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when the Argentinian government defaulted on its debt to foreigners in 2001, interest rates rose on...

when the Argentinian government defaulted on its debt to foreigners in 2001, interest rates rose on bonds issued by many other developing countries. Why do you suppose this happened? Explain this in a competitive loanable funds market

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Answer #1

There are three possible explanations:

A.The creditors had to cover losses from the default so they raised interest rate.The loss could be covered from higher interest rate on loans.

B.The supply of loanable funds fell because of the default.When supply of loanable funds fall,the interest rate rises.

C.Higher interest rate makes borrowing expensive,making the poor countries reluctant to borrow funds from other countries and reducing the chances of future defaults.

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