Game Theory Analysis: Difference between revisions
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*Moratorium on debt payments => Negotiations with the financial institutions (IMF / World Bank) | *Moratorium on debt payments => Negotiations with the financial institutions (IMF / World Bank) | ||
*Negotiations with the financial institutions => Brady plan (July 28, 1994) + IMF | *Negotiations with the financial institutions => Brady plan (July 28, 1994) + IMF | ||
* | *Conditions on agreeing to the Brady plan => | ||
**Debt relief -> Guarantees needed for remainder of debt | **Debt relief -> Guarantees needed for remainder of debt | ||
**Guarantees offered by Worl Bank and IMF -> World Bank and IMF effectively own Bulgaria's debt | **Guarantees offered by Worl Bank and IMF -> World Bank and IMF effectively own Bulgaria's debt | ||
**Worl Bank + IMF own debt -> | **Worl Bank + IMF own debt -> World Bank and IMF can demand specific economic reforms (dependancy) | ||
<br> | <br> | ||
*'''POSITIVE''' effects of the Brady plan: | *'''POSITIVE''' effects of the Brady plan: | ||
**Increased credibility rating | **Increased credibility rating | ||
**Increased credibility rating => Expected increase in investment (stabilization) | **Increased credibility rating => Expected increase in foreigm direct investment (stabilization) | ||
**Budget is freed from debt repayment burden | **Budget is freed from debt repayment burden | ||
**Government can lower obligation to the IMF and World Bank by directly purchasing Brady bonds | **Government can lower obligation to the IMF and World Bank by directly purchasing Brady bonds | ||
**Brady bonds can be used as payment in the privatization process | **Brady bonds can be used as payment method in the privatization process | ||
<br> | <br> | ||
*'''NEGATIVE''' effects of the Brady plan: | *'''NEGATIVE''' effects of the Brady plan: | ||
**Country becomes dependent on IMF / World Bank (shareholder interests) | **Country becomes dependent on IMF / World Bank (shareholder interests) | ||
**IMF / World Bank can demand actions such as removal of trade barriers, monopolies, or special tax distortions | **IMF / World Bank can demand actions such as removal of trade barriers, monopolies, or special tax distortions | ||
**Currency pegged to the euro/dollar | |||
<br> | <br> | ||
*In 2002 Bulgaria exchanged the Brady bonds for global bonds => | *In 2002 Bulgaria exchanged the Brady bonds for global bonds => | ||
| Line 32: | Line 33: | ||
**Debt maturity extended in time | **Debt maturity extended in time | ||
**Debt / GDP ratio decreased -> credit profile increased (14 times) | **Debt / GDP ratio decreased -> credit profile increased (14 times) | ||
**Also shows a country can make it on its own without becoming dependent on the financial institutions | **Also shows a country can make it on its own without becoming dependent on the financial institutions (needs excellent management) | ||
<br> | |||
===South America: Argentina=== | ===South America: Argentina=== | ||
| Line 40: | Line 41: | ||
---- | ---- | ||
*Crisis in 1980 in Latin America leaves Argentina with an outsanding foreing debt => Negotiations with the IMF | |||
*IMF offers help under certain conditions => Argentina need to replace existing military regime | |||
*New government elected in 1991 => The peso is tied to the US dollar | |||
*Peso tied to US dollar: | |||
**Limited monetary growth and increase in reserves | |||
**Lower inflation and increasing GDP (7%) | |||
<br> | |||
*Outside factors in 1997 (Crisis in Mexico and Brazil + US dollar depreciates) => | |||
**Peso depreciates -> 2001 Argentina crisis | |||
**Extreme fall in credibility -> major decrease in foreing investments | |||
<br> | |||
*IMF demand payment on debt => | |||
**Argentina can choose to stop payments: | |||
***Unstable markets and more problems for neighbouring countries | |||
**Argentina pays: | |||
***Taxes increase and government spending decreases | |||
***GDP falls and unemplayment rises | |||
***Riots take the streets | |||
<br> | |||
*Deficit targets not met => IMF simply increases the target percentages so that the country meets the requirements | |||
*Operating at new targets lead to greater fianacial crisis => IMF issues more loans | |||
*More loans => More debt | |||
*More debt => Eventually the country is back where it started, but with higher inflation and unemployment rates | |||
*IMF demands more productivity (pensions / environmental requirements / severence benefits) => Argentina defects | |||
*Argentina defects => IMF backs off due to the high-profile status of the country and the february 2004 $88 billion debt | |||
*IMF admits mistakes => IMF loses credibility and respect | |||
<br> | |||
===Africa: Nigeria=== | ===Africa: Nigeria=== | ||
| Line 47: | Line 73: | ||
---- | ---- | ||
*In 1980 Nigeria receives a loan from the Paris Club => Generates an outstanding foreign debt of $19 billion | |||
*Great debt repayment problems due to: | |||
**corruption / unstable government | |||
**poverty / poor agriculture, industry, and infrastructure | |||
<br> | |||
*'''POSITIVE''' factor: Nigeria is rich in oil | |||
<br> | |||
*Military dictatorship => Financial institutions refuse negotiations with Nigeria | |||
*No negotiations with the Paris Club / IMF / World Bank => Interest arrears and penalties accumulated | |||
<br> | |||
*In 2000 Nigeria agrees to IMF demands and starts negotiations => Nigeria receives debt restructuring from the Paris Club and a $1 billion credit from the IMF | |||
*In 2002 Nigeria fails to meet spending and exchange rate targets => Pulls out of the IMF program | |||
<br> | |||
*Increase in oil exportation, deregulation and partial privatization of the oil industry => GDP increases significanlty in 2005 | |||
*In Novemreb 2005 Nigeria signs a deal with the Paris Club and the IMF to eliminate $30 billion from the $37 billion oustanding debt (under the agreement that it will pay $12 billion in arrears to bilateral creditors) => Nigeria is allowed to buy the remainder of the debt at a discount + agrees to more intensified IMF reviews | |||
*Increase in IMF control => political and social reforms needed + Nigeria looses some of its financial independance | |||
<br> | |||
Latest revision as of 08:41, 1 May 2006
Introduction | Cases | Strategy Analysis | Aggregate Model | Conclusion | Sources Used
Eastern Europe: Bulgaria
- $10 billion debt (74% of GDP) => Moratorium on debt payments
- Moratorium on debt payments => Negotiations with the financial institutions (IMF / World Bank)
- Negotiations with the financial institutions => Brady plan (July 28, 1994) + IMF
- Conditions on agreeing to the Brady plan =>
- Debt relief -> Guarantees needed for remainder of debt
- Guarantees offered by Worl Bank and IMF -> World Bank and IMF effectively own Bulgaria's debt
- Worl Bank + IMF own debt -> World Bank and IMF can demand specific economic reforms (dependancy)
- POSITIVE effects of the Brady plan:
- Increased credibility rating
- Increased credibility rating => Expected increase in foreigm direct investment (stabilization)
- Budget is freed from debt repayment burden
- Government can lower obligation to the IMF and World Bank by directly purchasing Brady bonds
- Brady bonds can be used as payment method in the privatization process
- NEGATIVE effects of the Brady plan:
- Country becomes dependent on IMF / World Bank (shareholder interests)
- IMF / World Bank can demand actions such as removal of trade barriers, monopolies, or special tax distortions
- Currency pegged to the euro/dollar
- In 2002 Bulgaria exchanged the Brady bonds for global bonds =>
- Bulgaria becomes a real participant in the global economy
- Bought $5.137 billion worth of Brady bonds for $2.486 billion
- $135 million collateral released
- Debt maturity extended in time
- Debt / GDP ratio decreased -> credit profile increased (14 times)
- Also shows a country can make it on its own without becoming dependent on the financial institutions (needs excellent management)
South America: Argentina
- Crisis in 1980 in Latin America leaves Argentina with an outsanding foreing debt => Negotiations with the IMF
- IMF offers help under certain conditions => Argentina need to replace existing military regime
- New government elected in 1991 => The peso is tied to the US dollar
- Peso tied to US dollar:
- Limited monetary growth and increase in reserves
- Lower inflation and increasing GDP (7%)
- Outside factors in 1997 (Crisis in Mexico and Brazil + US dollar depreciates) =>
- Peso depreciates -> 2001 Argentina crisis
- Extreme fall in credibility -> major decrease in foreing investments
- IMF demand payment on debt =>
- Argentina can choose to stop payments:
- Unstable markets and more problems for neighbouring countries
- Argentina pays:
- Taxes increase and government spending decreases
- GDP falls and unemplayment rises
- Riots take the streets
- Argentina can choose to stop payments:
- Deficit targets not met => IMF simply increases the target percentages so that the country meets the requirements
- Operating at new targets lead to greater fianacial crisis => IMF issues more loans
- More loans => More debt
- More debt => Eventually the country is back where it started, but with higher inflation and unemployment rates
- IMF demands more productivity (pensions / environmental requirements / severence benefits) => Argentina defects
- Argentina defects => IMF backs off due to the high-profile status of the country and the february 2004 $88 billion debt
- IMF admits mistakes => IMF loses credibility and respect
Africa: Nigeria
- In 1980 Nigeria receives a loan from the Paris Club => Generates an outstanding foreign debt of $19 billion
- Great debt repayment problems due to:
- corruption / unstable government
- poverty / poor agriculture, industry, and infrastructure
- POSITIVE factor: Nigeria is rich in oil
- Military dictatorship => Financial institutions refuse negotiations with Nigeria
- No negotiations with the Paris Club / IMF / World Bank => Interest arrears and penalties accumulated
- In 2000 Nigeria agrees to IMF demands and starts negotiations => Nigeria receives debt restructuring from the Paris Club and a $1 billion credit from the IMF
- In 2002 Nigeria fails to meet spending and exchange rate targets => Pulls out of the IMF program
- Increase in oil exportation, deregulation and partial privatization of the oil industry => GDP increases significanlty in 2005
- In Novemreb 2005 Nigeria signs a deal with the Paris Club and the IMF to eliminate $30 billion from the $37 billion oustanding debt (under the agreement that it will pay $12 billion in arrears to bilateral creditors) => Nigeria is allowed to buy the remainder of the debt at a discount + agrees to more intensified IMF reviews
- Increase in IMF control => political and social reforms needed + Nigeria looses some of its financial independance
