96/YOUR MONEY OR YOUR LIFE!
ends of the planet, had to double the yield on their debt issues in order
to remain attractive to foreign investors.
What influences changes in risk premiums? The level of investor
confidence in a borrower country's ability to pay off its debts.
Obviously, the economic crisis in Southeast Asia has reduced investor
confidence. Yet it was the very same investors who unleashed the
crisis by withdrawing their capital from the countries of the region.
These same lenders (including the IMF and the World Bank) are now
demanding a higher rate of return as a condition for bringing back
some of this capital.
Two American rating agencies, Moody's and Standard and Poor's,
specialise in 'country-risk' estimations. They have significant
influence on risk-premium levels. On 22 December 1997, Moody's
decided to downgrade South Korea by several notches in its 'country-
risk' tables. Until that date, South Korea had been given the same
ranking as reliable industrialised countries. Overnight, it became a
high-risk country on a par with the Philippines. Ever since, South
Korean debt paper has had the same risk rating as junk bonds.
We are seeing a repeat of the 1982 crisis, 16 years later, on the eve
of the new millennium. South Korea and the countries of the Third
World will henceforth pay higher interest rates than the North. The
phenomenon has been exacerbated by the 'flight to quality'. As a
result, since the end of 1997, institutional investors have preferred
debt issues from the most industrialised states over those from the
economies of the Periphery. This has sparked a generalised fall in the
rates offered by the North's governments.
The gap is widening still further between the interest rates paid by
the periphery and those found in the centre.
Deterioration in the Terms of Trade
The world market is characterised by the fact that the majority of
countries in the South have continued to be exporters of raw
materials and low value-added manufactured goods. Conversely,
these countries import high value-added industrial goods and
technology. They are also net importers of farm products destined to
feed the population and livestock - which livestock is largely exported
to the North.
The terms of trade are based on what a basket of goods exported by
the South can fetch in the North. According to the UN Secretariat, a