Latin American debt crisis

The Latin American debt crisis was a financial crisis that occurred 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

In the 1960s and 1970s many Latin American countries, notably Brazil, Argentina, and Mexico, borrowed huge sums of money from international creditors for industrialization; especially infrastructure programs. These countries had soaring economies at the time so the creditors were happy to continue to provide loans. Between 1975 and 1982, Latin American debt to commercial banks increased at a cumulative annual rate of 20.4 percent. This heightened borrowing led Latin America to quadruple its external debt from $75 billion in 1975 to more than $315 billion in 1983, or 50 percent of the region's gross domestic product (GDP). Debt service (interest payments and the repayment of principal) grew even faster, reaching $66 billion in 1982, up from $12 billion in 1975.

Beginning of the debt crisis

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. 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. 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. The contraction of world trade in 1981 caused the prices of primary resources (Latin America's largest export) to fall.

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. 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.

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).

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. [1]

Effects

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.

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.

The debt crisis is one of the elements which contributed to the collapse of some authoritarian dictatorships in the region, such as Brazil's military regime and the Argentine bureaucratic-authoritarian regime.^{[citation needed]}

Current levels of external debt

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. However, the debt crisis continues to have enduring effects, including the USD 2.94 trillion of Latin American and Caribbean debt traded globally in 2004, accounting for 63.2 % of total emerging market debt traded worldwide that year. The following is a list of external debt for Latin America based on a March 2006 report by The World Factbook.

Rank	Country - Entity	External Debt (million US$)	Date of information
22	Brazil	211,400	30 June 2005 est.
24	Mexico	174,300	30 June 2005 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

• La Década Perdida
• Developing countries' debt
• Odious debt
• Sovereign default

Further reading

• 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 9781566390545. http://books.google.com/books?id=eYeNcQxLiawC&pg=PA289. 

External Links

• Latin American Debt Crisis: Effects on Mexico from the Dean Peter Krogh Foreign Affairs Digital Archives