Discuss & explain the justification for private banks financing balance of payments deficits in 1970s and assess the medium & long term implications of this type of financining for the international banking system.
Before commenting or justifying the statement “private banks financing balance of payments deficits in 1970s” following question should be address: “what was the reason or in simpler form the problem that lead to private banks financing balance of payments deficits?” Answer to the question is the massive & stubborn imbalance that prevailed in payments relations among nations due to the actions of the member countries in OPEC. The “quintupling” of oil prices in 1974 resulted in the increasing deficits on the current accounts of OECD and non-OPEC less developed countries (LDCs). If looked back in 1950s and 1960s the pattern of imbalance between these gropes was fairly constant but during 1973 – 1974 and again in late 1970s and early 1980s the pattern was marked by the high surplus of the OPEC sector and very huge deficits on the current account of the OECD and non-OPEC LDCs sector. This is clear shown by the increase of deficit from $2 billion in 1973 to $52 billion the following year, a combined analysis of OECD and LDCs. (Howcroft, 1997)
The picture of the world economy in 1970’s was quite bad for most of the nations, on one hand members of OPEC whose importing absorption was low were enjoying huge amount of surplus money on the other hand OECD and non OPEC LDCs were suffering from the burden of massive deficits bills. In response to the situation of OECD and non OPEC LDCs payment of deficits, two options were in front of them, first was to draw down assets and the second was to
borrow money in form of foreign aid and in t ...