Causes Of International Bank Crisis Involving Less...

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 year s 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. †¢ DetroitShow MoreRelatedThe Hardships Hitting Least Developed Countries1627 Words   |  6 PagesIntroduction: Developed countries are countries which obtain a great level of income and are also referred to as industrialised countries. Developed countries are in support of free market principals, are very advanced in their education levels, technology. They also have high standard of living, and also have a declining rate of population. 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