Question

Recent news have shown that Greece was on the verge of financial default and continues to be in a state of crisis.Argentina defaulted and went bankrupt a few years ago.Under what circumstances is it responsible for developing countries to continue to borrow billions of dollars? What is the responsibility of international lenders from developed/rich countries to keep on lending?

Answer 1

Many developing countries have defaulted on loan and still continue to default. Argentina, Brazil and many African countries are example of such defaults. More over , recently, even Greece was also faltering under the burden of debt. IMF and European central bank had to extend bailout package to Greece. Such bailout packages have led to the emergence of problem of moral hazard. Many countries are now becoming wilfull defaulters.

These countries do not have sufficient resources to fund their expenditures. IMF and other international institutions must act prudently and must impose stringent conditionalities. These countries frequently make expenditure on unproductive activities. Such funds are not appropriately channelized towards the developmental projects. Thus, growth rate and employment remain subdued in these countries. There must be appropriate pressure on these countries to use fund wisely and productively. These countries also must be made to observe fiscal austerities to reduce fiscal deficit.