Robert Lenzner, “Banks Selling Short on Third World Debt,”  Austin

 

American Statesman, March 19, 1989.

 

Main Point:

 

Major US and international banks have been selling short the Third World debt in order to make a profit out of the failing economic systems in Latin America.  This was done in order to make a short-term profit in able to offset a long-term loss of money due to the loans to Third World countries.

 

Summary:

 

US banks that have been short selling on the debt may be doing so because of potential government plans to force banks to dismiss some of the money owed to them.  Banks have already abandoned $1.25 million in the last three months of 1988.  Treasury Secretary Brady is planning to ask banks to willingly disregard $400 million that the Third World owes them while the IMF and the World Bank take care of the rest of the debt.

 

Short selling is what happens when an investor believes that the price of a security is decreasing.  This security is sold at a price with the purpose of buying it back later on for less.  Currently, the short selling of Third World debt by US banks is legal, but there is opposition to it by a few.  The consequent market prices of loans to the Third World have fallen 30-50 percent between September of 1988 and March of 1989.  As the prices of these loans fell, banks who sold it bought back the debt and made money.

 

~Summary by Jean Miaw