What are the impacts of the international debt crisis
1. The scale of domestic investment will be significantly reduced
1. In order to repay principal and interest, debtor countries must significantly reduce imports to obtain a considerable amount of foreign trade surplus. Therefore, the import of materials, technology and equipment required for economic development and structural adjustment will inevitably be severely suppressed, resulting in a shrinking of investment in production enterprises, and even normal production activities will be difficult to maintain.
2. The outbreak of the debt crisis has greatly reduced the international credit of debtor countries, and blocked access to the international capital market for financing. It is not only difficult to borrow loans with favorable terms, but also Even loans with stringent conditions are not easy to get. At the same time, international investors will also regard the country where the crisis broke out as a high-risk location and reduce direct investment in the country. The reduction in external capital inflows has prevented debtor countries from raising sufficient construction funds.
3. After the crisis broke out, holders of domestic funds became pessimistic about the domestic economic prospects and withdrew domestic investments one after another, which not only increased the country’s debt The burden also reduces domestic investment funds and cannot maintain the investment scale necessary to promote economic development.
2. Inflation will intensify
After the debt crisis breaks out, The flow of funds into debtor countries has decreased significantly, while the flow of funds out of debt repayments has increased. The outflow of capital is actually the outflow of goods, because debt repayment funds of debtor countries mainly rely on expanding exports and reducing imports. Due to the reduction of investment, the production capacity of enterprises has also been affected, and it is difficult for products to meet domestic demand and export needs at the same time. To repay debt and interest, the country prioritizes exports over domestic demand. On the other hand, some basic consumption crystals in imported goods have also decreased significantly. When the supply of goods in the domestic market is reduced to the point where it cannot meet basic requirements and a supply crisis occurs, inflation is inevitable. In addition, when there is a huge net outflow of funds and a shortage of positions, the governments of debtor countries often adopt measures such as expanding the scale of domestic public bond issuance and raising bank savings interest rates to raise funds. But a considerable part of the funds raisedIt is used by the government to purchase foreign currency from the private sector to repay foreign debts, which will inevitably lead to an increase in currency circulation in the domestic market. Since this part of the funds is less used for investment, it has no value preservation or appreciation effect. In this way, when the public debt matures or depositors withdraw money, the national bank is actually unable to repay it, so it has to issue more new bonds with higher interest rates and shorter maturities, and expand currency issuance. In this case , inflation is inevitable.
3. Economic growth will slow down or stagnate
In order to prevent To control the outflow of funds and control inflation, the government will significantly increase interest rates, further tightening monetary policy, and a large amount of foreign exchange needs to be exchanged to repay debts, which will cause the local currency to depreciate sharply, and the import costs of enterprises to rise sharply. The lack of funds and the rise in production costs have seriously affected the normal production activities of enterprises, and even led to bankruptcy or closure. Decreased investment and reduced imports will help eliminate the economic gap, but the decline in production will inevitably affect the growth of exports. If exports cannot accelerate growth, they will not be able to create enough foreign exchange to repay foreign debts, and it will be difficult to reduce the country's debt burden. All these factors have slowed down the country's economic growth and may even lead to a significant setback. For example, after the debt crisis broke out in Latin America in the 1980s, its economy basically stood still. Throughout the 1980s, Latin America's cumulative GDP growth was 12.4%, while per capita growth was -9.6%. During the Asian financial crisis, Thailand, Indonesia and South Korea, which were deeply troubled by the foreign debt crisis, had estimated 1998 GDP estimates of -5.5%, -14% and -2%.
4. Serious social consequences
With the onset of economic recession , a large number of factories and enterprises closed down or stopped production, resulting in a sharp increase in the unemployed population. Under conditions of high inflation, workers' lives have also been seriously affected, and the purchasing power of wages continues to decline. For low-income workers, it is even more difficult to make ends meet. The rise in unemployment and the fall in real wages have made people in debtor countries increasingly impoverished, and the ranks of the poor have become larger and larger. On the other hand, due to the implementation of austerity policies for debt repayment, debtor countries will have less and less investment funds for the development of public and social undertakings, and people's living standards will also deteriorate. Therefore, people's dissatisfaction is growing day by day. They oppose the government's reduction of people's living standards, oppose the dismissal of workers, and demand higher wages. The government, under pressure from creditor banks and international financial institutions, had to implement austerity policies. Under such circumstances, people will use demonstrations or even violence to express their extreme dissatisfaction with the status quo, leading to political instability and social unrest.
5. Impact on the international financial system
The impact of the debt crisis on the operation of the international financial system is also very obvious. First, creditor countries and debtor countries are in the same financial system. If one party suffers, the other party will inevitably be implicated. If the creditor does not Providing timely assistance to debtor countries will cause further chaos in the international financial system, thereby affecting the development of the world economy; secondly, for those creditor banks that concentrate huge loans on a few debtor countries, once the debtor country goes bankrupt, it will inevitably causing it to suffer serious losses or even bankruptcy; thirdly, the debt crisis sharply destabilizes the domestic situation of the debtor country, and will also have an adverse impact on the creditor country economically and even politically. In this case, the creditor has to participate in the debt crisis Solved.
The above knowledge is the answer to the question "What are the impacts of the international debt crisis?" If readers need legal help, they are welcome to go to the Legal Savior Network for legal assistance. Consultation.
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