The schemes devised are effective in solving the crisis that is facing the European Union. This is because the challenges of the EU are similar to those affecting countries in Latin America in the eighties. Solving the current EU crisis The Baker plan and the Brady plan can solve the present economic crisis in Europe because they focus on growth of the economy. Countries in Latin America succeeded in solving their debt crisis in 1980s using the two schemes. According to research by economists in Europe, the Brady plan is more effective because it emphasizes on debt reduction. In Mexico, investors’ debts were cleared using the guidelines of the plan (Habermas & Ciaran 107). Interestingly, the Brady plan and the Baker plan are approaches that America use when handling financial crisis for the developing countries. The two plans advocate for sound economic policies when enhancing growth. According to Habermas, & Ciaran (14), the strategy should target least developed economies. The Baker plan identified the countries that needed aid before formulating policies that restructure the economy. This is an indication that European countries should classify their economies before coming up with corrective measures. According to the plan, extending governments should extend the maturity period for loans for countries such as Greece. This will cushion the citizens from crisis. Member countries in the European Union will have to restructure their financial system to improve the economy. The plan equally advocates for intervention by the IMF in aiding ailing economies. IMF should increase lending to commercial banks. Additionally, developed countries should voluntarily reduce debts for ailing economies. The EU government should seek support from Asian economies in creating a balance. For example, the government can encourage the swapping of bonds with creditors from China. This is preferable in the case of Greece. According to Habermas, & Ciaran (2), Latin America received support from Japan in averting their financial crisis. Although the strategy worked in Latin America, it is difficult to estimate the magnitude of a crisis using previous explanations. However, this does not mean that the approach used in Latin America in the 80 will fail in Europe. According to the Baker plan, countries should strive to sustain the growth of their economies independently. Consequently, governments in Europe should encourage investments in the private sector to boost growth in the domestic market. Subsequently, trade regulatory institutions within the EU should introduce price control measures for consumer commodities. This will help cushion households from the effects of inflation. Governments should encourage investments within nations that trade within the EU block. This is because the liberalization of trade at the different levels of the economy creates a balance in deficit for countries (Brauch 8). Stable economies such as Germany and France should lend on behalf of ailing economies. This would reduce deficit for ailing countries within the EU trading block. This means that countries cannot restructure economies without seeking assistance of international agencies. Since, the Bakers plan advocates for debt acquisition to the interest of the nation, countries should consult expert economists before making decisions on economic issues. Additionally, least developed countries within the EU, should also seek support from the World Bank instead of the IMF. Equal participation of
Name: Institution: Task: Date: Some of the "schemes" used to solve Latin America Debt Crisis of the 1980s can be use to the current EU Crisis Countries use a combination of strategies when handling crises. The most common stratagems used are the Baker plan, the Brady plan and the debt forgiveness…
Ultimately, cheap credit was easily available to banks for borrowing. Details of the Crisis Shadow Banking comprises of financial institutions such as investment banks which do not come under the category of commercial banks and hence were not regulated by the US federal government.
Introduction: The 1980’s Crisis The crisis in the 1980’s was a financial crisis in the Latin American countries where they came to a point that could no longer repay their foreign debts as the total amount that is payable to their loan exceeded their capacity to pay.
However, Wallison (2012, p. 71) expressed the view that “in a true sovereign debt crisis, a country cannot meet its debt obligations, largely because it does not have enough of the currency in which its debt is denominated.” The European sovereign debt crisis began in 2008 with the banking crisis in Ireland with the contagion of the crisis spreading out to Greece, Ireland and Portugal in 2009 (Investopedia 2012).
From $36 trillion in 2000, the income from the fixed income securities rose to around $70 trillion in 2007. The funds offered lucrative returns which were even higher than the US treasury bonds in the global financial markets. Due to the high turnover of the fixed income securities in the global financial markets, the lenders overlooked the government regulation in order to tap the exorbitantly high returns from the investments and the borrowers flowed in excessively to avail such loans that did not demand adherence of strict credit parameters.
The crisis was a collective result of the sovereign debt crisis, crisis related to liquidity and also a crisis in the growth and competitiveness in that area. The countries in the European Union found it difficult to repay their debt without the support of any other entity.
Brazil implemented a program of industrial expansion. Argentina and Chile established an overvalued exchange rate policy as an integral part of anti-inflationary strategy. Diverse government policies led these Latin American countries to defective exchange rate policies and excessive dependence on external capital flows
The author states that commercial borrowing increased sharply and was one of the main reasons behind the huge debt accumulation. The private sector was partly or mostly responsible for the debt crisis because of their extensive borrowing of short-term loans with higher interest rates from foreign countries and banks.
This was day that Mexico’s Secretary of Finance flew to Washington, DC to announce that Mexico was in danger of defaulting because its foreign debt was unmanageable. Some external debts were falling due yet Mexico could not raise a loan
The economists’ Baker and Brady devised the strategies on behalf of the US treasury (Brauch 50). The schemes devised are effective in solving the crisis that is facing the European Union. This is because the challenges of the EU are