Question

Some believe that the Debt Crisis of the 1980s was the result of exploitation of developing countries by advanced countries. Those who argue this proposed that all developing country debts should be canceled. identify at least one country that suffered as a result of the Debt Crisis and explain whether Debt Reduction strategies were justified or Do you think that debt reduction contributes to moral hazard? In answering this question, you must define Moral Hazard.

Answer 1

Greece is the biggest example of a country falling into a debt crisis by defaulting on its loans worth 1.6 billion euros with the IMF.

Debt reduction strategies are justified only to an extent, post which it contributes to the problem of moral hazard.

Moral hazard refers to a situation in which one party behaves irrationally once it is aware that the risk of its actions will be borne by another player.

In case of debt reduction strategies, there are very high chances of moral hazard being a problem. This is because some countries will stand a chance to behave irrationally or take loans after loans and default on them and then ask for debt reduction or relief.

However, this is not the case with everyone. Sometimes countries are actually stuck and need escape and help. In those cases these strategies come in handy.

Thus, debt reduction strategies should be allowed with only a limit of one country can avail it only once in a lifetime and justify how its its investment got into losses