Although individual banks may have been less than prudent in lending to the non-oil producing LDC’s (less developed countries) in the wake of the quantum jump in the world price of petroleum, collapse of the entire banking system is not imminent. The real casualties are the LDC’s.
LDC’s now depend to an unprecedented degree on the private banking system for balance of payments support. Of their total debt service, 80 per cent represents payments to that system—payments that are running at roughly the level of new credits flowing from private resources at the end of 1975. A country can safely increase its external debt, however, only as long as it can service the increase by expanding exports; when export receipts fail to grow as rapidly as debt service requirements, the country enters the danger zone. And when debt service requirements approach the proceeds from net borrowing, the country is in trouble. This is precisely where LDC’s find themselves today.
Those LDC’s unable to expand exports can only meet their balance of payments needs by spending reserves or curtailing imports, and their reserves have largely been exhausted. Curtailing imports implies, first, a decline in the rate of growth of LDC exports, hence heightened financing problems in the future, and second, the danger of diminished exports for the industrial countries themselves.
Unfortunately, repercussions for the world community do not stop with economic implications. Diminished imports for the LDC’s imply declining real incomes. In the more stoical societies, to be sure, popular resentment may take time to manifest itself, but civil strife and mounting terrorism are very real dangers.