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Context of '1980-2006: Third World Nations Pay Over $7 Trillion Servicing External Debts'

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The US Federal Reserve, under recent Carter appointee Paul Volcker, declares that it will begin a major policy shift by tightening the money supply. Its main method of doing so will be significant increases in the interest rate. [Campbell, 2005, pp. 194-195]

Entity Tags: Paul Volcker, US Federal Reserve

Timeline Tags: Neoliberalism and Globalization

As a result of Paul Volcker’s tightening of the US money supply (see October 6, 1979), 145 developing and emerging market economies pay a total of $7.673 trillion (in current dollars) in order to service their external debts. $675 billion of this money comes from Africa, the poorest continent in the world. Despite these massive payments, the external debt held by these nations actually increases from $618 billion in 1980 to $3.150 trillion in 2006. [Nakatani and Herera, 6/2007]

Timeline Tags: Neoliberalism and Globalization

A combination of factors puts the Mexico into a major balance of payments crisis. US Federal Reserve Bank Chairman Paul Volcker’s decision to increase the Federal Reserve’s interest rate (see October 6, 1979) increases the amount of debt held by the Mexican government. In addition, a decrease in the global price of oil and a recession in the US (thereby decreasing US demand for Mexican goods) makes it harder for Mexico to pay off the debt on its own. The Mexican government decides to devalue the peso, its national currency, by 78 percent. [Hart-Landsberg, 12/2002]

Entity Tags: Mexico, Paul Volcker

Timeline Tags: Neoliberalism and Globalization

New York University economist Nouriel “Dr. Doom” Roubini and Western Europe Finance and Banking analyst Elisa Parisi-Capone of RGE Monitor release new estimates for expected loan losses and writedowns on US originated securitizations:
bullet Loan losses on a total of $12.37 trillion unsecuritized loans are expected to reach $1.6 trillion. Of these, US banks and brokers are expected to incur $1.1 trillion.
bullet Mark-to-market writedowns based on derivatives prices and cash bond indices on a further $10.84 trillion in securities reached $1.92 trillion. According to flow-of-funds data, about 40% of these securities (and losses) are foreign-held. US banks and broker dealers are assumed to incur a share of 30-35%, or $600-700 billion in securities writedowns.
bullet US-originated assets’ total loan losses and securities writedowns are expected to reach about $3.6 trillion. The US banking sector is exposed to half of this figure, or about $1.8 trillion (i.e. $1.1 trillion loan losses + $700bn writedowns).
bullet As of the third quarter of 2008, Federal Deposit Insurance Corporation-insured banks’ capitalization is $1.3 trillion; as of the same period, investment banks had $110bn in equity capital. Roubini and Parisi-Capone say that past recapitalization through the first release of the TARP funds for $230bn, and private capital of $200bn leaves the US banking system very nearly insolvent, should loss estimates materialize.
bullet In order to restore safe lending, additional private and/or public capital of approximately $1 to 1.4 trillion is needed, thus calling for a comprehensive solution along the lines of a “bad bank” proposed by policymakers, or an outright restructuring through a new resolution trust corporation (RTC).
bullet In September 2008, Roubini proposed a solution for the banking crisis that also addresses the root causes of the financial turmoil in the housing and the household sectors. The HOME (Home Owners’ Mortgage Enterprise) program combines an RTC to deal with toxic assets, a homeowners loan corporation to reduce homeowners’ debt, and a reconstruction finance corporation to recapitalize viable banks.
They concluded that total financial system losses will likely hit $3.6 trillion, half of which, according to Roubini, “will be borne by US firms,” and that the losses will overwhelm the US financial system which, in the third quarter of 2008, had a capitalization of $1.3 trillion in commercial banks and $110 billion in investment banks. [Bloomberg, 1/20/2009; AFP Reporter, 1/22/2009] Since September 7, 2006, Dr. Roubini, an economics professor at New York University, has been known as “Dr. Doom” after telling an audience of economists at the International Monetary Fund that an economic crisis was brewing in the coming months and years. He warned that the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession, and laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he said, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac. [New York Times Magazine, 8/15/2008]

Entity Tags: Nouriel Roubini, Elisa Parisi-Capone, RGE Monitor

Timeline Tags: Global Economic Crises

Group of 8 (G-8) leaders from across the globe release a statement from their meeting in L’Aquila, Italy, saying that economic recovery from the worst recession since World War II is too frail for them to consider repealing efforts to infuse money into the economy. US President Barack Obama, British Prime Minister Gordon Brown, European Commission President Jose Barroso, German Chancellor Angela Merkel, Canadian Prime Minister Stephen Harper, French President Nicolas Sarkozy, Japanese Prime Minister Taro Aso, Italian Prime Minister Silvio Berlusconi, and Russian President Dmitriy Medvedev assembled for the annual gathering where Obama pressed to maintain an open door for additional stimulus actions. A new drop in stocks generated global concern that, to date, the $2 trillion already sunk into economies had not provided the economic bump that would bring consumers and businesses back to life. “The G-8 needed to sound a second wakeup call for the world economy,” Brown told reporters after the gathering’s opening sessions. “There are warning signals about the world economy that we cannot ignore.” A G-8 statement embraces options ranging from a second US stimulus package—advocated by some lawmakers and economists—to an emphasis by Germany on shifting the focus to deficit reduction.
What Next? - Disagreements over what to do next, as well as calls from developing nations to do more to counteract the slump, emphasize that the Group of 8 has little if any room to maneuver, since the largest borrowing binge in 60 years has, so far, failed to stop rising unemployment and has left investors doubting the potency of the recovery. Even as G-8 leaders held their first meeting, the Morgan Stanley Capital International (MSCI) World Index of stocks continued a five-day slide, and the 23-nation index had dropped 8 percent since its three-month rally that ended on June 2. The International Monetary Fund (IMF) upgraded its 2010 growth forecast, saying the rebound would be “sluggish,” and urged governments to stay the course with economic stimuli. The IMF also said that emerging countries such as China would lead the way, with an expansion of 4.7 percent in 2010, up from their April prediction of 4 percent. “It’s a very volatile situation,” said European Commission President Barroso in a Bloomberg Television interview from L’Aquila. “We are not yet out of the crisis, but it seems now that the free fall is over.”
Exit Strategems Discussion - “Exit strategies will vary from country to country depending on domestic economic conditions and public finances,” the leaders conclude, but deputy US National Security Adviser Mike Froman tells reporters, “There is still uncertainty and risk in the system.” Froman says that although exit strategies should be drawn up, it’s not “time to put them into place.” The IMF forecasts that, in 2014, the debt of advanced economies will explode to at least 114 percent of US gross domestic product because of bank bailouts and recession-battling measures. German Chancellor Merkel, campaigning for re-election in September and the leading opponent of additional stimulus, warned against burgeoning budget deficits, which the IMF has predicted will rise to an average of 6 percent of the EU’s 2009 gross domestic product, from 2.3 percent in 2008. At last month’s European Union summit, Merkel pushed through a statement that called for “a reliable and credible exit strategy,” and insisted, “We have to get back on course with a sustainable budget, but with the emphasis on when the crisis is over.” [G8 Summit 2009, 7/2/2009; Bloomberg, 7/9/2009]

Entity Tags: Morgan Stanley Capital International (MSCI) World Index, Mike Froman, Jose Manuel Barroso, International Monetary Fund, Taro Aso, National Security Council, Nicolas Sarkozy, Silvio Berlusconi, Angela Merkel, Gordon Brown, Barack Obama, Standard & Poor’s, Stephen Harper, Dmitriy Medvedev

Timeline Tags: Global Economic Crises

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