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LDC Crisis

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Olivia Crystal

on 19 October 2013

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Transcript of LDC Crisis

What is LDC Crisis?
LDC=>less-developed country

Mexico’s inability to service its outstanding debt began on August 12 1982

situation continued to worsen by October 1983
--> 27 countries owing $239 billion rescheduled their debt

16 countries from Latin America and the four largest owed $176 billion, about 74%of total LDC debt outstanding

Three main periods

1973-78 1979-82 post-1982

causes: continued result:
sharp rise heavy debt relief
in crude borrowing
Oil price

Strategy Under Uncertainty
Lessons learned from the case
Lessons learnd from the case
Traditional Approach
work well under stable environment

applying powerful analytical tools

underestimating uncertainty
New Approach
avoiding binary views of uncertainty

offering a more complete understanding of the uncertainty

judging which analytic tools used

Risk Management
Thank you
Making Contingency plan
-eg:government bail out

Credit Quality Assessment
-eg: sovereign country

Regulation Enhancement
-eg:capital requirement
Crisis erupted in 1982, Mexico first announced cannot repay the debts. In end of 1982, 40 more nations added, and another 27 more added one year later

Outstanding loans affected the profitability of the banks, as banks' profit was from interest and fee income.
Compare and Contrast
European Debt Crisis
Similar symptoms with LDC Debt Crisis
Compare and Contrast
European Debt Crisis (cont.)
Different responds due to distinct features
Compare and Contrast
2008 Global Financial Crisis
Neglecting Credit Risk, similar with LDC Debt Crisis
Compare and Contrast
2008 Global Financial Crisis(cont.)
reactions regarding regulation
LDC Crisis
LDC Facts
Risk Management Issues
Compare and Contrast
Low interest of developed countries in 1970s

in order to look for higher return, capital shifted from the developed countries to higher interest rates countries.

Deterioration of international trade
lack of economic structural diversity rely on exports

Significant volatility in oil price

1979 rise interest rate of developed countries

government implemented contractionary monetary policies increased interest rate.
Level of Uncertainty
Old Approach VS New Approach
Traditional Approach : uncertainty is seen as binary
Predictable or completely unpredictable
New Approach:
Four levels of uncertainty
LDC Crisis
3rd level of uncertainty
emerging markets
big bet
risk management failures: fail to predict a range of outcomes of future.

Weakness Credit Ratings
Actions in resolving crisis:

Bank for International Settlement, 1988, ‘International convergence of capital measurement and capital standards’, accessed 8 September 2013,
< http://www.bis.org/publ/bcbs04a.pdf>

EMTA, 2009, ‘History and Development’, accessed 7 September 2013,

Philip A. Wellons, 1987, ‘Passing the Buck: Banks, Government and Third World Debt: Latin America refers to all Caribbean and South American nations,’ Federal Financial Institutions Examination Council (FFIEC), Country

Actions in resolving crisis:
Actions in resolving crisis:
Full transcript