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The Latin American debt crisis ( es, Crisis de la deuda latinoamericana; pt, Crise da dívida latino-americana) was a
financial crisis A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many ...
that originated in the early 1980s (and for some countries starting in the 1970s), often known as '' La Década Perdida'' (The Lost Decade), when
Latin America * pt, América Latina, link=no , image = Latin America (orthographic projection).svg , area = , population = ( est.) , density = , religions = , demonym = Latin American , countries = 20 , dependencies = 14 , languages = Romance languages Ot ...
n countries reached a point where their
foreign debt External debt (or foreign debt) is the total debt which the residents of a country owe to foreign creditors; its complement is internal debt, which is owed to domestic lenders. The debtors can be the government, corporations or citizens of that cou ...
exceeded their earning power, and they were not able to repay it.


Origins

In the 1960s and 1970s, many
Latin America * pt, América Latina, link=no , image = Latin America (orthographic projection).svg , area = , population = ( est.) , density = , religions = , demonym = Latin American , countries = 20 , dependencies = 14 , languages = Romance languages Ot ...
n countries, notably
Brazil Brazil ( pt, Brasil; ), officially the Federative Republic of Brazil (Portuguese: ), is the largest country in both South America and Latin America. At 8.5 million square kilometers (3.2 million square miles) and with over 211 millio ...
,
Argentina Argentina (), officially the Argentine Republic ( es, link=no, República Argentina), is a country located mostly in the southern half of South America. Sharing the bulk of the Southern Cone with Chile to the west, the country is also bordered by ...
, and
Mexico Mexico ( es, México ; Nahuan languages: ), officially the United Mexican States (; EUM ), is a country in the southern portion of North America. It is bordered to the north by the United States; to the south and west by the Pacific Ocean; to ...
, borrowed huge sums of money from international
creditor A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some propert ...
s for
industrialization Industrialisation Industrialisation (or industrialization) is the period of social and economic change that transforms a human group from an agrarian society into an industrial society. This involves an extensive re-organisation of an economy for ...
, especially
infrastructure Infrastructure is the set of fundamental facilities and systems that support the sustainable functionality of households and firms. Serving a country, city, or other area, including the services and facilities necessary for its economy to function. ...
programs. These countries had soaring economies at the time, so the creditors were happy to provide loans. Initially, developing countries typically garnered loans through public routes like the
World Bank The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. It comprises two institutions: the International Bank for ...
. After 1973, private banks had an influx of funds from oil-rich countries which believed that sovereign debt was a safe investment. Mexico borrowed against future oil revenues with the debt valued in US dollars, so that when the price of oil collapsed, so did the Mexican economy. Between 1975 and 1982, Latin American debt to
commercial bank A commercial bank is a financial institution which accepts deposits from the public and gives loans for the purposes of consumption and investment to make profit It can also refer to a bank, or a division of a large bank, which deals with corporat ...
s increased at a cumulative annual rate of 20.4 percent. This heightened borrowing led Latin America to quadruple its external debt from US$75 billion in 1975 to more than $315 billion in 1983, or 50 percent of the region's
gross domestic product Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced in a specific time period. GDP (nominal) per capita does not, however, reflect differences in the cost of living and the inflation ...
(GDP). Debt service (interest payments and the repayment of principal) grew even faster as global interest rates surged, reaching $66 billion in 1982, up from $12 billion in 1975.


History

When the world economy went into
recession In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various eve ...
in the 1970s and 1980s, and
oil prices The price of oil, or the oil price, generally refers to the spot price of a barrel of benchmark crude oil—a reference price for buyers and sellers of crude oil such as West Texas Intermediate (WTI), Brent Crude, Dubai Crude, OPEC Reference Ba ...
skyrocketed, it created a breaking point for most countries in the region.
Developing countries 450px, Example of Older Classifications by the IMF and the UN from 2008 A developing country is a country with a less developed industrial base and a low Human Development Index (HDI) relative to other countries. However, this definition is n ...
found themselves in a desperate liquidity crunch.
Petroleum Petroleum (), also known as crude oil and oil, is a naturally occurring, yellowish-black liquid found in geological formations beneath the Earth's surface. It is commonly refined into various types of fuels. Components of petroleum are separate ...
-exporting countries, flush with cash after the oil price increases of 1973–1980, invested their money with international banks, which "recycled" a major portion of the
capital Capital most commonly refers to: * Capital letter, an upper-case letter in any type of writing * Capital city, the area of a country, province, region, or state, regarded as enjoying primary status, usually but not always the seat of the governm ...
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 some oil-producing countries took on substantial debt for economic development, hoping that high prices would persist and allow them to pay off their debt. As interest rates increased in the United States of America and in
Europe Europe is a continent located entirely in the Northern Hemisphere and mostly in the Eastern Hemisphere. It comprises the westernmost peninsulas of the continental landmass of Eurasia, and is bordered by the Arctic Ocean to the north, the Atlant ...
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 market 200px, The trading floor of the New York Stock Exchange, one of the largest secondary capital markets in the world. Most of the trades on the New York Stock Exchange">New York Stock Exchange">trading floor of the New York Stock Exchange, one o ...
s became aware that Latin America would not be able to pay back its loans. This occurred in August 1982 when Mexico's Finance Minister, Jesús Silva-Herzog, declared that Mexico would no longer be able to service its debt. Mexico stated that it could not 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
sovereign default A sovereign default is the failure or refusal of the government of a sovereign state to pay back its debt in full when due. Cessation of due payments (or receivables) may either be accompanied by that government's formal declaration that it will ...
, 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 The International Monetary Fund (IMF) is an international financial institution, headquartered in Washington, D.C., consisting of 190 countries working to foster global monetary cooperation, secure financial stability, facilitate international ...

International Monetary Fund
(IMF). There were several stages of strategies to slow and end the crisis. The IMF moved to restructure the payments and reduce government spending in debtor countries. Later it and the World Bank encouraged opened markets. 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. However, some unorthodox economists like
Stephen Kanitz Stephen Charles Kanitz (born in São Paulo) is a Brazilian business consultant, lecturer, professor and writer. Academic life He holds a D.Sc. in Accounting from University of São Paulo, Master's degree in Business Administration from Harvard ...
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.


Effects

The debt crisis of 1982 was the most serious of Latin America's history. Incomes and imports dropped; economic growth stagnated; unemployment rose to high levels; and inflation reduced the
buying power Bargaining power is the relative power of parties in a situation to exert influence over each other. If both parties are on an equal footing in a debate, then they will have equal bargaining power, such as in a perfectly competitive market, or betwe ...
of the middle classes.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. In fact, in the ten years after 1980, real wages in urban areas actually dropped between 20 and 40 percent. Additionally, investment that might have been used to address social issues and poverty was instead being used to pay the debt. In response to the crisis, most nations abandoned their
import substitution industrialization Import substitution industrialization (ISI) is a trade and economic policy that advocates replacing foreign imports with domestic production.''A Comprehensive Dictionary of Economics'' p.88, ed. Nelson Brian 2009. It is based on the premise that a ...
(ISI) models of economy and adopted an
export-oriented industrialization Export-oriented industrialization (EOI) sometimes called export substitution industrialization (ESI), export led industrialization (ELI) or export-led growth is a trade and economic policy aiming to speed up the industrialization process of a c ...
strategy, usually the
neoliberal Neoliberalism or neo-liberalism is a terminology used to describe the 20th-century resurgence of 19th-century ideas associated with economic liberalism and free-market capitalism. It is generally associated with policies of economic liberalizat ...
strategy encouraged by the IMF, although there were exceptions such as
Chile Chile (, ; ), officially the Republic of Chile (), is a country in western South America. It occupies a long, narrow strip of land between the Andes to the east and the Pacific Ocean to the west. Chile covers an area of and has a population ...
and
Costa Rica Costa Rica (, ; ; literally "Rich Coast"), officially the Republic of Costa Rica ( es, República de Costa Rica), is a country in Central America, bordered by Nicaragua to the north, the Caribbean Sea to the northeast, Panama to the southeas ...
, which adopted reformist strategies. A massive process of capital outflow, particularly to the United States, served to depreciation (currency), 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 US$108 billion.


International Monetary Fund

Before the crisis, Latin American countries such as Brazil and Mexico borrowed money to enhance economic stability and reduce the poverty rate. However, as their inability to pay back their foreign debts became apparent, loans ceased, stopping the flow of resources previously available for the innovations and improvements of the previous few years. This rendered several half-finished projects useless, contributing to infrastructure problems in the affected countries. During the international recession of the 1970s, many major 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. Between the years of 1970 to 1980, Latin America's debt levels increased by more than one-thousand percent. The crisis caused the per capita income to drop and also increased poverty as the gap between the wealthy and poor increased dramatically. Due to the plummeting employment rate, children and young adults were forced into the drug trade, prostitution and terrorism. The low employment rate also worsened 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 American countries, unable to pay their debts, turned to the IMF (
International Monetary Fund The International Monetary Fund (IMF) is an international financial institution, headquartered in Washington, D.C., consisting of 190 countries working to foster global monetary cooperation, secure financial stability, facilitate international ...

International Monetary Fund
), which provided money for loans and unpaid debts. In return, the IMF forced Latin America to make reforms that would favor free-market capitalism, further aggravating inequalities and poverty conditions. The IMF also forced Latin America to implement austerity plans and programs that lowered total spending in an effort to recover from the debt crisis. This reduction in government spending further deteriorated social fractures in the economy and halted industrialisation efforts. The efforts of the IMF effectively aimed to transform Latin America's economy abruptly into a capitalist free-trade type of economy, which is an economic model preferred by wealthy and fully developed countries. Latin America's growth rate fell dramatically due to government austerity plans that restricted further spending. Living standards also fell alongside the growth rate, which caused intense anger from the people towards the IMF, a symbol of "outsider" power over Latin America. Government 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". The result of IMF intervention caused greater financial deepening (Financialization) and dependence on the developed world capital flows, as well as increased exposure to international volatility. The application of structural adjustment programs entailed high social costs in terms of rising unemployment and underemployment, falling real wages and incomes, and increased poverty.


2015 levels of external debt

The following is a list of external debt for Latin America based on a 2015 report by The World Factbook.The World Factbook, 2015


See also

* Crisis of 1982, Chilean crisis of 1982 * 1998–2002 Argentine great depression * Latin American economy * List of sovereign debt crises * Odious debt


References


Further reading

* Signoriello, Vincent J. (1991), Commercial Loan Practices and Operations, Chapter 8 Servicing Foreign Debt, Latin American Debt Crisis, Performing a Vital Service, . * Signoriello, Vincent J. (1985, Jan–Feb) International Correspondent Banker Magazine, London, England, Performing a Vital Service, The Future for Debt Rescheduling, pp. 44–45. * Sunkel, Osvald and Stephany Griffith-Jones (1986), ''Debt and Development Crises in Latin America: The End of an Illusion'', Oxford University Press. *


External links


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


{{Financial crises 1970s economic history 1980s economic history Economic history of Mexico Financial crises History of government debt Latin American history Economy of Central America Economy of South America Economy of the Caribbean 1970s in South America 1980s in South America 1970s in Central America 1980s in Central America