FACULTAD DE ESPECIALIDADES EMPRESARIALESING. COMERCIO Y FINANZAS INTERNACIONALES BILINGUE

BANKINGTUTORIAL WORKDEBT

Members:Cevallos Tello AnalyJaen Eras LizethSales JoseVelasco Snchez CesarVillalta Troya Erika

Course:8th A

July, 2015

Index

Definition2Reasons for Indebtedness2Types of debts3External Debt3Sovereign Debts3Federal Debt3Types of debt instrument4Bonds4Sovereign Bond4Government Bond4Treasury Bond5Treasury Note5Treasury Bills5State Obligations5Promissory Notes6Mortgages6Why do debts exist?6When DEBT is good6How Government Debt can shapes corporate behavior7How can a country's debt crisis affect economies around the world?7Rankings of the most indebted countries8Ecuador's debt8Chronology of Ecuador's debt9December 19939Brady plan 19949Cumulative debt 19999Proposal of Ecuador9The multilateral debt granted by international financial organizations loans.10Bilateral debt10External Public Debt 201510Paris Club11Domestic debt, as to the numerous issues of government bonds, Stabilization Bonds and AGD Bonds.12Measures that the Ecuadorian government has taken to pay the foreign debt14The origins of Greeces debt crisis14Greece before the euro14Eurozone Membership: Sweeping problems under the carpet15Lack of independent monetary policy16The global financial crisis16Austerity Package17Debt Composition17Contagious Effect18Definition18Guarantee18PIIGS19Portugal19Ireland19Italy19Spain19References20

DebtDefinition Debt is an amount of money borrowed by one party from another. Many corporations/individuals use debt as a method for making large purchases that they could not afford under normal circumstances. A debt arrangement gives the borrowing party permission to borrow money under the condition that it is to be paid back at a later date, usually with interest. Bonds, loans and commercial paper are all examples of debt.Reasons for Indebtedness Some typical reasons for the serious indebtedness of a country are: Natural disasters, epidemics and the like, which require borrowing to mitigate its effects. Investments for development. Mismanagement of funds, which produce a sustained deficit increasingly, involves every time more external resources to compensate. Neglect (intentional or not) about the effects that excessive debt can have. Debt unworthy, as one that shrank and allowed to contract despite knowing it would cause serious problems for the economy and development of the country that requested it. The unworthy debt also has a requirement that the agency or lender country will find it impossible not to know the effects that such credit will cause the receiver.Types of debtsExternal Debt The portion of a country's debt that was borrowed from foreign lenders including commercial banks, governments or international financial institutions. These loans, including interest, must usually be paid in the currency in which the loan was made. In order to earn the needed currency, the borrowing country may sell and export goods to the lender's country.A debt crisis can occur if a country with a weak economy is not able to repay external debt due to the inability to produce and sell goods and make a profitable return. The International Monetary Fund (IMF) is one of the agencies that keep track of the country's external debt.Sovereign Debts Bonds issued by a national government in a foreign currency, in order to finance the issuing country's growth. Sovereign debt is generally a riskier investment when it comes from a developing country and a safer investment when it comes from a developed country. The stability of the issuing government is an important factor to consider, when assessing the risk of investing in sovereign debt, and sovereign credit ratings help investors weigh this risk.An unfavorable change in exchange rates, and an overly optimistic valuation of the payback from the projects that the debt is used to finance, can make it difficult for countries to repay sovereign debt. The only recourse for the lender is to renegotiate the terms of the loan - it cannot seize the government's assets. A country that defaults on its sovereign debt will have difficulty obtaining a loan in the future.Federal DebtThe total amount of money that the United States federal government owes to creditors. Include all individuals, businesses, governments and other organizations that own U.S. government debt securities. The federal debt exists as a result of federal government shortfalls, or deficit budgets in which the government's expenses exceed its revenues. The federal debt does not include any debts in the name of individuals, corporations and state or municipal governments.As of April 2006, the total federal debt was estimated to be $8.4 trillion. Viewed as an absolute number, the federal debt seems quite enormous, representing more than 20% of total worldwide debt.Types of debt instrumentBonds A bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debtholders, or creditors, of the issuer.Many corporate and government bonds are publicly traded on exchanges, while others are traded only over-the-counter (OTC).Sovereign Bond A debt security issued by a national government within a given country and denominated in a foreign currency. The foreign currency used will most likely be a hard currency, and may represent significantly more risk to the bondholder. The government of a country with an unstable economy will tend to denominate its bonds in the currency of a country with a stable economy. Because of default risk, sovereign bonds tend to be offered at a discount. Brady bonds, which are issued by governments in developing countries, are a popular example of sovereign debt securities.Government Bond A debt security issued by a government to support government spending, most often issued in the country's domestic currency. Government debt is money owed by any level of government backed by the full faith of the government and there are different types of bonds for example the Federal government bonds in the United States include: Treasury bond, Treasury bills, Treasury notes Treasury inflation-protected securities (TIPS), and others. Before investing in government bonds, investors need to assess several risks associated with the country such as: country risk, political risk, inflation risk, and interest rate risk.Treasury Bond A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest payments semi-annually and the income that holders receive is only taxed at the federal level.Treasury bonds are issued with a minimum denomination of $1,000. The bonds are initially sold through auction in which the maximum purchase amount is $5 million if the bid is non-competitive or 35% of the offering if the bid is competitive.A competitive bid states the rate that the bidder is willing to accept. A non-competitive bid ensures that the bidder will have to accept the set rate. After the auction, the bonds can be sold in the secondary market.Treasury noteA marketable U.S. government debt security with a fixed interest rate and a maturity between one and 10 years. Treasury notes can be bought either directly from the U.S. government or through a bank.When buying Treasury notes from the government, you can either put in a competitive or noncompetitive bid. With a competitive bid, you specify the yield you want; however, this does not mean that your bid will be approved. With a noncompetitive bid, you accept whatever yield is determined at auction.Interest payments on the notes are made every six months until maturity. The income for interest payments is not taxable on a municipal or state level but is federally taxed.Treasury Bills A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations of $1,000 up to a maximum purchase of $5 million and commonly have maturities of one month, three months or six months.T-bills are issued through a competitive bidding process at a discount from par, which means that rather than paying fixed interest payments like conventional bonds, the appreciation of the bond provides the return to the holder.State Obligations They are very similar to government bonds, being the term the biggest difference. They are issued 10, 15 and 30 years, so it is very long-term investments.The yields are obtained by the collection of the coupon, which is the name given to the interest generated by investing annually and by the difference between the purchase price and the redemption value.To assign a scale of strength to public debt, the rating agencies are responsible for classifying debt issues by the public entities based on the macro situation of the country, various indicators, general economic environment, and exposure to major risks.In these cases, the rankings give an idea of the real situation of the country's economy, based in the quality of the debt they have issued.Promissory NotesIs a financial instrument that contains a written promise by one party to pay another party a definite sum of money either on demand or at a specified future date. A promissory note typically contains all the terms pertaining to the indebtedness by the issuer or maker to the note's payee, such as the amount, interest rate, maturity date, date and place of issuance, and issuer's signature. The 1930 international convention that governs promissory notes and bills of exchange also stipulates that the term promissory note should be inserted in the body of the instrument and should contain an unconditional promise to pay.MortgagesA debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses to make large real estate purchases without paying the entire value of the purchase up front. Over a period of many years, the borrower repays the loan, plus interest, until he/she eventually owns the property free and clear. Mortgages are also known as "liens against property" or "claims on property." If the borrower stops paying the mortgage, the bank can foreclose.Why do debts exist?The answer is common sense: because the whole economy spends more in consumption or investment than available incomes. Debt expands the possibilities of internal savings and should be covered with external investment, financial flows or debt financing.When DEBT is goodThere are two reasons why a company should use debt to finance a large portion of its business: First, the government encourages businesses to use debt by allowing them to deduct the interest on the debt from corporate income taxes. With the corporate tax rate at 35% (one of the highest in the world) that deduction is quite enticing. It is not uncommon for a company's cost of debt to be below five percent after considering the tax break associated with interest. Second, debt is a much cheaper form of financing than equity. It starts with the fact that equity is riskier than debt. Because a company typically has no legal obligation to pay dividends to common shareholders, those shareholders want a certain rate of return. Debt is much less risky for the investor because the firm is legally obligated to pay it. In addition, shareholders (those that provided the equity funding) are the first to lose their investments when a firm goes bankrupt. Finally, much of the return on equity is tied up in stock appreciation, which requires a company to grow revenue, profit and cash flow. An investor typically wants at least a 10% return due to these risks, while debt can usually be found at a lower rate.These facts make debt a bargain. It would not be rational for a public company to be funded only by equity. It's too inefficient. Debt is a lower cost source of funds and allows a higher return to the equity investors by leveraging their money.How Government Debt can shapes corporate behaviorThe types of bonds can be government bonds that are safer or corporate bonds that are riskier but may have higher yield.One of the consequences of public debt to corporations is according as the government issues many bonds, becomes more difficult for corporations to sell their bonds, because once the government issues their bonds it reduce the demand for corporate bonds and find it difficult to finance their investment.To attract investors, the government can increase the yield. And if corporations want to compete they must raise their yields more, making it more expensive the financing for investments, making it more difficult for companies to issue bonds in that form when government issue too, so corporate investment falls when government debt issuance rises.Large non-financial corporations' role complements that of the financial institutions. When a drop in government debt creates excess demand for safe long-term securities, corporations step in to supply it, while Financial Institutions are more likely to step in to supply safe short-term securities when demand is high.How can a country's debt crisis affect economies around the world?A country's debt crisis affects the world through a loss of investor confidence and systemic financial instability. A country's debt crisis occurs when investors lose faith in the country's ability to make payments due to either economic or political troubles. It leads to high interest rates and inflation. It creates losses for investors in the debt and slows the global economy.The effect on the world differs based on the size of the country. For large, currency-issuing countries, such as Japan, the European Union or the United States, a debt crisis could throw the entire global economy into a recession or depression. However, these countries are much less likely to have a debt crisis as they always have the ability to issue currency in order to pay back their own debt. The only way a debt crisis could happen is due to political issues.Smaller countries have debt crises due to profligate governments, political instability, a poor economy or some combination of these factors. The rest of the world is affected as foreign investors of the debt lose money.Rankings of the most indebted countriesNowadays there are many countries indebted. Japan tops the rankings by a large margin and among the 10 most indebted countries in the world. Greece, Portugal are among developed countries with debt above 100% of its Gross Domestic Product (GDP), that is everything that produces national economy in a year. We made a list about the 11 most indebted countries in the worldwide.CountriesPIBMillonesPer Capita

1Japan242,59% 8.985.826,00 70.298,00

2USA103,42% 13.056.275,00 41.160,00

3Greece177,10% 317.094,00 28.867,00

4Portugal130,20% 225.280,00 21.613,00

5Ireland109,70% 203.319,00 44.099,00

6Singapore98,75% 230.081,00 41.841,00

7Belgium106,50% 428.365,00 38.447,00

8Spain97,70% 1.033.857,00 22.256,00

9Egypt90,47% 194.973,00 2.294,00

10Brazil65,22% 1.154.582,00 5.694,00

11Venezuela57,00% 74.397,00 3.763,00

Ecuador's debtEcuador's foreign debt was born as a result of the "Oil boom" of 70s. At that time, the petrodollars were plentiful in international banking and it launched a campaign to grant credit lines throughout Latin America through local banks. This means that in the period between 1980 and 1985 the country was limited by the shortage of foreign currency, the Sucre had suffered continuous devaluations and prohibitions on imports; both measures limited the outflow of foreign exchange, but also adversely affected economic activity.

Chronology of Ecuador's debtDecember 1993 Ecuador accumulated debt of $ 7,580 million. This value corresponds to 4.472 million and 2.283 million equity interests. This value is owed to commercial banks and financial institutions.Brady plan 1994 Ecuador joined to the program proposed by US Treasury Secretary Nicholas Brady in 1994 The aim was to convert the debt that Ecuador had with commercial banks in papers to sell on the international market and with it achieve higher rates of repayment.Cumulative debt 1999 Ecuador again accumulated external debt and was about to not meet payments. The basic reasons were natural disasters such as El fenmeno del Nio, the confrontation with Peru in 1995, also in the government of Sixto Duran Ballen and Fabian Alarcon hired more domestic debt in dollars.Proposal of Ecuador Exchange the debt that was expressed in bonds, that is, the 6,650 million for new bonds by 3,950 million. Global bonds are of two kinds: 30 and 12 year term. The aim was to obtain new trading conditions, so that Ecuador can meet payments.Global bonds (12 years):Issued by 2,700 million semiannual interests who was 4% in the first year and then increased by 1% a year, reaching up to 10%, meaning that for every $ 100 of debt, interest paid 10. They are paid after 30 years.Global bonds (30 years old):They were issued for 1,250 million bearing interest at 12% per annum fixed. The multilateral debt granted by international financial organizations loans.According to the analysis of multilateral debt that Ecuador had with international institutions is due to credit and programs financed by the same international agencies such as: World Bank ( WB) International Monetary Fund ( IMF) The International Bank for Restructuring Development (IBRD ) The Interamerican Development Bank (IDB ) The Andean Development Corporation ( CAF) The Latin American Reserve Fund ( FLAR) , The International Fund for Agricultural Development (IFAD )From 1982 Ecuador increased the borrowing process with multilateral agencies through appropriations for macroeconomic investment projects, becoming means of pressure for the country to submit to enforcement of economic policies. According to data released by the Ministry of Finance, during the period 1976-2006, Ecuador contracted 286 credits with multilateral agencies for approximate amounts of $ 12,500.3 million and 386 loans from governments, foreign banks and bond issues covering suppliers the remaining 58 % of the number of loans taken earlier. Bilateral debt Bilateral debt grouping credits from governments or government agencies; It was specially audited by the higher receivables as are Spain and Brazil, and those that make up the Paris Club.Bilateral investment treaties are agreements entered into by two composite states for loans and guarantees benefits. In our country these treaties emerged in the 90s (neo liberalist process) under foreign investment. External Public Debt 2015- April, $ 19,326 million Bilateral Debt.

Paris ClubThe Paris Club is an informal group of government creditors in the industrialized countries aimed at supporting the financing needs of countries with high levels of external debt by an economic program and with the backing of the International Monetary Fund. Analysis: The total bilateral refinanced debt through the Paris Club is for $ 322 million. The possibility of debt swaps until the entire debt from concessional loans for the Official Development Assistance (ODA, for its acronym in English Official Development Assistance set.An example of the bilateral agreement between Ecuador and Spain is the dual nationality after one year of residence and Spanish nationality to children born in Spanish Ecuadorian territory.

Domestic debt, as to the numerous issues of government bonds, Stabilization Bonds and AGD Bonds.Ecuador placed $ 700 million in sovereign bonds with interest rate 10.5 %. High rate of return is justified by the circumstances of the oil price. This means that the bonds placed on the international capital market for five years amount to $ 750 million, which will be allocated to the Annual Investment Plan 2015

Ecuador issued sovereign bonds for $ 2 billion after the selective default of its public external debt declared in 2008. These bonds were traded for 10 years with a rate de7.95 %. The total domestic debt in April 2015 it was $ 12526.4 million.This whole analysis of the reality of Ecuador with the world is very important to note periods since the creation of the debt as a symbol of an economy in trouble Ecuadorians, to the current situation of how a country can cope with the major challenges to stabilize the economic situation for the benefit of all. Measures that the Ecuadorian government has taken to pay the foreign debtEcuador has taken measures such as reduction of 10 % of the salaries of senior civil servants, cut the budget for the 2015 of $ 1,420 million tariff rate of 32% in imports for the purpose of an accumulation of liquidity for the fulfillment of the debt that the country maintains.The origins of Greeces debt crisis

Greece before the euroBefore acceptance into the Eurozone in 2001, Greeces economy was plagued by several issues. During the 1980s the Greek government pursued expansionary fiscal and monetary policies. But, rather than strengthening the economy, the country suffered soaring inflation rates, high fiscal and trade deficits, low growth rates and several exchange rate crises.In this dismal economic environment, joining the European Monetary Union (EMU) appeared to offer a glimmer of hope. The belief was that the monetary union backed by the European Central Bank (ECB) would dampen inflation, helping to lower nominal interest rates, thereby encouraging private investment and spurring economic growth. Further, the single currency would eliminate many transaction costs, leaving more money for deficit and debt reduction.So with the difficult to achieve those numbers in a country with economic problems, it did so under false pretenses to be within the limits to qualify in the EU. And In 2004, the Greek government admitted to having done, they made up the budget in order to join the Eurozone.Eurozone Membership: Sweeping problems under the carpetSuddenly, Greece was perceived as a safe place to invest, which significantly lowered the interest rates the Greek government was required to pay in order to borrow money. These lower interest rates allowed Greece to borrow at a much cheaper rate, fueling an increase in spending. While helped to spur economic growth for a number of years, the country still had not dealt with its deep-seated fiscal problems and began to acquire more debts.At root, Greeces fiscal problems stem from a lack of revenue. The real problem for Greece is that revenues are much less than expenditures.Much of this lack of revenue is the result of systematic tax evasion, and it is primarily the wealthier classes. Generally self-employed, these workers tend to under report income while over reporting debt payments.The debt crisis originated from the Greek government's fiscal profligacy. When Greece join the European Union, its economy and finances were in good shape. But the situation deteriorated dramatically over the next 30 years.Due to the Panhellenic Socialist Movement (PASOK), that came into power on a populist platform. They create a bloated, inefficient, and protectionist economy.For instance, salaries for workers in the public sector rose automatically every year, instead of being based on factors like performance and productivity. Pensions increased too. Perhaps the most infamous example of undue generosity was the prevalence of 13th and 14th-month payments to Greek workers. Workers were entitled to an additional month's pay in December to help with holiday expenses and also received one-half month's pay at Easter and one-half when they took their vacation.As a result of low productivity, eroding competitiveness, and rampant tax evasion, the government had to resort to a massive debt binge to keep the party going. The adoption of the euro made it much easier for the government to borrow, due the Greek bond yields and interest rates declined sharply as they converged with those of strong European Union (EU) members like Germany. But that growth came at a steep price, in the form of rising deficits and a burgeoning debt load. This was exacerbated by the fact that these measures for Greece had already exceeded the limits mandated by the EU's Stability and Growth Pact when it was admitted into the Eurozone. For example, Greece's debt-to-GDP ratio was at 103% in 2000, well above the Eurozone's maximum permitted level of 60%. Greece's fiscal deficit as a proportion of GDP was 3.7% in 2000, also above the Eurozone's limit of 3%.As Greece's economy contracted in the aftermath of the crisis, the debt-to-GDP ratio skyrocketed, peaking at 180% in 2011. The final nail in the coffin came in 2009, when a new Greek government led by Papandreou's son George came into power and revealed that the fiscal deficit was 12.7%, more than twice the previously disclosed figure, sending the debt crisis into higher gear.Lack of independent monetary policyCompared to Germany, Greece has a much lower rate of productivity, making Greek goods and services far less competitive.The adoption of the euro only served to highlight this competitiveness gap as it made German goods and services relatively cheaper than those in Greece. Giving up independent monetary policy meant that Greece lost the ability to devalue its currency relative to that of Germanys. This served to worsen Greeces trade balance, increasing its current account deficit. While the German economy benefits from increased exports to Greece, banks, including German ones, benefit from Greek borrowing to finance the importation of these cheap German goods and services. But, as long as borrowing costs remained relatively cheap and the Greek economy was still growing, these issues could be ignored.The global financial crisis The recession served to weaken Greeces already paltry tax revenues, causing the deficit to worsen.In 2010, U.S. financial rating agencies stamped Greek bonds with a 'junk' grade. As capital began drying up Greece was facing a liquidity crisis, forcing the government to begin seeking bailout funding. Austerity Package

A bailout package will give Greece time to get their house in order, but that means a tremendous austerity program, including major cuts in public wages and pensions and an increase and host of new taxes. The bailouts have only served to ensure that Greeces creditors are paid while the government is forced to scrape together what little its citizens have left to give. But Greek people didnt accept that by vote to the OXI, saying that the austerity is not the best way to recover the economy so the principal authorities of EU are negotiating another way to help Greece.51% of bailout funds would be allocated to repay the debt. 81,300 million (32%) to maturity bills and bonds, 40,600 million (16%) interests and 9,100 million 3%, to return money to the IMF. Over 11,300 million (4%) to repurchase.Debt CompositionThe debt is divided between the IMF, European Central Bank and euro zone governments.Private investors hold 38,700 million in Greek government bonds.Athens has issued 15,000 million in notes in short-term government, mainly to Greek banks.

245,000, a life paid by the European Union members of a 27.06% (66,310 million) responds Germany States.Contagious EffectDefinitionIn the great crisis in Greece we can find how their debt can affect other countries, this due to the poor economic situation of a country, high deficit, weak growth, high debt, this makes it highly risky for the country can declare in default, not pay back their loans and repay bonds, so investors avoid to invest in this country and analyze other countries with similar economic situations like Portugal, Ireland, Italy and Spain and assume that these countries could also go in the same way in the future, so they prefer avoid investments in them too, creating a domino effect or contagion.Spain, Portugal and Ireland make up a far larger component, and many of these nations have banks with significant international lending operations. If Spain falls into crisis, the entire credit system in Europe could grind to a halt and that would send tremors throughout the world's financial system.PIIGSThe PIIGS are the five Eurozone nations which are considered weaker economically following the financial crisis: Portugal, Italy, Ireland, Greece and Spain.Portugal As of November 2014, the IMF and European Union facilities have bailed out Portugal to the tune of 79 billion after its economy failed to recover from the great recession. Like the Greeks, the Portuguese are subject to a series of austerity measures aimed at controlling spiraling government debt and one of the largest budget deficits in the Eurozone. The Portuguese government has insinuated that even with bailouts it might never be able to repay its debts unless it could leave the euro and default.Ireland Although it was once seen as a burgeoning financial hub, the Great Recession exposed weaknesses in Ireland's banking system. The country witnessed bank runs and bankruptcies with many of the larger financial institutions requiring recapitalization in the form of guarantees from the EU and IMF who orchestrated bailout packages of over 130 billion. On December 15, 2013, Ireland recovered sufficiently to exit the bailout and even considered early repayment of longer-term obligations. Still, many Irish prefer a Plan B scenario whereby they could devalue their own sovereign currency removed from the euro.Italy The Italian economy is the largest of the troubled PIIGS, and the fallout from a euro exit would be much more severe than that of a smaller country like Greece or Portugal. Also subject to bailouts, Italian government bonds saw their interest rates soar and their credit ratings slashed. Though restructuring efforts have been underway, its economy has continued to skirt dipping back into recession with a GDP still 10% smaller than before the crisis hit. If Rome sees that smaller countries are able to exit the euro and subsequently devalue their way back to stability, they may decide to follow suit to ease their own pain. (For more, see: How Did Italy Get to This Point.)Spain Although Spain was a relative latecomer to the European sovereign debt crisis, it was hit rather hard following the burst of its domestic housing bubble. Again, austerity measures were implemented in return for bailout money and loan guarantees leading to extremely high levels of unemployment and popular dislike of those policies. Spain has estimated that it could take more than a decade for employment to recover. The incentive to leave the euro is already strong, as it would allow for a default, wiping the slate clean but conferring massive losses to outside investors and bondholders.References http://www.datosmacro.com/deuda http://www.datosmacro.com/ratings http://www.eluniverso.com/2003/05/23/0001/8/16178D1C4BE5412392329D2816F5AAFF.html http://www.auditoriadeuda.org.ec/images/stories/documentos/deuda_bilateral/consolidado_deuda_bilateral.pdf http://www.usfq.edu.ec/publicaciones/koyuntura/Documents/koyuntura_004.pdf

19