The Politics of Debt

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  • Created by: Catherine
  • Created on: 22-05-14 17:48
History of the UK debt
1855 -56 107% of GDP 1914-15 26% 1918-19 114% 1923-24 180% 1939-40 141% 1945-46 232% 1969-70 74% 1979-80 46% 2014 Feb 74.7%
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definition of credit
Credit is the ability to transfer a future income stream to the present. it enables households, firms and the government to bring spending power forward to the current in exchange for future payments. Firms and governments can borrow to invest
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Define Debt
Outstanding financial liabilities arising from past borrowing. Debt may be owed to external or domestic creditors and typically, debt financing is in the form of loans or bonds. The debtor may be eith a public or private sector entity.
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what was the pace of debt accumulation in 2012?
9%, having slowed from 11% in 2011
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In 2011, what was the increase in short term debt?
17% which grew almost twice as fast as long term debt
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Top 4 developing countries debt
China $754 billion, Brazil $440.5 billion India $379.1 billion, Mexico $354.9 billion
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Old politics of debt
International lending more profitable than domestic for 2/3 banks 70s80s90s
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The growth of Odious Debt
During the 1970s developing countries undertook 1614 megaprojects, costing more than $1tril, nearly 1/4 in oil sector. virtually all required foreign financing to proceed
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Odious Debt: THe 1982 Mexican Debt Crisis
In th early 1980s, when banks realised their clients were nearly bankrupt, they protected themselves. Mexico declared it was broke and proved how vulnerable the system was. IMF made commerical banks lend $5bn to Mexico.
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Odious debt: The 1982 Mexican Debt Crisis, the situation in 1983
In 1983 the nine largest US banks were owed nearly $39bn by just 4 borrowers, by 1990 the developing world owed about $1trn to developed world
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Odious Debt: the Brady Plan 1989
Designed to get new money flowing, by having rich countries guarantee the repayment of debt. many feared it would only breathe life into the governments' cash starved megaprojects
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Odious Debt: The Brady Plan's first test case
Mexico: After negotiations with the IMF and world bank, Mexico borrowed $1.96bn from world bank and $3.6bn from IMF, to finance two HEP dams, destroying the environment of at least 3000 peasants and indigenous people and foreshadowing a new assult
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The credit crunch defined: a severe shortage of money or credit
Credit Crunch a situation where banks and other lenders all cut back their lending at the same time, because of widespread fears about the ability of lenders to repay. If heavily indebted borrowers are cut of frm new loans, they will be unable to pay
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Effect of reduced lending
Reduced lending slows economic growth, which makes it harder for businesses to repay their debts.
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Credit crunch defined by the FT
When creditors become relictant to lend money to businesses or individuals because of the increased risk of default due to adverse economic or political conditions
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The Credit Crunch: The seven stages of the credit crisis
the credit crisis is broadly acknokledged as taking hold in August 2007 1- start of liquidity crisis 2-banks face mounting losses 3-Bear Sterns 4-Solvency crisis 5- emergency support 6-partial relapse 7-slow recovery
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The Credit Crunch: Stage 1
Start of Liquidity crisis: severe liquidity issues affect financial markets,fears over the US sub-prime housing markey were exacerbated as BNP froze 3 exposed funds. Northern Rock experienced liquidity problems, asked BofE 4 help, run on bank
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The Credit Crunch: Stage 2
banks across the world reported losses, weakening their capital positions. Banks were uncertain of scale of their losses. UBS said $4bn in Oct, $10bn in Dec
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The Credit Crunch: Stage 3
Bear Stearns, a large US investment bank, requires emergency funding from the Federal Reserve before being bought by JP Morgan ($10 a share, was $172/share in 2007) central banks continue to provide extra liquidity
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The Credit Crunch: Stage 4
Lehman Brothers filled for bankruptcy leads to frantic round of consolidatopn in the global banking sector, banks at risk of collapse seek shelter from more stable counterparts. Bradford and Bingley broken up. US intervened to stop AIG collapsing.
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The Credit Crunch: Stage 5
Recapitalisation of banks by governments. Additional measures to ensure financial market liquidity by central banks. Governments provide additional guarantees for bank deposits. Short selling of shares by financial companies banned. Reduced bank rate
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The Credit Crunch: Stage 6
Renewed concerns about stability of banks, Macroeconomis conditions worsened, negative growth, stock markets fell, prompted second wave of support
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The Credit Crunch: Stage 7
Confidence beginsto return to financial markets, with asset prices rising aided by central bank support through QE. Banks continue to repair their balance sheet. Many of the supportive measures undertaken by govts remain in place
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The Politics of debt in the UK: Public Debt
net debt was £1246.8bn in Feb 2014 - 74.7% of GDP
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The Politics of debt in the UK: Private Debt
Outstanding personal debt Nov 2013 $1.432 trn Outstanding secured (mortgage) £1.273 trn -nov 2013 Outstanding unsecured debt (consumer credit) £158.9 bn Nov 2013
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Household debt in the UK
avg debt £54,197 in Nov. Avg per UK adult £28,528 around 115% of average earning. Average consumer borrowing per UK adult was £3167
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The Route out of Debt
In 32 episodes of significant post-financial crisis deleveraging from 1930 until 2012 there was 'belt tightening' ie prolonged austerity in 16 cases, 8 cases of high inflation, 7 masive defaults but only one case of growing out of debt
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Define Deleveraging
A period during which the ratio of total debt to GDP declines for at least 3 consecutive year and falls by 10% or more
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Rates of bank lending post 2010
2010: -7.1% 2011: -3.3% 2012: -3.1% 2013Q2: -3.3%
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Impact of Austerity
OBR forecasts sugget 19.8% cut to department spending between 2010-11 and 2018-19
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The Budget 2014: Debt Reduction After the Election? The OBR Forecast
Just over 80% of the reduction in debt is accounted for by a reduction in public spending, will take public spending to its smallest share of national income since 1948. Public sector debt should rapidly fall after 2017, but household liabilities ^
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Card 2

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definition of credit

Back

Credit is the ability to transfer a future income stream to the present. it enables households, firms and the government to bring spending power forward to the current in exchange for future payments. Firms and governments can borrow to invest

Card 3

Front

Define Debt

Back

Preview of the front of card 3

Card 4

Front

what was the pace of debt accumulation in 2012?

Back

Preview of the front of card 4

Card 5

Front

In 2011, what was the increase in short term debt?

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Preview of the front of card 5
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