Latin American debt crisis

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The Latin American debt crisis was a financial crisis that originated in the early 1980s (and for some countries starting in the 1970s), often known as the "lost decade", when Latin American countries reached a point where their foreign debt exceeded their earning power and they were not able to repay it.

Origins[edit]

In the 1960s and 1970s many Latin American countries, notably Brazil, [[the situation [1]

Beginning of the debt crisis[edit]

When the world economy went into recession in the 1970s and 80s, and oil prices skyrocketed, it created a breaking point for most countries in the region. Developing countries also found themselves in a desperate liquidity crunch. Petroleum exporting countries – flush with cash after the oil price increases of 1973-74 – invested their money with international banks, which 'recycled' a major portion of the capital as loans to Latin American governments. The sharp increase in oil prices caused many countries to search out more loans to cover the high prices, and even oil producing countries wanted to use the opportunity to develop further. These oil producers believed that the high prices would remain and would allow them to pay off their additional debt.[2]

As interest rates increased in the United States of America and in Europe in 1979, debt payments also increased, making it harder for borrowing countries to pay back their debts.[3] Deterioration in the exchange rate with the US dollar meant that Latin American governments ended up owing tremendous quantities of their national currencies, as well as losing purchasing power.[4] The contraction of world trade in 1981 caused the prices of primary resources (Latin America's largest export) to fall.[4]

While the dangerous accumulation of foreign debt occurred over a number of years, the debt crisis began when the international capital markets became aware that Latin America would not be able to pay back its loans. This occurred in August 1982 when Mexico's Finance Minister, Jesus Silva-Herzog declared that Mexico would no longer be able to service its debt.[5] Mexico declared that it couldn't meet its payment due-dates, and announced unilaterally, a moratorium of 90 days; it also requested a renegotiation of payment periods and new loans in order to fulfill its prior obligations.[4]

In the wake of Mexico's default, most commercial banks reduced significantly or halted new lending to Latin America. As much of Latin America's loans were short-term, a crisis ensued when their refinancing was refused. Billions of dollars of loans that previously would have been refinanced, were now due immediately.

The banks had to somehow restructure the debts to avoid financial panic; this usually involved new loans with very strict conditions, as well as the requirement that the debtor countries accept the intervention of the International Monetary Fund (IMF).[4] There were several stages of strategies to slow and end the crisis. The IMF moved to restructure the payments and reduce consumption in debtor countries. Later it and the World Bank encouraged opened markets.[6][7] Finally, the US and the IMF pushed for debt relief, recognizing that countries would not be able to pay back in full the large sums they owed.[8]

However, some unorthodox economists like Stephen Kanitz attribute the debt crisis not to the high level of indebtedness nor to the disorganization of the continent's economy. They say that the cause of the crisis was leverage limits such as U.S. government banking regulations which forbid its banks from lending over ten times the amount of their capital, a regulation that, when the inflation eroded their lending limits, forced them to cut the access of underdeveloped countries to international savings.[9]

Effects[edit]

The debt crisis of 1982 was the most serious of Latin America's history. Incomes dropped; economic growth stagnated; because of the need to reduce importations, unemployment rose to high levels; and inflation reduced the buying power of the middle classes.[4] In fact, in the ten years after 1980, real wages in urban areas actually dropped between 20 and 40 percent.[6] Additionally, investment that might have been used to address social issues and poverty was instead being used to pay the debt.[2]

In response to the crisis most nations abandoned their import substitution industrialization (ISI) models of economy and adopted an export-oriented industrialization strategy, usually the neoliberal strategy encouraged by the IMF, though there are exceptions such as Chile and Costa Rica who adopted reformist strategies. A massive process of capital outflow, particularly to the United States, served to depreciate the exchange rates, thereby raising the real interest rate. Real GDP growth rate for the region was only 2.3 percent between 1980 and 1985, but in per capita terms Latin America experienced negative growth of almost 9 percent. Between 1982 and 1985, Latin America paid back 108 billion dollars.[4]

Effects of Latin American Debt Crisis and the IMF[edit]

Since Latin American countries, such as Mexico and Brazil, were not able to pay back their foreign debts, it showed that Latin America is not able to keep up with the pace in which their debts grew. Before the crisis, Brazil and Mexico tried to borrow money to enhance economic stability and reduce the poverty rate. But after continuously borrowing money, they fell in the whirlpool of debt, and the innovations and improvements from the past few years became meaningless.[10]

During the 1970s the world fell into an international recession which strained and put stress onto the economies of countries all over the world. Many major nations and countries attempted to slow down and stop inflation in their countries by raising the interest rates of the money that they loaned, causing Latin America's already enormous debt to increase further. In between the years of 1970 to 1980, Latin America's debt levels increased by more than one-thousand percent.[10]

The crisis caused the per capita income to drop and also ironically increased poverty as the gap between the wealthy and poor increased dramatically. Due to the plummeting employment rate, children and young adults were forced to join the drug trade, and some even began prostitution.[11] The low employment rate also caused many problems like homicides and crime and made the affected countries undesirable places to live. Frantically trying to solve these problems, debtor countries felt pressured to constantly pay back the money that they owed, which made it hard to rebuild an economy already in ruins.

Latin America, unable to pay their debts, turned to the IMF (International Monetary Fund) who provided money for loans and unpaid debts. In return, the IMF forced Latin America to make reforms that would favor free-market capitalism. The IMF also helped Latin America utilize austerity plans and programs that will lower total spending in an effort to recover from the debt crisis. The efforts of the IMF brought Latin America's economy to become a capitalist free-trade type of economy which is a type of economy preferred by wealthy and fully developed countries.[12]

Latin America's growth rate fell dramatically due to the government's austerity plans which prevented them from further spending. The living standards also fell alongside the growth rate which caused much anger and hatred from the people towards the IMF. This caused the IMF to become a symbol that people came to dislike as more and more people began to reject the IMF's policies which imposed the power of international agencies over Latin America.[12]

The citizens of Latin America did not like the fact that their government was being controlled by "outsiders". Leaders and officials were ridiculed and some even discharged due to involvement and defending of the IMF. In the late 1980s Brazilian officials planned a debt negotiation meeting where they decided to "never again sign agreements with the IMF".[13] The efforts of the IMF helped Latin America regain some balance after the debt crisis but was not able to resolve all of its issues.

Current levels of external debt[edit]

Since the 1980 several countries in the region have experienced a surge in economic development and have initiated debt management programs in addition to debt relief and debt rescheduling programs agreed to by their international creditors. The following is a list of external debt for Latin America based on a March 2006 report by The World Factbook.[14]

Rank Country - Entity External Debt
(million US$)
Date of information
22 Brazil 312,021 31 December 2013 est.
24 Mexico 274,800 30 June 2011 est
29 Argentina 119,000 June 2005 est.
39 Chile 44,800 31 October 2005 est.
43 Venezuela 39,790 2005 est.
45 Colombia 37,060 30 June 2005 est.
50 Peru 30,180 30 June 2005 est.
65 Ecuador 17,010 31 December 2004 est.
73 Cuba 13,100 2005 est.
79 Uruguay 9,931 30 June 2005 est.
81 Panama 9,859 2005 est.
85 El Salvador 8,273 30 June 2005 est.
88 Dominican Republic 7,907 2005 est.
95 Bolivia 6,430 2005 est.
98 Guatemala 5,503 2005 est.
103 Honduras 4,675 2005 est.
108 Nicaragua 4,054 2005 est.
110 Costa Rica 3,633 30 June 2005 est.
112 Paraguay 3,535 2005 est.

See also[edit]

References[edit]

  1. ^ http://www.unlp.edu.ar/articulo/2011/3/17/entrevista_a_gerardo_de_santis
  2. ^ a b Ferraro, Vincent (1994). World Security: Challenges for a New Century. New York: St. Martin's Press. 
  3. ^ Schaeffer, Robert. Understanding Globalization, p. 96
  4. ^ a b c d e f García Bernal, Manuela Cristina (1991). "Iberoamérica: Evolución de una Economía Dependiente". In Luís Navarro García (Coord.), Historia de las Américas, vol. IV, pp. 565-619. Madrid/Sevilla: Alhambra Longman/Universidad de Sevilla. ISBN 978-84-205-2155-8
  5. ^ Pastor, Robert A. Latin American Debt Crisis: Adjusting for the Past or Planning for the Future, p. 9
  6. ^ a b Felix, David (Fall 1990). "Latin America's Debt Crisis". World Policy Journal 7 (4): 733–771. 
  7. ^ Devlin, Robert; Ricardo French-Davis (July–September 1995). "The great Latin American debt crisis: a decade of asymmetric adjustment". Revista de Economía Política 15 (3). 
  8. ^ Krugman, Paul (2007). International Economics: Theory and Policy. Pearson Education. 
  9. ^ Kanitz, Stephen. "Brazil: The Emerging Boom 1993-2005 Chapter 2". brazil.melhores.com.br. 
  10. ^ a b "Encyclopedia Britannica Online School Edition". Encyclopedia Britannica. Retrieved 21 May 2012. 
  11. ^ Ruggiero, Gregory. "Latin American Debt Crisis: What Were Its Causes And Is It Over?". AngelFire. Retrieved 15 May 2012. 
  12. ^ a b "Latin American debt crisis". ABC-CLIO. Retrieved 22 May 2012. 
  13. ^ Pastor, Manuel Jr. "Latin America, the Debt Crisis, and the International Monetary Fund". JSTOR. Retrieved 22 May 2012. 
  14. ^ The World Factbook, 2006

Further reading[edit]

  • Signoriello, Vincent J. (1991), Commercial Loan Practices and Operations, Chapter 8 Servicing Foreign Bebt, Latin American Debt Crisis, Performing a Vital Service, ISBN 978-1-55520-134-0.
  • Signoriello, Vincent J. (1985, Jan/Feb.) International Correspondent Banker Magazine, London, England, Performing a Vital Service, The Future for Debt Rescheduling, p. 44-45.
  • Sunkel, Osvald and Stephany Griffith-Jones (1986), Debt and Development Crises in Latin America: The End of An Illusion, Oxford University Press
  • Pastor, Manuel (1993). "15: Managing the Latin American Debt Crisis: The International Monetary Fund and Beyond". In Gerald A. Epstein, Julie Graham, Jessica Gordon Nembhard. Creating a new world economy: forces of change & plans for action. Temple University Press. ISBN 978-1-56639-054-5. 

External links[edit]