The current indebtedness of nations to the international financial market has been hailed as one of the most daunting monetary problems facing the Western banking system and governments today. The debt problem has survived a series of economic and political crises which have severely strained the demand and supply of foreign capital to the Third World, but the situation has become increasingly more precarious and unstable since the 1970's.
The major concern, given the enormous loans of some banks to borrower countries, is the ability of the international banking system to cope with outright default on debt by one, or a few of these borrower countries should it materialise. Such an eventuality has far reaching implications. For example, it raises questions as to the strength of the philosophical base of capitalism, to the stability of world financial order, to the welfare of the poor, to international relations, to income distribution across nations, to war and peace, and to other issues dealing with law, economics, sociology, politics, and even psychology (Khoury, 1985, p.l) G It would be impossible to address all these issues in the one report and, consequently, the focus of this report will be on some of the immediate issues surrounding the stability of the international financial system.
The specific aim is to critically investigate the cause and nature of the international debt problem. The report begins with a discussion of terminology that is inherent in this area of analysis. This discussion serves to highlight the misconceptions that can result from misinterpretation of such basic terms as risk and uncertainty.
The report continues by investigating the origins of the debt problem and the processes and determinants by which banks (lenders) justify their international loan portfolios. The mechanics of a typical country risk analysis (CRA) is presented and the obvious shortfalls of such a system are exposed. From this discussion the underlying reasons for the accumulation of international debt are identified. In order to maintain balance, some policy issues contributing to the debt problem with their origins in the debtor countries (borrowers) are reported.
Finally, some broad based proposals to assist in solving the debt problem are presented. It is concluded that a resolution of such a complex issue will necessarily take some time and, require much more cooperation and understanding from bankers, governments and supervisory authorities who are the main players in this dilemma.