Third World Debts

July 25, 1980

Report Outline
Recent Spurt of Indebtedness
Sources of International Lending
Monetary Stability Questions
Special Focus

Recent Spurt of Indebtedness

Bankers' Concern About New Oil Prices

The health of the international banking system, a source of lively concern after the first round of world oil price increases in 1973–74, once again is arousing anxieties among leading bankers and monetary officials. Willard C. Butcher, the president of Chase Manhattan Bank, told stockholders on April 15 that the international economic environment is “the most uncertain I can recall in my better than three decades as a banker.” Henry C. Wallich, a member of the Board of Governors of the Federal Reserve System, told a congressional subcommittee during the spring that “great problems are down the road.” Otmar Emminger, the prestigious former head of West Germany's central bank, has expressed fear that the world financial system could “have a great fall.”

Once again, oil is at the root of the anxiety. The latest round of price increases has driven up import costs still further, and though the increases are smaller than in 1973–74, the countries they hurt most are much more deeply in debt than they were seven years ago. Between 1974 and 1978, the world's developing countries, aside from those that are themselves oil exporters, incurred annual deficits of roughly $30 billion in their current accounts — the combined total of foreign trade, tourism and interest in foreign debts. This year, according to estimates by the Morgan Guaranty Trust Co. in New York, those deficits approach $60 billion.

Typically, the countries financed those deficits by borrowing heavily in the world's capital markets, in the hope of paying off the loans in better times. But renewed increases in oil prices during the past two years drove the deficits higher than ever, creating greater borrowing needs, while at the same time making it all the harder to pay off existing debts.

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International Finance