International Economics Study Set 9

Business

Quiz 20 :

International Lending and Financial Crises

Quiz 20 :

International Lending and Financial Crises

Question Type
search
arrow
"Because a national government cannot go bankrupt, it is safe to lend to a foreign government." Do you agree or disagree Why
Free
Essay
Answer:

Answer:

I agree to the reasoning that since governments cannot go bankrupt it is safe to lend to foreign governments. Sovereign defaults are situations where governments declare themselves to default and will not pay its debt obligations as we have witnessed in the past, however this will severely affect their ability to borrow in the future as other countries will refuse credit in the future. Besides this the country can also go into a banking crisis, an economic crisis and/or a currency crisis as internationally there is a chance of write off which urges the sovereign under debt to not default but only as a last resort which keeps the lenders confidence with lending to governments.
Based on the various events we have witnessed like the Grexit or the crisis of 1980s, there were international agencies like IMF who came in agreement to restructure the deals and requested participation of other nations to deal with such disasters. As we have witnessed various types of crisis in the world occur, the international financial system also has pushed various methods to avoid any sort of default especially to fail the same way in the past crisis's.

Tags
arrow
What triggered the debt crisis iN1982
Free
Essay
Answer:

Answer:

To begin with, there were a dozen of developing countries who announced that it will be unable to repay large foreign debt. The reasons were mainly due to the tight monetary policy in the US due to a high inflation. While the real interest rates remained high, industrial countries went into severe recession, developing countries exports declined and commodities prices also plummeted. This also affected the repayment capability of various borrowers at such high interest rates.
As a result, many smaller banks had to sell off the loans to be repaid and this took a toll on larger banks. The larger banks rescheduled debt repayment and loaned smaller amount out so that this could be repaid. As a result, private lending went down in this period as well existing long-term debt to developing countries doubled during the period making it an even more significant net loan to national product ratio.

Tags
arrow
Consider Figure 21.1. In comparison with free international lending, what happens if each country imposes a 2 percent tax on the international lending (so that there is a total of 4 percent of tax) What is the net gain, or loss, for each country img FIGURE 21.1 Gains and Losses from Well-Behaved International Lending
Free
Essay
Answer:

Answer:

In a case where an international tax set by one of the lending countries, especially if the country is having a market power this will lead to a gain to those countries which imposes a tax. In our case if the country imposes a 2% tax on international lending, provided the country has a market power the country's government will continue to pocket that tax making a new equilibrium with other countries and the world.
However, in case all the countries with a market power impose tax on lending this could lead to an increase in international lending tax which will be at 4% in case there are two countries. In such a scenario the international lending will shrink as compared to a free lending position. This also proves that such increase in tax at most can only lead to a scenario where one country gains but most likely will lead to a scenario where both countries will suffer loss in the long run.

Tags
arrow
Consider the graph in the box "The Special Case of Sovereign Debt." a. Show graphically the effect of an increase in the interest rate ( i ). If the country's government would not default before this change, could this change lead to default b. Show graphically the effect of an increase in the cost of defaulting. If the country's government would not default before this change, could this change lead to default
Essay
Answer:
Tags
arrow
The "Optimal Deadbeat" Problem: The World Bank is considering a stream of loans to the Puglian government to help it develop its nationalized oil fields and refineries. This is the only set of loans that the World Bank would ever give Puglia. If Puglia defaults, it receives no further funds from this set of loans from the World Bank. Whether the Puglian government repays the loan or defaults has no other impact on Puglia. If the World Bank's stream of loans would have the effects shown in the accompanying table, would it ever be in Puglia's interest to default on the loans If not, why not If so, why and when img
Essay
Answer:
Tags