The External Debt Problem of Developing Countries

Abstract

The article is aimed at researching the problem of external debt of developing countries. The current status of external debt of developing countries is analyzed. The growing demand for investors, combined with the growing number of firms looking to take on large debts, has led to a deterioration in underwriting standards and the credit quality of such loans. The grounded relevance of the use of borrowing resources today is not necessarily a bad thing, even on the contrary – it is one of the most effective ways to stimulate the growth of the economy. When these resources are used targeted and efficiently, they generate more revenue for the borrower. But this gets worse when loans are used inefficiently, that is when they stimulate excessive consumption rather than bring in additional benefits. The author concluded that the reasons for the current fears began long before the crisis of 2008. A debt is not a bad instrument if it is used to finance investments that make a profit or create assets that are worth more than the debt itself. It’s hard to find such data, but if we trace the tendency of global growth and compare it to the tendency of debt accumulation, we’ll see that doesn’t happen. Therefore, it seems that the situation is out of control, i.e., debts continue to accumulate, excessive accumulation of loan portfolios increases, and low interest rates imply the survival of companies and countries. This leads to liquid risks with the expiration of the debt repayment period. Governments have been addicted to increased loans – none of the more developed economies could cope with a possible tightening of monetary policy. This means that when the time comes to severely lower the credit shoulder, economic growth will suffer. Central banks, in turn, find themselves trapped because maintaining such loose monetary policy and a high credit shoulder poses a risk of forming the price bubbles. It is determined that while rates remain at current low levels, investors will be looking for a bigger return, which means taking more risk – this, in turn, could trigger the «butterfly effect», causing destruction to the entire financial system.