Download Tequila Hangover: Latin America`s Debt Crisis

Tequila Hangover:
Latin America's
Debt Crisis
JEREMY ADELMAN
ntroduction The year, 1994, was supposed to crown
a process of successful economic restructuring in Latin
America and usher in a new era for the region. Scarcely
a decade ago, debt, inflation and social malaise engulfed
the region. In recent years, gutted public sectors and rapidly
opening national markets have reshaped the face of Latin
American capitalism, thereby creating models of transformation for the rest of the post-Cold War Third World.
Mexico turned on its national-popular heritage more significantly than did any other country in the region. By deregulating local markets, privatising state firms, and joining
the North American Free Trade Agreement, Mexico became
the darling "emerging market."! In the rest of Latin America,
as the forces of transnationalism swept across the continent
enciphered in the rhetoric of neoliberalismo, the 1990s were
also supposed to conclude the long populist experiment that
had been inaugurated in the 1930s and 1940s.
However, Latin America's annus mirabilis turned out to
be a long nightmare. A peasant uprising in Southern Mexico,
the assassination of Mexico's leading presidential candidate,
and the plunge of the peso in December 1994, ensured that
the happy script went completely awry. Just as Mexico had
unleashed the first Latin American debt crisis in 1982, it
once again sucked the rest of the region into its vortex of
trouble in 1994. At present, Mexican banks are still hovering
on the brink of insolvency, slave-labour is on the rise in
Brazil, and Argentina's official unemployment hovers around
20 per cent. The general rule in Latin America is slow or
no growth. There is also widespread fear of powerful and
I
Studies in Political Economy 55, Spring 1998
5
Studies in Political Economy
vindictive investors and the spectre of capital flight always
lurks in shadows. Not even Chile, the rediscovered darling
of the neoliberals, is unscathed by Latin America's renewed
agony.I
In examining what went wrong with those felicitous expectations, this article presents two interrelated arguments.
First, many of the current Latin American economic ailments
can be attributed to the way the 1980s debt crisis was managed. For all the panegyrics about solving Latin America's
financial woes in the late 1980s, many of the policies adopted
at that time displaced rather than resolved, the source of
those problems. Second, the nature of external indebtedness
has changed dramatically. In particular, new financial relations between Latin America and world money centres have
sharply reduced the power of the banks, while exposing debtors to much more volatile capital flows. Combined, these
two developments
have crippled Latin American governments' ability to manage external shocks, resulting in a frequent exaggeration of their severity. Furthermore, the fall-out
from the external shocks has called for delicate public interventions requiring tools that Latin American states no
longer possess. Indeed, any efforts to soften the resulting
blows from or ease the adjustment to these external shocks
tend to be seen as reversions to old anti-market habits and
thus liable to aggravate capital flight. In effect, public management of this latest round of the debt crisis will be reduced
to desperate efforts to prevent further drainage of finance
capital. Thus apostolic neoliberalismo has reshaped the face
of financial dependence, while dismantling the machinery
normally used to deal with the resulting cyclical ravages.
The Debt Crisis in Retrospect One way to explain the
events of 1994 is to depict them as accidental blips; as examples of bad political management of temporary problems.
Some would say that Latin American governments made bad
choices in the past by postponing devaluations for electoral
reasons, smothering domestic savings to cater to consumers,
and not embracing neoliberal recipes with quite enough enthusiasm. Now these governments can get back on track with
the assistance of the money market's generosity. However,
6
Adelman/Debt Crisis
this view, shared by the International Monetary Fund, the
region's major lenders, and which is consistently broadcast
in the pages of The Economist, does not explain why so
many Latin American governments made these choices. In
fact, this view does not offer a plausible account in the world
of "rational agents" as it portrays investors as entering into
their ventures blind. In short, this view does not consider
the larger structural problems of Latin American capitalism.
Reducing the trouble to Mexico's idiosyncracies misses the
regional nature of the crisis.I
The current problems can be traced back to the debt crisis
of 1982, whose origins, in tum, date back to domestic and
international changes starting in the 1960s. On the demand
side, the crisis of national populism, and the yawning balance
of payments problems have reshaped Latin American dependence on world money markets. By the 1960s, importsubstitution industrialisation
(lSI) was running up against
stubborn obstacles. Industries became more capital-intensive, requiring imports of expensive technology and machinery, and traditional exports could not always assure a steady
source of foreign exchange. External financing helped cover
the shortfall. Much of this financing came in the form of
multinational
investment, prompting Peter Evans to speak
of the much trumpeted "Triple Alliance", a fusion of local
private, state and foreign capital. By 1974, one third of external financing took the form of foreign direct investment.f
Fiscal politics sharpened this shift to external funds.
Industrial malaise was compounded by rising public sector spending which paid scant attention to overhaulling the
tax machinery largely because rulers did not want to tamper
with regressive subsidies to high income earners. Growing
public spending, coupled with rising inefficiency and escalating indebtedness of state-owned firms, led to massive net
increases in public expenditures. Again, external funds met
the shortfall for a time. By 1974, 42% of lending to Latin
America came in the form of official credits, mostly earmarked for the public sector. Financing current spending in
this way meant monetising the deficit, so that the supply of
money rose, fueling inflation. Rising prices, coupled with
fixed or crawling exchange rates led to overvalued exchange
7
Studies in Political Economy
rates (especially in Argentina, Mexico and Venezuela) which
triggered more imports, and thus aggravated trade deficits.>
One last factor contributed to the 1980s debt crisis. It
affected the Southern Cone countries of Argentina, Chile
and Uruguay in particular. By1976, all three countries were
in the grip of military regimes which aimed to bury the
remnants of state dirigisme and populism, and which had
brought the Southern Cone republics to the brink revolution
and civil war. A cornerstone of their policies was to alleviate
what neoliberal economists call (without irony) "financial
repression."
In other words they sought to free domestic
capital markets from government distortions and reduce public borrowing from, and public ownership of, financial agencies. By easing restrictions
on capital movements
and
relaxing bankers' standards of operation, deregulated banking systems intensified foreign borrowing. Overblown and
cluttered financial systems soon collapsed, which lead to
massive bankruptcy, debt, and paradoxically unprecedented
government intervention in Southern Cone banks.f
While the implosion of this national-popular
model intensified the demand for external finance, emerging world financial networks created an enormous supply of flexible and
mobile money. The cornerstone of the shifting personality of
finance capital was the commercial bank. Until the late 1950s,
commercial banks had played a residual role in dispensing
global capital. With the collapse of the Bretton Woods system,
financial deregulation, and the emergence of the Eurodollar
market in the wake of the OPEC oil price hikes of the early
1970s, banks emerged as major controllers of world liquidity.
In fact, the nucleus of the resulting wave of international
borrowing and lending was formed by a small group of very
large banks with extensive overseas operations."
In the midst of these institutional changes, the oil crisis
plunged the world economy into its deepest recession since
the 1930s. Output in industrialised countries slumped and
unemployment soared. All the while, the oil exporting countries of the Middle East, who were unable to absorb the
massive amounts of capital suddenly produced, deposited
their windfalls in offshore accounts. Thus, just as unused
industrial capacity in the OECD rose, the global stock of
8
Adelman/Debt
Crisis
investible funds increased sharply, leading to a sharp downturn in returns to capital. In response, a new brand of borrower entered the scene helping to avert catastrophe: clients
in the Third World. By the mid-I970s, the glut of capital
had been redirected to fund-starved industrialisers in the
semi-periphery.f
This confluence of demand and supply-side developments
enabled and induced unprecedented flows of capital from
the North Atlantic to the semi-periphery, and to four large
Latin American countries in particular, Brazil, Mexico, Argentina and Venezuela. In Brazil and Argentina military juntas sought the means to rebuild capitalism from the ruins
of populism. Mexico and Venezuela, large oil exporters, embarked on massive public sector spending programs and used
overvalued currencies to keep the loyalty of their citizenry,
as electoral politics reinforced the grip of traditional party
rulers. In the cases of Argentina, Mexico and Venezuela,
these policies, combined with political instability, eventually
provoked massive capital flight. Between 1975 and 1985, the
cumulative capital flight from Latin America exceeded $100
billion, roughly $265 per capita. During the peak exodus from
1979 to 1982, Argentina lost $22.4 billion, Mexico $22.3 billion, and Venezuela $20.7 billion. Brazil began large-scale capital exports only once the debt crisis broke in 1982. The result
was an utterly perverse circulation of funds from banks to
Latin American borrowers, and then back to offshore private
accounts. This process helped to create the debt crisis and
to shore up returns to global finance capital.?
This was, however, an unsustainable situation. The problems
of post-1973 adjustment were due to this combination of freeflow bank lending and domestic policies which encouraged debt
without ensuring the growth of future exports. On the whole,
massive commercial bank inflows did not create better conditions for loan repayment or contribute to the necessary longterm restructuring of Latin American capitalism. However, as
long as yields on loans to Latin America exceeded those available to investors within the world's money centres, and as
long as real interest rates for Latin American borrowers were
negative, the pattern of financial flows to the semi-periphery
9
Studies
in Political
Economy
were logical from the point of view of lender and borrower
alike.!"
In this respect, the difference between Latin America and
East Asian "Tigers" is clear. The latter group, South Korea
and Taiwan for instance, also turned to banks for external
funds but used the money to promote vigorous export diversification and growth without widespread market "liberalisation." As well, the Asian "Tigers" did not relax the
strictures on local banking institutions in the name of alleviating financial repression. I I Latin America's misfortune
was that it turned to international bank lending while at the
same time throwing open its financial systems (thereby facilitating
capital flight) and funding consumer
imports
(therefore enlarging current account deficits). Although this
broad comparison needs qualification, it does suggest that
the source of Latin America's problem was not financial
dependency per se, but rather the political and economic
framework for those capital flows. Accordingly, while the
semi-periphery
absorbed a rising share of the world's billowing trans-border capital flows, the big Latin American
debtors were increasingly ill-prepared for any sudden change
in those flows, or in the terms of their obligations.
The Climacteric of the Early 1980s The neo-conservative
demarche began by dismantling the welfare state and removing remnants of national market industrialism
in the
North Atlantic, but it soon inflicted devastating, if unintended
effects on Latin America. Permissive credit flows to the semiperiphery soon began to choke. The elections of Margaret
Thatcher and Ronald Reagan, both of whom embarked on determined anti-inflationary campaigns and tight money policies,
sealed the fate of fiscal and monetary expansion and flows of
hot money to semi-peripheral borrowers.
In the United States, monetarism coupled with massive
public sector spending increases and faltering revenues, created a yawning public debt. European and North American
policies suddenly sent the cost of borrowing capital soaring.
Although London Inter-Bank Offer Rates (interest charged
on loans between offshore banks) were negative through the
1970s, by 1981 they had reached 7.5%, and 11% by 1982.
10
AdelmanlDebt Crisis
Since most debts carried variable interest rates, these sharply
rising increases, meant that much of the massive lending to
Latin America after 1979 (once Paul Volcker took over as
Chairman of the Federal Reserve) was needed to service the
escalating interest charges on previous debts.l? Moreover, with
the 1979 wave of oil price rises, the OECD economies slumped
again by even more than they had in 1974, forcing them to
reduce their imports and provoking a sharp decline in the terms
of trade for Third World exports. More lending covered the
worsening balance of payments. With rising interest rates and
declining returns on their exports, from 1972 to 1982, developing countries in general faced a tenfold increase in debtservice ratios (the interest and service charges on debts in
proportion to total export earnings). By 1982, debt payments
siphoned off 59% of Latin American export eamings.U
The crisis finally broke in the summer of 1982. On the
eve of the IMF-World Bank meetings in Toronto, Mexico's
Finance Minister Jesus Silva Herzog announced that Mexico
could no longer afford to keep up payments on its debt. His
declaration sent riptides through the world's financial system. One by one, other big debtors followed the Mexican
lead, and it seemed as if the biggest spontaneous collective
default in history was imminent.H In the first few years of
the debt crisis, world finance teetered on the verge of collapse. Calculations of Latin America's trade and financial
future have fueled contemporary gloom and doom. Indeed,
many observers, convinced of the rigidity of the world financial system, and underestimating
the Third World's ability to absorb large declines in living standards, urged big
debtors to default in order to avert a full-scale financial
collapse, which would have been an even worse economic
and political catastrophe.l> Such a catastrophe would have
compelled creditors to bear some ofthe brunt of the resulting
adjustment.
Instead, the burden shifted entirely on to the shoulders
of the debtors. However, effecting this shift required some
fancy financial footwork among lenders who carefully moderated
the bargaining with big debtors. First, a powerful actor was
brought onto the world's financial stage: the IME Its command
over crucial dollar reserves and its immense discretionary
11
Studies in Political Economy
powers, enabled the Fund to provide conditional short-term
loans to debtors to get them over immediate cash shortfalls.
These stand-by loans were often arranged as countries neared
the brink of insolvency, not as their performance improved.
The main intention of these conditions was to prevent (or
as Fund officials liked to say, "rescue") debtors from reneging on their obligations, rather than to reward them for their
travails. Moreover, these loans came with stringent conditions. However, the selective negotiation and disbursement
of these conditions ensured that no Latin American country
declared wholesale default, though many countries were allowed to let payments slip into arrears. Furthermore, banks,
by renegotiating credits, rolling over debts and deferring
payments, averted default. Latin American debtors invested
enormous energy and paid substantial fees to stay in good
standing with commercial banks - hoping that circumstances would soon return to the permissive conditions of
the 1970s. When the industrial economies eventually recovered from the Reagan-Thatcher recession, Latin American
exports began rising. Although oil exporters such as Mexico
and Venezuela did not fare well, the rest of the region registered a recovery in export values and volumes. Meanwhile,
economic austerity had slashed Latin American imports. The
resulting foreign exchange surpluses allowed earnings to be
directed to meet debt payment obligations.
It is important to underscore the uniqueness of the 1980s.
The institutional personality of finance capital in the 1970s
made commercial banks not just the intermediaries between
global savings regions and world borrowers, but the final holders of most of the semi-periphery's debt, a situation with few
precedents. In the nineteenth-century, and in the inter-war years,
banks had served as conduits, and not as holders of debt instruments. Moreover, the banks' syndicated lending practices
allowed them to maintain a common front in contrast to the
atomised and disorganised position of bondholders in earlier
financial cycles. In previous similar conjunctures (the 1820s,
1890s, and 1930s) borrowers more easily defaulted, or forced
lenders to reschedule debts, since investors did not have the
institutional clout of today's money-centre banks which are
backed by the IMF. Historically speaking, banks had seldom
12
Adelman/Debt
Crisis
wielded the power they had by the late 1970s. These combined institutional changes dramatically shifted the bargaining power from the borrower to the lender.Iv This power
enabled the banks to divert substantial resources from the
periphery to the core. Chart I shows how Latin America's
largest debtors sustained net outflows of resources (debtservice charges over new earnings of foreign exchange)
throughout the 1980s.
The aim of this early mix of policies was to protect the
stability of the world financial system, not to assist borrowers. However, the first phase of adjustment soon ran into
trouble. By 1987, the big debtors had suffered five years of
financial compression and clearly displayed signs of debtfatigue: rising social tension, careening inflation and widening budget deficits. The latter two problems were actually
aggravated, not ameliorated by IMF stabilisation.!? Moreover, the commercial banks remained cautious and parsimonious. The hopes of debtors (and of IMF officials) rested
largely on renewed commercial lending to the periphery.
However, this money was not forthcoming. As a result, Latin
American debt-service ratios rose dramatically peaking in
1986, the year in which Argentina sent nearly 80% of its
export earning to service its debts (see Chart II). Economic
recovery receded below the horizon; Presidents Alfonsin in
Argentina and Garcia in Peru pleaded for relief and warned
of drastic measures to come.
Once again, defaults loomed. Into this spectre of implosion entered the United States Treasury Department. First
under James Baker, and later Nicholas Brady, it proposed
alternative policies to alleviate these onerous resource transfers. These proposals were two pronged. First, measures had
to be taken to reduce the weight of outstanding debt. International institutions and US Treasury bonds were used to support debt buy-backs, allowing Central Banks to purchase debt
from creditors at a discount, and bank-debt was to be converted
to longer-term portfolio debt (so-called Brady Bonds). Second,
a much vaunted "adjustment with growth" proposal was
launched in an effort to encourage new bank lending.
In the end, the U.S. Treasury Department administration
failed to recruit the full support of bankers, but it did succeed
13
....
.•..
Chart I: Annual Net Transfer of Resources, 1983-1994
Argentina, Brazil, Mexico, Venezuela (billions US dollars)
25,-------------------------,
20
15
10
5
of------=......a.-;:----;7L2-:r-4=""'=d
-5;k~~~~
-10
""'--*----'ll[
-15
-20L------.J_--'-_--'-_----L_---"-_-L-_-L-_...L--_-'--_'----'
198319841985198619871988198919901991
199219931994
--- Argentina
+ Brazil
"* Mexico
.• Venezuela
UNECLA, Economic Survey of Latin America and the Caribbean, 1992
Statistical Yearbook for Latin America and the Caribbean, various years.
Adelman/Debt
Crisis
in encouraging hobbled Latin American democracies to restructure large portions of their external debts. Beginning
in 1987 with Chile (still far from an electoral turn), and
then later in 1989 under the umbrella of "the Brady Plan,"
Chile, Mexico, Venezuela, Costa Rica, Uruguay and Argentina offered various debt and debt-service reduction options.
By 1993, some $116 billion had been transformed from
short-term into longer-term debt instruments, or from foreign
to domestic obligations, through buy-back provisions (in
which Latin American treasuries assumed the obligations
from banks in return for some compensation). 18 This transformation helped to reduce substantially the stream of repayments and debt-service ratios (see Chart II.)
This second phase of debt-adjustment had its domestic
corollary. In countries with chronically high inflation, such
as Argentina and Brazil, governments tackled inflation with
dramatic austerity measures. For example, President Menem
clamped down on Argentina's porous fiscal machinery and
slashed monetary expansion. In Brazil, three separate stabilisation plans were enacted in five years, the most sweeping of
which was President Collor de Melo's heterodox restriction of
foreign exchange speculation and the freezing of financial assets.
The political crisis surrounding Collor's impeachment undermined the effectiveness of his government's anti- inflationary
measures, however former Finance Minister Cardoso's preelection stabilization plan, and post-election promise to
deepen structural adjustment, have dramatically curbed Brazilian inflation. In moderately inflationary countries like Mexico, stabilization was easier. However, even in Mexico
stabilisation came on the heels of a domestic political pacta,
designed by the out-going Miguel de la Madrid government
in 1988, which froze wages and prices, and had an official
quid pro quo that public prices and the exchange rate would
remain fixed.l? Across the region, for a time, local currencies
served as anchors to combat inflation, however, they were
soon overvalued once again.
Meanwhile, the massive privatisation of state firms further
redefined Latin America's relationships with external creditors. There is a crucial link between reducing debt-loads
and selling public assets, which should not be obscured by
15
------------------
.. -
-
~
Chart II: Debt-service-to-export ratios, 1985-1994
Argentina, Brazil, Mexico, Venezuela
debt servicepayments/exports
100,----------------------,
80
OL---'----'----'-----'---'------'---'-----'--~
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
Year
~ Argentina + Brazil
-* Mexico ---Venezuela
World Bank,World Debt Tables,1996 (Washington,1996)
AdelmanlDebt Crisis
Chart III: Proceeds from Privatization in Argentina, Brazil and Mexico, 1988-1994
lmllllon.
of us dollars)
Thousands
12,------------------,
10
8
-Brazil
+ Argentina
6
"Mexico
4
1988 1989 1990 1991 1992 1993 1994
World Bank, World Debt Tables, 1996(Washington,
1996)
the official rhetoric of raising the efficiency of hitherto publicly managed enterprises. By the time the big debtors began
lining up prospective domestic and international buyers, they
had two aims. First, was to line Treasury coffers, thereby
closing the fiscal gap. Second, they aimed to restock Central
Bank reserves, thereby giving governments
desperately
needed foreign exchange with which to combat downward
pressure on local currencies.s'' In Mexico alone, of the 1,155
firms in state hands in 1982, only 269 remained so in 1991.
Argentina has managed to privatize almost all of its public
firms, even including the Buenos Aires municipal zoo. Brazil
remains the laggard having sold only 33 companies (worth
some $6 billion) in the past two years. However, many expect
a reelected Fernando Henrique Cardoso will embark on a
wholesale transfer of state assets during his second term.
Chart III illustrates the sudden surge and subsequent waning
of the sell-off by the three biggest vendors.
All told, these policies coincided with more propitious
conditions for Latin America's exports. The region's nadir
in terms of net resource transfers was 1988 (see Chart 1).
The outflow began to abate thereafter, and by 1991, money
began flowing back into the region. By the end of the decade,
17
Studies in Political Economy
it seemed to many that Latin America's malaise was over. However, the solution had entailed a dramatic domestic redistribution of wealth: curbing the income base of the region's
poorest citizenry, and strapping public policy more tightly
to the Procrustean bed of global finance capital's interests.
Not surprisingly,
the world's attention now shifted away
from the external constraints on Latin America's fortunes,
and focussed on the prospects of lucrative returns available
from investing in their so-called "emerging markets" (a term
invented by a World Bank official in 1981 to encourage new
investment).
The Fund Fetish While international bankers and Latin
American creditors were locked in protracted negotiations
through the 1980s, the general background rules of world
financial operations changed rapidly. The late 1960s and
early 1970s had altered the channels through which capital
flowed from core lenders to peripheral borrowers. The late
1980s were to prove equally trans formative. First, US and
British governments substantially liberalised their financial
markets, dropping entry barriers to new investors and money
managers. As a result, the old world of commercial bank
authority over financial hubs was exposed to intense competition and it began to collapse.U
As capital has been flowing back to the semi-periphery
through new institutional channels after 1989, in order to
understand world finance, we have to focus on non-bank
money managers and creditors. Changing background rules,
especially deregulation, has led to the emergence of a host
of new financial intermediaries
(mutual, trust and pension
funds, insurance companies,
internationally-linked
stock
market brokers), and the resurrection of firms interested in
investing directly in large Latin American economies.V
These developments have spawned, in the words of the IMF,
"financial conglomerates"
which have increased the range
and flexibility of financial instruments, and have permitted
Latin American borrowers to broaden the range of institutions that can be used as sources of capital. At the same
time, these conglomerates
have generated a new host of
18
AdelmanlDebt
Crisis
problems concerning financial supervision and regulation, a
point to which I will return below.
Although commercial banks dominated external finance
to Latin America in 1982, a decade later their business has
shrunk drastically. On the other hand, foreign direct investment (FDI, offshore ownership of assets within Latin America) has risen. However, the most remarkable increase was
that of the coterie of new private intermediaries active in
portfolio equity and bond markets.23
As a result of the above changes, patterns of borrowing
have shifted. Much of the lending in the 1970s and early
1980s was to sovereign states. However, by 1992 60% of
lending was to Latin America went to private agents. Given
the catastrophic state of Latin America's treasuries private
creditors interested in public sector investments are scarce.
However, it should be noted that this new profile of lending
and borrowing closely resembles earlier patterns of capital
flows to Latin America. Prior to the global economic malaise
of the 1970s, Latin America's private sector had been the
largest recipient of such funds, and capital had flowed
through an array of non-bank channels. Therefore, it might
be tempting to conclude that the long-run effects of this
particular "resolution" of the debt-crisis has been to restore
the pre-1973 institutional fabric of global financial relations.
While it may be true that the sidelining of the banks has
eliminated a source of turbulence,24 recent events suggest
that such a conclusion would be premature and excessively
optimistic.
For example, the scale of the new lending has changed
significantly. By 1992, total lending to Latin America was
significantly higher than in 1982 on the eve of the first crisis
(see Chart IV.) And since then, the lending has soared in
spite of Mexico's blow-out in 1994.25
From 1990 to 1993, private capital flows to the developing
world rose by 250%, most of which was concentrated in
middle-income countries. In 1993 alone, the total debt stock
of developing countries rose by $90 billion. Some of this
increase did reflect the reconversion of old debts. The capitalisation of interest - the folding of accumulated interest
arrears into the principal of the loan while rescheduling its
19
-------------------------
Chart IV: Total Disbursed
External Debt, 1987 & 1994 (billions
US dollars)
Argentina, Brazil. Mexico. Venezuela
Brazil
$ 149.5
Brazil
$ 121.2
Venezuela
$ 34.8
Argentina
$ 58.3
Mexico
$ 102.4
Mexico
$ 135.5
1987
UN ECLA, Statistical
Yearbook
1994
for Latin America
and the Caribbean,
1995 (New York, 1996)
AdelmanlDebt Crisis
maturity and setting new interest rates - alone raised Third
World debt stocks by $15 billion in 1993. It is estimated
that another $10 billion in interest arrears remain out standing.26
If the scale of these new capital flows poses hazards which
are no less dangerous than those of the early 1980s, so do
the terms under which these new debts are being incurred.
Just as capital flowed to Latin American borrowers during
the OECD slump ofthe 1970s and flowed out with the North
Atlantic recovery of the mid-to late 1980s, this new deluge
was once again contingent upon conditions in the OECD.
Beginning in 1989, as interest rates in the OECD declined,
investors flooded to booming "emerging markets" in pursuit
of higher returns. Semi-peripheral borrowers therefore continue to live in an inverse relationship with core borrowers.
With the recent economic "recovery," especially in North
America, finance capital has been returning to core investment. Indeed, the current turmoil in Asia and the whiplash
inflicted on other emerging markets in Latin America may
reinforce this flight to more secure, core assets.
What has changed most, and which continues to pose an
indeterminate risk, is the institutional personality of finance
capital. Non-bank capital flows are as responsive, ifnot more
so, to shifting relative returns (e.g., as gauged in interest
rates) between core markets and emerging markets, and between lending and borrowing regions. Thus, in early 1994,
when the Federal Reserve raised interest rates to curb fears
of domestic inflation and to cleanse the market of overheated
financial speculation, Latin American interest rates had to
move in step. Latin America had to raise rates above their
already very high levels in order to keep investors from divesting their more risky Latin American assets in favour of
assets yielding rising returns at home.I? In this way, central
banking policies (especially in the U.S.) continue to calibrate
the money flow, both out-bound and in-bound, between core
and periphery. The new generation of investors and fund
managers watch every twitch of Alan Greenspan's face (the
Federal Reserve Board Chair). Their changing sentiments
can lead to stampedes on the computer screens of central
bankers in Latin America, who must watch, powerlessly, as
21
~~-----
--------------------
Studies in Political Economy
their reserves drain from their coffers and their currencies
plunge.
Moreover, foreign direct investments will eventually lead
to remittances of substantial profits and dividends. Indeed,
the World Bank has recently calculated that due to sharply
rising interest and profit remissions, these outflows reached
$80 billion in 1992, and $92 billion in 1993.28 This prospect
of rising reverse capital flows is reminiscent of the events
which led to earlier disillusionment
with FDI and multinationals in the late 1960s and 1970s, leading to the shift to
commercial bank lending.
In summary, the institutional fabric of international capital
markets has thus not eliminated the semi-periphery's
vulnerability to the fickleness of investors. If anything, the herdlike behaviour and short-term horizons of the new non-equity
portfolio managers may actually aggravate the degree of
volatility in the markets. As the handling of Mexico's plight
has shown, the custodians of hot money are often free-riders
and efforts to quiet their collective panic have proven largely
ineffective except for the massive intervention of the United
States Treasury in February 1995. But to understand the full
dimensions of the current crisis, we need to return to the
demand side of world money markets.
Mexico and the Demand Side It would be a mistake to
ascribe the causes of Latin America's plight to factors at
work only in the core countries. Efforts to control ravaging
inflation and to contain distributional
social conflicts did
little to curb government
reliance on new money from
abroad. With only meagre reserves to protect local currencies, states had to find alternative means to tame unruly,
and inflationary, exchange rates. One option they had was
to raise reserves by selling off local public property. Latin
American governments have used the proceeds from privatisation for short-term stabilization rather than for long-term
fixed capital formation, especially in Argentina, Venezuela
and Mexico.I? The argument in favour of the passive use
of such revenues is that resulting stability generates confidence, that will result, in turn, in rising investment rates.
However, private domestic rates of saving and investment
22
Adelman/Debt
Crisis
continue to lag; this is a growing source of concern throughout the region.
To make matters worse, local financial institutions remained
weak. Consequently, local firms have to rely on in-house
sources of finance or expensive bank lending, and are unable,
for instance, to raise funds through the public flotation of
stocks. Capital inflows, therefore, merely perpetuated weak
local capital markets. It was only after the massive inflow
of capital, from 1989 to 1993, ended that authorities (with
the belated benediction of the IMF) have turned to financial
reform. At this point Mexico, which had a relatively closed
financial system, threw its doors open, allowing foreign
banks to establish branches within its borders. Eighteen permits were issued in October 1993, and in the wake of the
debacle of December 1994, the doors have all but been removed. However, local banking remains divided between a
clutch of highly concentrated big banks surrounded by tottering overexposed smaller banks.
Meanwhile the Argentine and Brazilian financial systems
retain their lucrative commitment to short-term speculative
investment backed by threadbare capital reserves. Only recently has the Menem administration turned to banking reform; the Cardoso government is expected to do the same.
On the whole, Latin American banks are notoriously inefficient, uncompetitive and resistant to the very free market
forces that they like to see prevail in other realms.J"
In short, sclerotic local money markets only perpetuated
financial dependency. Savers and small borrowers, as the
IMF and World Bank have now come to realize, could intensify their activity, reducing reliance on external money,
if local money markets were less dominated by rentier blocs.
This change, however, would require tackling the very same
institutions that bankroll hobbled Latin American treasuries
and that mediate the capital flows that keep local currencies
from collapsing,
a political proposition
that the Bretton
Woods agencies recoil from embracing.
However, perhaps the most evident and worrying upshot
of the region's recent resurgent indebtedness is its effect on
the balance of payments. The massive surpluses in Latin
America's capital accounts are mirrored by deficits in its
23
Studies in Political Economy
current accounts. Mexico's deficit in 1994 was by far the
Third World's largest at close to $30 billion, followed by
China and Argentina. This trade imbalance stems less from
any essential nature of finance capital than from domestic
policies. As large volumes of capital began flowing back
into Latin America, most countries had embarked on tough
counter-inflationary
policies involving, with various degrees
of stringency, fixed exchange rates. By fixing local currencies to the US dollar (Argentina went so far as to enshrine
this practice into law in April 1991), Central Banks relinquished monetary independence in return for a degree of
stability. However, in many cases, local currencies eventually became overvalued. To make matters worse, with the
blessing of foreign powers and international financiers protectionist barriers were being torn down. The result was that
foreign funds flowed in, rejuvenating local short-term consumer credit, and high exchange rates slashed the costs of
imports while crippling exports. Dismantling old populist
and nationalist supports and protection for local industries
opened the floodgates for cheap consumer imports.U
Once again, it helps to compare Latin America to other
semi-peripheral countries, especially the East Asia "Tigers,"
where external funds have gone more directly into productive
capacity, into manufactured goods for export in particular.
The institutional girding of capital markets in East Asian
industrialising
countries has been much more successful at
translating large-scale borrowing into capital formation. Recent evidence suggests that much of the difference between
the two regions can be ascribed to the fabric and efficiency
of local financial systems, in spite of the recent upheaval
there.32
In East Asia, regulation made the difference. Authorities
prevented capital from entering local money supplies in the
form of consumer credit and, instead of subsituting for it,
foreign capital bolstered public savings. In contrast, evidence
from Latin America suggests that severe stabilization limited
the discretionary power of monetary officials, and weakening
the flexibility of their responses to volatile capital flows. The
paradoxical, and perilous, result of combining the use of hot
money to bolster anti-inflation drives, by perpetuating ossified
24
Adelman/Debt
Crisis
local capital markets and encouraging cheap imports, is that
those foreign funds have contributed to falling domestic savings in much of Latin America.V If, of late, East Asian
"Tigers" are starting to look more Latin American, it is because the very controls that they used in the 1980s and early
1990s to regulate "hot money" flows have been dismantled.
By the end of 1994, close observers outside the myopic
community of money managers, were throwing up warning
signals.H Mexico, the darling borrower, turned out to be
the system's Achilles Heel, combining all the potential pathologies of economic restructuring on unsound foundations.
The now-vilified Carlos Salinas de Gortari overvalued the
peso while liberalising trade. Furthermore, the government
relaxed transaction rules in financial markets in a fashion
which spurred consumer credit over investment which, in
turn, only aggravated the country's historically low savings
rates. This decision, it is worth saying, was designed to assuage middle and upper class Mexicans after the debacle of
the 1988 election. Meanwhile, the public sector divested itself of most of its prime assets while public spending was
pared down to a minimum. On the surface, this yielded a
better fiscal balance, but it also deprived the government of
policy instruments that it might need to cope with future
crises, such as the one sparked by the Federal Reserve Board,
north of the Rio Grande, when it began to raise interest
rates.
Political contingencies soon overwhelmed the triumphalism of NAFTA's ratification and President Salinas' proclamation that Mexico had joined the First World. With the
Chiapas uprising and the assassination of Luis Donaldo Colosio the fuse was lit. In the first 40 days of 1994, Mexican
Central Bank officials recorded a financial exodus of $11
billion; in March alone the Mexican stock exchange lost
$5.9 billion in foreign investment.l> Alarmed at the prospect
of a massive flight of capital, Salinas and his successor Emesto
Zedillo struggled to pacify foreign investors by protecting them
against the threat of a future devaluation. Interest rates began
to rise, but, more importantly, Mexico's treasury allowed bondholders to convert their maturing peso-denominated securities
(cetes) into dollar-denominated instruments (tesobonos). This
25
Studies in Political Economy
latter move was crucial since it meant that investors could
keep their money in Mexico without being harmed by a devaluation (which many were predicting). In the argot of the
money markets, this conversion of government debt shored
up "investor confidence." Over the course of 1994, $29 billion worth of tesobonos were issued on local stock markets.
By December
1994, on the eve of the peso's collapse,
tesobonos accounted for 87% of Mexico's newly issued public debt, up from 6% a year earlier.
As it turned out, this short-term change in public indebtedness merely elongated the fuse packing the system with
even more dynamite. First of all, much of this dollar-denominated debt was short-term and would come due in the
early months of 1995. Second, authorities could not rely on
the traditional cornerstone response to balance of payments
problems, devaluating currency to slash imports and bolster
exports, because this would expose the treasury to massive
increases in debt overnight. In sum, the level of Central
Bank reserves to meet a sudden run on the currency (the
obsession of bankers and IMF officials alike) is only a poor,
and ultimately misleading, indicator of a government's ability to cope with potential external account problems. However, as this package began to disintegrate, the recirculation
of funds created the illusion that the Central Bank had the
power to defend the exchange rate.36
More serious tremors began in late November 1994. As
interest rates climbed to protect the exchange rate, the number of failing domestic consumer loans rose in step. As many
observers began to fret about the solvency of the domestic
financial system, the peasants in the south increased the decibel level of their frustration, prompting rumours of a second
uprising. In mid-December
1994, news-agencies
began reporting guerrilla movements in Chiapas, provoking investors
to pull $2 billion from Mexico two days prior to the peso's
December 20th plummet. Over the following days, the Central Bank spent between $5 billion and $7 billion in reserves
to protect the exchange rate. Foreigners, but more especially
Mexicans withdrew their funds in droves, intensifying the
pressure on the Central Bank's dwindling reserves. Having
squandered
the opportunity
to introduce the devaluation
26
Adelman/Debt
Crisis
gradually, the new Zedillo administration was forced to abandon any semblance of macroeconomic
order. Only when it
was clear that foreign and Mexican investors could no longer
be protected did Finance Minister Jaime Serra Puche let the
peso drop. It fell precipitously.J?
What started as a foreign exchange crisis soon billowed
into the threat of insolvency. Just as the peso tumbled, the
accumulated tesobonos began to mature. By early February,
all efforts to reassure investors (domestic and foreign alike)
had failed. It seemed that few would keep their money in
Mexican public securities, and that a full-scale default was
imminent. As rumours of a collapse spread, investors accused
the Mexican government of betrayal.P Capital flight was
inevitable, and there was little the Mexican authorities could
do but brace themselves for the fall-out.
The speed and scale of the crisis exceeded the capacities
of the normal channels of financial supervision. This was
no ordinary exchange shortage, the stock-in-trade business
of IMF stand-by loans. Mexico was threatened by a wholesale liquidity crisis; on a scale which threatened to engulf
much of Latin America. Investors began to subject local markets in Argentina and Venezuela to the same panicked capital
flight. By early February, the only saviour of the teetering
system to appear was the US government. Yet even here,
the initial talk of a "rescue plan" became bogged down in
Congress, as isolationist Republicans and Democrats embittered over their loss in the NAFTA vote, conspired to hold
New York financiers for ransom.J? With US banks holding
$41 billion in Latin American debt ($15.9 billion in Mexico
alone), US mutual funds carrying $17 billion in the region,
and three major securities firms deeply embroiled in Latin
America (J.P.Morgan,
Salomon Brothers,
and Goldman
Sachs together earned over $300 million from Latin American
trading in 1994), the paralysis in Washington briefly threatened to destabilize the pillars of global finance.
Goldman Sachs, as it turned out, was the largest single
underwriter
of Mexican securities ($5.17 billion between
1992 and 1994), and its former co-chairman, Robert Rubin,
was now President Clinton's alarmed Treasury Secretary.40
Rubin, in a panic, warned the President that Mexico could
27
Studies in Political Economy
default, and that his efforts to calm New York money managers were failing now that Mexican authorities had lost all
credibility. He successfully argued that Washington had to
step in directly to make the largest international financial
bail-out in world history. The Treasury posted $20 billion
and a reluctant IMF $17 billion, effectively operating as a
lender oflast resort to a volatile and herd-like private market.
As the rescue funds mopped up the bonds that had been
eulogised by domestic and foreign agents as a sound and
highly lucrative bet just a year before, Mexico avoided collapse.
Since 1995, the Mexican economy has stumbled along,
with only occasional moments of recovery and only very
localized
prosperity.
Mexican economic
growth is not
enough to absorb the vegetative expansion of the work force
(about 3.5% yearly), never mind absorbing dislocated workers from plant closures and agrarian enclosures. The toll of
urban squalor and petty crime rates is also becoming a major
source of alarm. Mexican austerity was the price paid to
accumulate foreign exchange to payoff the republic's "rescue" package. In the long-term Mexico is left fully exposed
to international financial whims.
The intervention of the US authorities was not just another
emergency measure, it epitomised how crippled Latin American states have become in the face transnationalism.
The
rest of the region has only barely avoided Mexico's complete
ignominy. The flight of funds from Mexico also sucked
money out of other so-called "miracles" and "emerging markets," in particular Argentina. Thus, despite the lofty promises of the neoliberal reformers, resources once again flowed
out of Latin America to world money centres. Over the past
two years, some capital has been crawling back, supporting
assertions that Rubin's efforts were successful. What has
not changed, however, is the extreme vulnerability of capital
flows to factors beyond the control of Latin American states,
as shown by the hammer-blows delivered to Latin American
markets in the wake of East Asian turmoil.
Conclusion Although
the most recent Mexican crisis once
again spread austerity, high interest rates and lay-offs across
28
AdelmanlDebt
Crisis
Latin America, it differed from its 1982 predecessor. Finance
capital is now more widely spread in a variety of institutional
forms, each having distinctive interests in host economies.
Whereas, much of the 1970s debt was held by large collaborating commercial banks, recent flows have been more
diversified. For some, these changes are reassuring. Portfolio
investment (especially in bonds derived from reconverted
old bank debt), and foreign direct investment,
represent
longer-term obligations. Moreover, the more atomised and
varied nature of today's investments inhibits the formation
of creditor-blocs like those that emerged in the wake of 1982.
Accordingly, Latin American debtors are thought to be in a
stronger position since they no longer face a tightly organized circle of lenders.
This is the silver lining, however, of a very large, dark
cloud. Creditor heterogeneity and atomisation may weaken
their collective bargaining strength, but such a structure also
creates undeniable problems of coordination. Capital flows,
though more polymorphous,
are now potentially far more
volatile and less susceptible to scrutiny and control.U Indeed, the fall-out from Mexico's debacle has illustrated the
difficulty of bringing panicky portfolio investors to heel
when the temptation to free-ride is so great.
In order to deal with Mexico's near-default in 1982 by
deferring payments and emergency loans from the IMF, there
had to be a united front and close collaboration between the
money-centre banks. But the change in the personality of
finance capital between 1982 and 1994 meant that the Mexican authorities were unable to cope with capital flight in
this way, and explains why the IMF was singularly unprepared to step in as a lender of last-resort in early 1995. On
this occasion, only massive and direct intervention by the
US Treasury slowed the stampede out of Latin America.
Thus, for all the institutional plasticity of recent global capital flows, panic is the spectre that still haunts all financial
authorities south of the Rio Grande. Indeed, the IMF may
no longer be necessary as a disciplinary agent since the mere
threat of capital-flight now forces regimes to impose austerity to deal with trade imbalances or government "overspending. "
29
Studies in Political Economy
Domestic factors also make the post-1994 crisis different
from the post-1982 one. Much of the restructuring during
the 1980s and early 1990s was financed by forced domestic
savings (meagre though these were) and the massive wholesale transfer of assets from the public to the private sector.
The full effects of Latin American privatisation and the removal of the last remnants of national populism have not
yet been seen, but the scale of the transformation has been
monumental. Such a sweeping re-mapping of property rights
carries with it the possibility of large associated speculative
gains, which can serve as giant magnets for new investment.
The beneficiaries of these changes have been both domestic
and foreign conglomerates, creating the new corporate sinews of the more internationalised markets of the region. But
now that this orgy of redistribution is almost over, except
in Cardoso's Brazil, there is little left to seduce new investors.42 The latest era of "hot money" in Latin America may
therefore be effectively over, not so much because the Mexican malaise has chastened investors, but because there is
simply nothing left to entice speculators. The only other
major enticement would be to attend to potentially rapidly
growing domestic markets. However, given the need to preserve a patina of "frugality" and "responsibility,"
Latin
American governments have to keep a tight lid on domestic
consumption.
The historical situation which most closely resembles the
landscape that faces much of Latin America today is the
need for adjustment to financial cycles before the Second
World War. Now, as then, stripped-down states have relinquished much of their ability to monitor, or to oversee local
markets. Bereft of any direct stake in production and distribution, deprived of fiscal discretion, and left with imperfect
tools wielded by "independent"
central bank authorities
(some of whom have completely abjured themselves as lenders of last resort), Latin American states now operate under
terms reminiscent of the old gold standard of the nineteenthcentury.O In summary, Latin American governments are being
called upon to alleviate the market's blows, to deepen the
process of economic restructuring, and to legitimate redefined property relations, at a time when their capacities to
30
Adelman/Debt Crisis
do so are increasingly constrained. For much of Latin America, the primary variable of adjustment to world money and
commodity market cycles is now the level of local incomes.
It remains to be seen how societies entering the next century
will address the on-going saga of dealing with the debt crisis
with policy tools fit for the last century. After a decade of
neoliberalismo, it is not only the state coffers which are
empty.
Notes
I.
2.
3.
4.
Pedro Aspe and Jose Angel Gurria, "The State and Economic Development: A Mexican perspective," in Proceedings of the World Bank
Annual Conference on Development Economics, i992, (Washington:
World Bank, 1993), pp. 9-14.
Oscar Altimir, "Income Distribution and Poverty through Crisis and
Adjustment," in Graham Bird & Ann Helwege (eds.), Latin America 50
Economic Future, (New York: Academic Press, 1994), pp. 265-302;
Ann Helwege, "Poverty in Latin America: back to the Abyss?" Journal of inter-American Studies and World Affairs, 37/3 (1995), pp.99124; John Sheahan, "Effects of Liberalization Programs on Poverty
and Inequality: Chile, Mexico and Peru," Latin American Research
Review, 32/3 (1997), pp. 7-37.
Refusal to deal with these embedded causes can produce some idiosyncratic results and wildly inconsistent appraisals. For a taste, see
The Economist's feature article on Mexico in the August 26-September I, 1995 issue. For the IMF's in-house account, see IMF, "Evolution of the Mexican Peso Crisis," international Captial Markets:
Developments, Prospects and Policy issues, (Washington DC: IMF,
1995), pp. 53-66.
Peter Evans, Dependent Development: The Alliance of Multinational,
State, and Local Capital in Brazil, (Princeton: Princeton University
Press, 1979); Inter-American Development Bank, External Debt and
Economic Development in Latin America: Background and Prospects,
5.
6.
7.
(Washington: IADB, 1984), p.7.
IADB, External Debt and Economic Development, p.7.
Carlos F. Diaz-Alejandro, "Good-bye Financial Repression, Hello Financial Crash," in Andres Velasco (ed.), Trade, Development and the
World Economy: Selected Essays of Carlos F Diaz-Alejandro, (Oxford: Basil Blackwell, 1988), pp. 364-386; Vittorio Corbo, Jaime de
Melo, James Tybout, "What Went Wrong with Recent Reforms in
the Southern Cone?" Economic Development and Cultural Change,
34/3 (1986), pp. 607-640.
The best study of this change is Robert Devlin, Debt Crisis in Latin
America: The Supply Side of the Story, (Princeton: Princeton University Press, 1989). See also, Carlos F. Diaz-Alejandro, "The Post
1971 International Financial System and the Less Developed Coun31
Studies in Political Economy
8.
9.
10.
II.
12.
13.
14.
15.
16.
17.
18.
32
tries," in G. Helleiner (ed.), A World Divided: The Less Developed
Countries in the International Economy, (Cambridge: Cambridge University Press, 1976), pp. 177-205.
Philip Armstrong & Andrew Glyn & John Harrison, Capitalism Since
World War ll, (London: Fontana, 1984); William Darity & Bobbie
Horn, The Loan Pushers: The Role of Commercial Banks in the International Debt Crisis, (Cambridge, Mass.: Ballinger, 1988).
Rudiger Dornbusch, "Capital Flight: Theory, Measurement and Policy
Issues," IADB Occasional Papers 2 (1990); Robert Cumby & Richard
Levich, "Definitions
and Magnitudes: On the definition and Magnitude of Recent Capital Flight," in Donald Lessard & John Williamson
(eds.), Capital Flight and Third World Debt, (Washington:
Institute
for International
Economics,
1987), pp. 27-67.
Albert Fishlow, "Lessons from the Past: Capital Markets during the
Nineteenth-Century
and the Interwar Period," International Organization, 39/3 (1985), pp.383-439.
This, of course, has been a thorny model for international
financiers
and their institutional girders. For an insight into the battle over financial paradigms,
see Robert Wade, "Japan, the World Bank and
the Art of Paradigm Maintenance,"
New Left Review, 217 (1996),
pp. 3-36. For a more general reflection on alternative financial systems see, Robert Pollin, "Financial Structures and Egalitarian Economic Policy," New Left Review, 214 (1995), pp. 26-61.
Cline, International Debt, Systemic Risk and Policy Response, p. II.
IADB, External Debt and Economic Development, pp. 7-10; Chris
Carvounis,
The Debt Dilemma of Developing
Nations (London:
Aldwych, 1984), p. 25.
For a good account of the political circumstances
within Latin America at the time, and their connection to debt-management,
see Jeffrey
Frieden, Development and Democracy: Modern Political Economy
and Latin America. 1965-1985, (Princeton:
Princeton
University
Press, 1991), especially chps. I & 2.
See for instance, Harold Lever & Christopher Huhne, Debt and Danger: The World Financial Crisis, (Harmondsworth:
Penguin, 1985);
Anatole Kaletsky, The Costs of Default, (New York: Priority Press,
1985). Even Carlos F. Diaz-Alejandro
urged some approximation
to
1930s-style default. See "Latin American Debt: I Don't Think We
Are in Kansas Anymore," Brookings Papers on Economic Activity,
2 (1984), pp. 335-389.
Christian Suter & Hanster Stamm, "Coping with Global Debt Crises:
Debt Settlements,
1820 to 1986," Comparative Studies in Society
and History, 24/4 (1992), pp. 645-678; Barbara Stallings, Banker to
the Third World: US Portfolio Investment Latin America. 1900-1986,
(Berkeley: University of California Press, 1987).
Nouriel Roubini & Xavier Sala-i-Martin,
"Financial Repression and
Economic Growth," Journal of Development Economics, 39 (1992)
pp. 5-30.
International
Monetary Fund, World Economic Outlook. October
1993, (Washington: IMF, 1993), p. 72. Brazil began negotiations
to
reconvert $44 billion in commercial
bank debt plus $3 billion in
interest arrears, but the prolonged political crisis associated
with
President Collor's demise postponed any final settlement. New York
AdelmanlDebt Crisis
19.
20.
21.
22.
23.
24.
Times, 10 July, 1992. In April 1994, a "Brady" deal was finally struck
with 750 creditors worth $60 billion to foreign banks and $6.9 billion
to domestic banks. The Economist, (26 Nov., 1994), p. 40.
Nora Lustig, Mexico: the Remaking of an Economy, (Washington:
Brookings Institute, 1992), pp. 50-54; Julio Nogues & Sunil Gulati,
"Economic
Policies and Performance
under Alternative
Trade Regimes: Latin America during the 1980s," The World Economy, 17/4
(1994), pp. 467-496.
Werner Baer, "Privatisation
in Latin America," The World Economy,
17/4 (1994), pp. 509-528.
It is worth observing that not until a decade after Latin America
began its arduous adjustment to bankers' demands did the IMF begin
to insist that there be stronger supervision and the creation of a sound
regulatory
framework
for banks. See IMF, Annual Report. 1994
(Washington: IMF, 1994), p. 25. Banks themselves responded by expanding the range of their activities as intermediaries.
They dipped
into a wide array of new business activities. But now that Third
World debtors were ruled out by virtue of their crippled economies
their loans were concentrated
in a new set of single-risk
classes,
their greatest preference being for domestic urban real estate. They
also made a booming business in over-the-counter
derivative markets.
In itself, the evolution of bank operations had little immediate impact
on the periphery, but it did make them less prominent players in
revamped Latin American markets. This conclusion does not mean
that banks are irrelevant, simply that they are no longer important
conduits of capital. In many ways, foreign banks' role within Latin
America has increased enormously as they have financed much of
the privatisation of state assets, making themselves important holders
of assets in sectors throughout the economy.
In the US, 1990 saw approval of two important measures, "Regulation
S" and "Rule 144A". The former clarified the definition of sale and
offer of developing country securities in the US (prior to 1990, the
Securities Act imposed stringent terms on security buyers and levied
heavy fines on public offerings which failed to meet legislative requirements). This enabled foreign issuers to duck registration requirements (of between $500,000 and $700,000). Rule 144A relaxed stipulations that securities buyers hold their investment for at least two years,
thereby increasing the liquidity of their holdings. In Japan, authorities
lowered minimum credit rating standards for public bond issues on the
Samurai market (from A to triple B) in June 1991. In Switzerland,
minimum credit rating standards were abolished altogether for foreign
bond issues (they had been at triple B). Mohammed
A. El-Erian,
"Restoration of Access to Voluntary Capital Market Financing," IMF
Staff Papers, 39/1 (1992), pp. 175-194; IMF, International Capital
Markets: Developments and Prospects (May, 1991), pp. 1-9.
UN, Economic Commission
for Latin America and the Caribbean,
Economic Survey of Latin America and the Caribbean. 1992, V.I
(Santiago: UNECLA, 1994), pp. 165-166.
Robert Devlin has charted the grim record of pro-cyclical behaviour
of banks, of exaggerating booms and aggravating recessions in Debt
and Crisis in Latin America, especially pp. 235-245.
33
Studies in Political Economy
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
34
Published figures may well underestimate the degree of bank claims
on developing countries due to American reporting habits to the Securities Exchange Commission. See "Bank Lending: Hidden Horrors,"
The Economist, (22 Oct., 1994).
World Bank, World Debt Tables, 1993-1994 (Washington: lBRD,
1993), p. 3.
There are also institutional reasons for the convergence in yields.
See "The Intermediary's Lot," The Economist, (5 Nov., 1994); Kenneth Gilpin, "The New Third World Fear: Investors Could Walk
Away," New York Times, 24 April, 1994; World Financial Markets,
(II Nov., 1994). Recent signs point to disenchantment with Mexico
and Buenos Aires, and new-found euphoria for Brazil. See Kathryn
Jones, "Steamy Brazil Helps Emerging Markets," New York Times,
(3 Oct., 1994).
World Bank, World Debt Tables, 1993-94 V.I, p. 9.
World Financial Markets, (14 August, 1992).
See the useful "Banking in Latin America," Latin American Special
Report, (Dec., 1993); John H. Welch, "The New face of Latin America: Financial Flows, Markets and Institutions in the I 990s, " Journal
of Latin American Studies, 25/1 (1993), pp. 1-24.
The exception here is Brazil, which has heretofore not been a major
new borrower and has sustained high export and stable import levels.
Cardoso's pre-election decision to peg the new real to the US dollar,
however, suggests he might send Brazil down the Mexican and Argentine path. "Cardoso takes the plunge," The Economist, 2 Apr.,
1994.
Susan Schadler, Maria Carkovic, Adam Bennett, and Robert Kahn,
"Recent Experiences with Surges in Capital Flows," IMF Occasional
Paper 108 (Dec., 1993); "Coping with capital," The Economist, (29
Oct., 1994).
Schadler et al, "Recent Experiences with Surges in Capital Inflows,"
pp.II-28; Guillermo Calvo, Leonardo Liederman, Carmen M. Reinhart, "Capital Inflows and Real Exchange Rate Appreciation in Latin
America," 1MF Staff Papers, 40/1 (1993), pp. 108-151. Thailand, for
instance, administered a quick and large fiscal adjustment, enjoyed
historically low inflation rates and hosted a banking system with
much greater capital absorptive capacity.
For a clear warning, see IMF, World Economic Outlook, October
1993, pp. 79-81 & Annual Report 1994, pp. 26-28; Latin American
Weekly Report, 7 Apr., 1994; and The Economist, (26 Nov., 1994),
especially p. 43.
Craig Torres & Thomas Vogel, "Some Mutual Funds Yield Growing
Clout in Developing Nations," Wall Street Journal, (14 June, 1994);
Latin American Weekly Report, (21 April, 1994). On estimates of
capital flight, see the report on Bancomer studies in Latin American
Weekly Report, (5 May, 1994).
"Factors Behind the Financial Crisis in Mexico," IMF, World Economic Outlook, May 1995, (Washington: IMF, 1995), pp. 90-97; Nora
Lustig, "Mexico y la crisis del peso: 10 previsible y la sorpresa,"
Revista de Comercio Exterior (forthcoming).
AdelmanlDebt Crisis
37.
38.
39.
40.
41.
42.
43.
"Mexican President Outlines Rescue Plan," New York Times, (30 December, 1994); "Mexico Puts Economic Steps on Hold," Wall Street
Journal, (27 December, 1994).
One foreign bond trader decried "this is just a complete shift in
credit fundamentals.
They've got to line up international
financial
institutions
and maintain credibility
with the creditor community,
which has been shredded here." Craig Torres & paul Carroll, "Mexico
Puts Economic Steps on Hold," Wall Street Journal, (27 Dec., 1994).
"Putting Mexico together again," The Economist, (4 Feb., 1995);
Craig Torres, "Mexico's Debt-Restructuring
Plans Stall," Wall Street
Journal, (15 Feb., 1995).
Tim Carrington,
"Rubin's
Link to Goldman is Scrutinized,"
Wall
Street Journal, (27 Feb., 1995); David Sanger, "The Education of
Robert Rubin," New York Times, (5 Feb., 1995).
IMF, World Economic Outlook, October 1994, (Washington:
IMF,
1994), p. 6 & International Capital markets, Developments, Prospects
and Policy Issues, (Washington: IMF, 1995), pp. 165-17 I.
For some recent reflections on Brazil, see Reinaldo Goncalves, "Globalizacao
financiera
e insercao internacional
do Brasil," Revista
Brasileira de Politica Internacional, 39/1 (1996), pp. 72-88; on Mexico, Juan Carlos Moreno and Jaime Ros, "Market reform and the
Changing Role of the State in Mexico," in Amitava Dutt, et al (eds.),
The State, Markets and Development, (Aldershot: Wheatsheaf, 1994),
pp. 107-143; on Argentina, Jeremy Adelman, "Post-Populist
Argentina," New Left Review, 203 (1994), pp. 66-91.
This, of course, is seen by some as a virtue, especially for open
economies unused to responsible
fiscal and monetary management.
See for instance, Harold James, International Monetary Cooperation
Since Bretton Woods, (Washington:
IMF/Oxford
University
Press,
1996).
35