Exogenous international shocks

Exogenous international shocks

When exogenous international shocks hit a country’s economy, international lenders and borrowers must reassess the borrowers’ ability to meet their obligations to service their debt.For instance, a decline in export earnings, perhaps due to a decline in the world price of the country’s key export commodity, makes it more difficult for the country to service its debt and thus more likely to default.

The experiences of the early 1980s and mid 1990s indicate that a change in US real interest rates is a major exogenous shock.New funding flows to developing countries decrease, as fewer projects meet this higher required return.In addition, projects previously funded may not be profitable enough, leading to difficulties in servicing bank loans and to decreases in the market prices of stocks and bonds in the developing countries.Foreign investors can sour on their investments and try to sell them off before values decline further.The abrupt shift in flows can result in a crisis if the borrowers cannot adjust quickly enough.