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Latin American Crisis of the 1980s
“The Lost Decade”
Econ. 462
Nov. 24, 2009
Edward Kulow
John Magallanes
Yojasi Lomas
Conditions Prior to the Crisis
History of L.A. Debt Crisis
• Post WWII
• Under Bretton Woods Agreement (1944)
- International Monetary Fund (IMF)
• Economic Policy
- Import Substitution Industrialization Model
Continued . . . .
• Economic Growth
- Eurodollar Market
- Early 1970s - Latin American exports increase
• Western Banks Fund Expansion
Private Financing by Commercial Banks vs. IMF
- 33% of all financing by 1973
-~50% of all financing by 1976
- 70% of all financing by 1980
Continued . . . .
• Oil Prices increase after 1973 (see graph)
- Petro – Dollar
• US Dollar strengthened in late 1970s due to
high interest rates (see graph)
Continued . . . .
• Oil Prices increase after 1973 (see graph)
- Petro – Dollar
• US Dollar strengthened in late 1970s due to
high interest rates (see graph)
Inflation and Interest Rates since
1970
- Inflation
-U.S. Interest
Rates
Contributing Factors
Between 1973-1983 external debt rose from
$48 billion to about $350 billion (see graph)
(about 58% of Gross Regional Product)
• Latin American Crisis – August 1982
- Mexican Finance Minister Jesus Silva-Herzog
L.A.C. Balance of Foreign Debt
(In Millions)
Conditions During the Crisis
What happened?
• Global Economy slows into Recession
• Debt Service
- $12 Billion in 1975
- $66 Billion by 1983
• Banks react to Mexico’s announcement
- Lending Freezes
- All loans due immediately!
Continued . . .
• Situation Worsens
- Domino Effect by Oct. 1983 (16 Nations)
- Big 4 (Mexico, Brazil, Venezuela, Argentina)
owe about $176 Billion (50% of debt)
- $37/$176 Billion owed to 8 largest U.S. banks
(representing 147% of capital reserves)
Conditions After the Crisis
Steps to Alleviate Debt Crisis
• Bridge Loans
- Permitted countries to pay interests only!
• Debt-Equity Swap
- Transfer of loan to another bank or 3rd party
• Restructuring
- Extension of terms or payment schedules
• Securitization of Loans
- Brady Plan
• IMF Restrictions
Brady Plan
• Securitization of sovereign debt
- 1989 Nicholas Brady U.S. Sec. of Treasury
- Converted loans into bonds backed by U.S.
T-bonds (available to general public)
IMF Restrictions
• Conditional Lending
– Increase in Interest Rates to Increase F.D.I.
– Devalue Currency to Increase NX
– Decrease Government Spending (no subsidies)
– Privatization to relief financial burden
– Stabilizes Index Prices & Wages to control inflation
– Removal of Tariff Barriers
(from Import Substitution Industrialization Policy
to Export Oriented Trade Policy)
L.A.C. Balance of Foreign Debt
(In Millions)
Conditions Today
Where Does L.A. Stand Now?
Continued . . .
Recent trends in Latin America's
Fiscal Performance (OECD)
• Since the end of the debt crisis of the 1980s,
Latin American Countries have:
– reduced deficits
– lowered fiscal volatility
– increased public expenditure and pioneered fiscal
innovations.
• However, important problems remain:
– revenue generation relies on volatile non-tax
sources and regressive indirect taxes, while public
spending and social transfers play a very limited
Any Questions?