Game Theory Analysis

Introduction | Cases | Strategy Analysis | Aggregate Model | Conclusion | Sources Used

Eastern Europe: Bulgaria

Action / Circumstance => Result

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• $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
• Agreeing to the Brady plan conditions =>
  • 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 -> WB and IMF can demand specific economic reforms (dependancy)

• POSITIVE effects of the Brady plan:
  • Increased credibility rating
  • Increased credibility rating => Expected increase in 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 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

• 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

Action / Circumstance => Result

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• 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

• 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

Action / Circumstance => Result

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