Chapter 7
Financial Crises
Multiple-Choice
1) A major difference between the 1980s foreign debt crisis and the
European debt crisis is:
a) Banks were seriously affected in the 1980s crisis, but they were less
affected in the European crisis.
b) Sovereign debt was more of a cause of the 1980s crisis than it was
of the European crisis.
c) Creditors first viewed the 1980s crisis as only a liquidity crisis.
d) The 1980s crisis led to more shifts in power and influence than the
European crisis.
2) In the early 1980s most Latin American states
a) had high debt service ratios.
b) had low debt service ratios.
c) finally switched to export-led growth policies
d) had debt service ratios similar to those of the East Asian
economies.
3) A difference between the Baker and Brady Plans was that
a) the Brady Plan focused on low-income LDCs.
b) the Brady Plan provided some debt reduction.
c) the Baker Plan handled debt on a case-by-case basis.
d) the Brady Plan was more willing to extend the debt repayment
period.
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4) Differences between the pre-1970s balance of payments financing regime
and the 1980s foreign debt regime included the following:
a) The Paris and London Clubs were formed in the 1980s to
restructure the debts of LDCs
b) The IMF and World Bank made less use of structural adjustment
loans in the 1960s than they did in the 1980s.
c) Creditors and debtors directly negotiated agreements in the 1980s
d) The IMF pressured private commercial banks in the 1980s to
continuing lending to debtor LDCs
5) IMF and World Bank members were willing to admit Romania in 1972
because
a) it had left the Soviet bloc.
b) it had begun to institute economic reforms.
c) it had distanced itself politically from the Soviet Union.
d) it had lowered its foreign debt.
6) When the
IOs, which organization treated its case as a representation rather than a new
membership issue?
a) IMF
b) WTO
c) OECD
d) GATT
7) The most informal group of creditor governments in terms of legal status,
written rules, and membership is the
a) London Club.
b) Group of 20.
c) Group of 7.
d) Paris Club.
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8) Which theorists are most opposed to having the IMF serve as a lender of
last resort?
a) Orthodox liberals
b) Neomercantilists
c) Institutional liberals
d) Interventionist liberals
9) The first program in which the IMF and World Bank permitted some
rescheduling of their loans was the
a) Brady Plan.
b) MDRI.
c) Baker Plan.
d) HIPC Initiative.
10) An Eastern European country that relied on a substantial reduction of its
debt by private banks was
a) Bulgaria.
b) Hungary.
c) Yugoslavia.
d) Czechoslovakia.
11) The most important factors contributing to the 1990s Asian financial
crisis included
a) governments with high debt service ratios.
b) unsustainable current account deficits.
c) poor macroeconomic fundamentals.
d) debts of private companies and domestic banks.
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12) The theorists who are most concerned with the problem of moral hazard
are
a) orthodox liberals.
b) historical materialists.
c) institutional liberals.
d) interventionist liberals.
13) Those in the London Clubs with the biggest interest in debt restructuring
are
a) the smallest creditor banks.
b) the largest creditor banks.
c) the smallest creditor states.
d) the largest creditor states.
14) The theorists most likely to attribute the 1980s debt crisis to the behavior
of lenders are
a) neomercantilists.
b) historical materialists.
c) interventionist liberals.
d) orthodox liberals.
15) For years U.S. commercial banks were insulated from the risky activities
of investment banks mainly because of the
a) Securities and Exchange Commission.
b) Gramm-Leach-Bliley Act.
c) Glass-Steagall Act.
d) Dodd-Frank Act.
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True-False
1) The Securities and Exchange Commission has regulated the activities of
U.S. commercial banks.
2) Collateralized debt obligations are bank-created securities that pool
together various types of debt, and then sell shares of that pool to investors.
3) The Paris Club first met in the 1970s to reschedule debts in the period
leading up to the 1980s foreign debt crisis.
4) The IMF has favored stricter terms with an emphasis on austerity than the
EU for joint EU-IMF loans to EU countries.
5) The IMF had not lent to EU countries for decades before the recent
European sovereign debt crisis.
6) The foreign debt crisis resulted in considerable overlap in the functions of
the IMF and World Bank.
7) Institutional and orthodox liberals were more concerned than other
theorists with revamping the international financial architecture to deal with
the 1990s Asian financial crisis.
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Fill in the Blank
1) ___________ is the process in which a bank or firm uses borrowed
money to make larger investments than they could with their own financial
resources.
2) The transmission of a financial shock from one market or country to other
independent markets or countries indicates there is ___________________.
3) The _____________________ is the share of lending financed by the
4) The
principal payments on its debt to its export income.
5) Informal groups of creditor governments that meet with individual debtor
governments to negotiate debt-rescheduling agreements are called the
______________.
6) The are informal groups in which the largest private
creditor banks engage in debt rescheduling negotiations with individual LDC
debtor countries.
7) When protection against risk encourages a person or state to engage in
riskier behavior, this is an indication of _________________.
Essay
1) What are the competing theoretical views regarding the causes of the
1990s Asian financial crisis? How did the 1990s Asian financial crisis differ
from the 1980s foreign debt crisis?
2) What are the competing theoretical views regarding the origins of the
1980s foreign debt crisis?
3) What are the similarities and differences between the 1980s foreign debt
crisis and the European sovereign debt crisis
4) How did orthodox liberals, interventionist liberals, and historical
structuralists propose to reform the international financial architecture after
the 1990s Asian financial crisis?
5) Discuss the relationship between the IMF, the Paris Club, and the London
Clubs in dealing with the 1980s foreign debt crisis.
6) How have the roles of the IMF and the World Bank, and the relationship
between them, changed as a result of the foreign debt and financial crises?
7) What were the causes of the 2008 global financial crisis? What are
mortgage-backed securities, collateralized debt obligations, and subprime
mortgages?
8) How do theorists differ in assessing the success of strategies to deal with
the 1980s foreign debt crisis? Did theorists agree on whether the 1980s
foreign debt crisis was adequately resolved? Do you believe that debt
reduction is a valuable strategy or do you think that it contributes to moral
hazard?
9) What role did the G7/G8 have in the 1980 debt and 1990 financial crises?
Why do you think that important institutional groupings such as the Paris
Club, the London Club, and the G7/G8 are so informal?
10) Why are banks so often central to financial crises? What was the Glass–
Steagall Act and what is its current status? What is the Dodd-Frank Act?