Defaults on international loans

Defaults on international loans may take several forms: repudiation of old loans by new governments swept into power during economic crises; failure to earn or unwillingness to expend foreign exchange to effect the transfer despite the fact the revenues are available in the domestic currency; and failure to collect sufficient revenues to cover debt service even when current expenditures have been drastically reduced (namely bankruptcy of the borrower).

The last major wave of defaults occurred in the 1930s but still influences thinking in connection with the international capital market. In 1935, 35% of the UK holdings of government and municipal securities were in default. In the same year 38% (Europe 51%, Canada 4.0, South America 77, Latin America 76, others 3.0) of the outstanding portion of foreign dollar bonds originally taken in the USA were in default. In many cases government loans secured by specific revenues were simply repudiated. Solvent corporations were often forced into default by exchange controls. Many developing countries, and particularly those in Latin America, were faced with an unpleasant choice: to cut back drastically on imports or go into default on their debts. After an initial attempt to cut imports, the second course was often adopted. Today the less developed countries are still paying for the consequence of this choice in reduced access to international capital markets. Thus, from the 1930s to the middle 1980s, the problem of defaults dominated discussions of the international capital market and the question of access by less developed countries to that market. The first prescription of every commentator was to 'solve the defaults problem'.

It is estimated that by the end of 1990 15 developing countries will owe about $524 billion to banks and governments, with nearly another $50 billion in interest payments falling due.