Causes Of International Bank Crisis Involving Less Developed Countries ( Ldc )

1989 Words Oct 22nd, 2016 8 Pages
Emily Atchison
Nicole Popp
Jared Rizzo
Michele Rudolph
Team 3 HW_2
End of Chapter Problems
Chapter 11:
• #5
The causes of the international bank crisis involving less developed countries (LDC) can be traced to the largest international banks concentrated lending to sovereign governments of some LDC 's and the lack of cautious expansion into unfamiliar activities. The root cause was oil. Because the price of oil dramatically increased, OPEC accumulated lots of US Dollars. These dollars were then lent by large banks to LDCs to generate interest income and the cycle continued until the tight monetary policies led to high inflation which eventually caused a global recession and LDCs could not meet their debt obligations. The solution to this crisis came from US Secretary Nicholas Brady and offered three options to creditor banks. The three options were to: 1. Convert their loans to marketable bonds with a face value equal to 65 percent of the original loan amount 2. Convert the loans into collateralized bonds with a reduced interest rate 6.5% (which extending the debt maturities y 25 or 30 years and the purchase by the debtor nation of zero coupon US Treasury bonds with a corresponding maturity to guarantee the bonds and make them marketable—these were nicknamed the "Brady bonds" or 3. Lend additional funds to allow the debtor nation to get on their feet. Most LDCs chose the Brady bond option and over $100 billion in bank debt had been converted to Brady bonds.
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