to expand exports to earn foreign exchange. If the debt growth rate continues to be higher than the export growth rate, it means that there are serious problems in the use and repayment of international capital movements. Theoretically, a country should control the ratio of its current year's principal and interest repayments to its export revenue below 20%. If it exceeds this limit, the borrowing country should attach great importance to it.

2. Unreasonable external debt structure

Under other conditions being equal Under such circumstances, the structure of external debt plays an important role in changes in debt. The main manifestations of the unreasonable external debt structure are:

(1) The proportion of commercial loans is too large.

Commercial loans generally have shorter terms. When the economy is better or all parties are optimistic about economic development, international banks are willing to continue lending, so these countries can Continuously "rolling" development by borrowing new debt to repay old debt. However, once certain unstable factors appear in economic development, such as the government's fiscal deficit, huge trade deficit, or political instability, which cause market participants to lose confidence and foreign exchange reserves are insufficient to repay maturing foreign debts, the exchange rate will inevitably fall sharply. . At this time, banks are no longer willing to lend new loans when they expire. In order to repay maturing foreign debts, foreign exchange funds that were already in short supply were flowing out on a large scale, triggering a crisis.

(2) Foreign debt currencies are too concentratedmiddle. If a country's foreign debt is concentrated in one or two currencies, the exchange rate risk will become greater. Once the foreign currency appreciates, the foreign debt will increase, making repayment more difficult.

(3) The term structure is unreasonable. If the proportion of short-term external debt is too large and exceeds the international warning line, or the debt repayment period is not reasonably arranged, it will cause a concentration of debt repayment time. If the liquidity is insufficient to pay the mature external debt, a crisis will erupt.

3. Improper use of foreign debt

After the borrowing scale and structure are determined , how to put it into the appropriate departments and maximize its use efficiency is the ultimate guarantee for repaying debts. In the long term, solvency depends on a country's economic growth rate, and in the short term, its export rate. So what people are really worried about is not the size of the debt, but the productivity and foreign exchange earning capacity of the debt. After borrowing heavily, many debtor countries fail to formulate foreign debt usage and debt repayment strategies based on comprehensive considerations such as investment amount, debt repayment period, project exchange rate, macroeconomic development speed and goals, regardless of the country's financial, material and human resources. Due to the limitations of other factors, we blindly engage in large-scale project construction. Since such projects consume money and have a long construction period, it is difficult to build production capacity and create sufficient foreign exchange in the short term, resulting in accelerated debt accumulation. At the same time, not only is the efficiency of using foreign debt for projects low, but a considerable part of the foreign debt does not flow into the production field or is used for the import of capital goods at all, but blindly and excessively imports durable consumer goods and luxury goods; this will inevitably lead to investment The decline in interest rates and the weakening of debt repayment capabilities. Unreasonable consumer demand is also the reason for the reduction in the savings rate, which makes the internal accumulation capacity unable to keep up with the growth of funds, thus promoting the further increase of external debt. Some countries borrow large amounts of short-term loans to make long-term investments domestically, and the investments are mainly in real estate and stock markets, thus forming a bubble economy. Once the bubble bursts, a crisis will come.

4. Lack of macro-level unified management and control of foreign debt

External debt management requires the state to implement technical and institutional management of external debts and assets, increase the returns from international borrowing, reduce the risks of foreign debt, and achieve the most perfect combination of risks and returns. This effective management is key to avoiding debt crises. The scope of its management is quite broad, involving all aspects of borrowing, using and repaying foreign debt, and requires policy coordination among various government departments. If the management of borrowed foreign debt is chaotic, long-term borrowing, and uncontrolled introduction of foreign capital will often cause the debt scale to be out of control and the debt structure to become irrational, it will prevent the government from making timely adjustments to policies based on the actual changed debt situation. Once the government discovers that the policy deviates too much from the planned goals,By this time, debt repayment difficulties have often already occurred.

5. The foreign trade situation has deteriorated and export revenue has dropped sharply

Due to The ability to earn foreign exchange from exports determines a country's debt repayment ability. Once a country fails to adapt to changes in the international market and adjust its export product structure in a timely manner, its export revenue will be significantly reduced and its current account deficit will expand, thus seriously affecting its repayment of principal and interest. ability. At the same time, the huge current account deficit further creates dependence on foreign capital. Once international investors lose confidence in the economic prospects of a debtor country and stop lending to it or refuse to extend it, a debt crisis will erupt.

Many experts from international financial organizations have put forward many ideas and suggestions to solve the debt crisis. I hope they will be helpful to everyone. If your situation is more complicated, Legal Savior Network welcomes you to seek legal consultation.