Latin American debt crisis
The Latin American debt crisis (Spanish: Crisis de la deuda latinoamericana; Portuguese: Crise da dívida latino-americana) was a financial crisis 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 American countries reached a point where their foreign debt exceeded their earning power, and they could not 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.[1][2] 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. After 1973, private banks had an influx of funds from oil-rich countries which believed that sovereign debt was a safe investment.[3] 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 banks increased at a cumulative annual rate of 20.4 percent. This heightened borrowing led Latin American countries to quadruple their 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 (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.[4]
History
When the world economy went into
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.[7] 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.[8] The contraction of world trade in 1981 caused the prices of primary resources (Latin America's largest export) to fall.[8]
While the dangerous accumulation of foreign debt occurred over a number of years, the debt crisis began when the international
In the wake of Mexico's sovereign 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, which 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
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 US 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.[15]
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
In response to the crisis, most nations abandoned their
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.[17]
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.[17]
The crisis caused per capita income to drop and also increased poverty as the gap between the wealthy and poor increased dramatically. Due to plummeting employment rates, children and young adults were forced into the drug trade, prostitution and terrorism.[18] Low employment also worsened many problems like crime and generally reduced quality of life in the affected countries. Frantically trying to solve these problems, debtor countries felt constant pressure to repay their debts, increasing the difficulty of rebuilding ruined economies.
Latin American countries, unable to pay their debts, turned to the IMF (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.[19][failed verification] 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.
Latin America's growth rate and living standards fell dramatically due to government austerity plans that restricted further spending, creating popular rage towards the IMF, a symbol of "outsider" power over Latin America.
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.[23][relevant?]
Rank | Country – Entity | External Debt (million US$ ) |
Date of information |
---|---|---|---|
24 | Brazil | 535,400 | 31 Dec 2014 est. |
26 | Mexico | 438,400 | 31 Dec 2014 est |
42 | Chile | 140,000 | 31 Dec 2014 est. |
45 | Argentina | 115,700 | 31 Dec 2014 est. |
51 | Colombia | 84,000 | 31 Dec 2014 est. |
52 | Venezuela | 69,660 | 31 Dec 2014 est. |
60 | Peru | 56,470 | 31 Dec 2014 est. |
79 | Cuba | 25,230 | 31 Dec 2014 est. |
83 | Ecuador | 21,740 | 31 Dec 2014 est. |
84 | Dominican Republic | 19,720 | 31 Dec 2014 est. |
86 | Costa Rica | 18,370 | 31 Dec 2014 est. |
88 | Uruguay | 17,540 | 31 Dec 2014 est. |
93 | Guatemala | 15,940 | 31 Dec 2014 est. |
94 | Panama | 15,470 | 31 Dec 2014 est. |
95 | El Salvador | 15,460 | 31 Dec 2014 est. |
103 | Nicaragua | 10,250 | 31 Dec 2014 est. |
106 | Paraguay | 8,759 | 31 Dec 2014 est. |
108 | Bolivia | 8,073 | 31 Dec 2014 est. |
117 | Honduras | 7,111 | 31 Dec 2014 est. |
See also
- List of Latin American economic crises
- Chilean crisis of 1982
- 1998–2002 Argentine great depression
- South American economic crisis of 2002
- Latin American economy
- List of sovereign debt crises
- Odious debt
References
- ^ a b "Global Waves of Debt: Causes and Consequences". World Bank. Retrieved 13 May 2022.
- ^ Diaz-Alejandro, Carlos F. (1 June 1984). "Latin American Debt: I Don't Think We are in Kansas Anymore". Brookings. Retrieved 13 May 2022.
- ^ a b c Ferraro, Vincent (1994). World Security: Challenges for a New Century. New York: St. Martin's Press.
- ^ Institute of Latin American Studies, The Debt Crisis in Latin America, p. 69
- ^ Gadanecz, Blaise (6 December 2004). "The syndicated loan market: structure, development and implications".
{{cite journal}}
: Cite journal requires|journal=
(help) - ^ "Will the FED Strangle Latin America Again?".
- ^ Schaeffer, Robert. Understanding Globalization, p. 96
- ^ ISBN 978-84-205-2155-8
- ISBN 978-0-88132-083-1.
- ^ Pastor, Robert A. Latin American Debt Crisis: Adjusting for the Past or Planning for the Future, p. 9
- ^ Sachs, J. D. (1989). "New Approaches To The Latin American Debt Crisis".
{{cite journal}}
: Cite journal requires|journal=
(help) - ^ a b Felix, David (Fall 1990). "Latin America's Debt Crisis". World Policy Journal. 7 (4): 733–71.
- ^ Devlin, Robert; Ricardo French-Davis (July–September 1995). "The great Latin American debt crisis: a decade of asymmetric adjustment". Revista de Economía Política. 15 (3).
- ^ Krugman, Paul (2007). International Economics: Theory and Policy. Pearson Education.
- ^ Kanitz, Stephen. "Brazil: The Emerging Boom 1993–2005 Chapter 2". brazil.melhores.com.br. Archived from the original on 5 August 2017. Retrieved 22 February 2009.
- ^ Nassim Nicholas Taleb (2007). The Black Swan: The Impact of the Highly Improbable. Random House.
- ^ a b "Encyclopædia Britannica Online School Edition". Encyclopædia Britannica. Retrieved 21 May 2012.
- ^ Ruggiero, Gregory. "Latin American Debt Crisis: What Were Its Causes And Is It Over?". AngelFire. Retrieved 15 May 2012.
- ^ Ghosh, Jayati. The Economic and Social Effects of Financial Liberalization: A Primer for Developing Countries. Working Paper. United Nations, Department of Economics and Social Affairs, 2005.
- ^ "Latin American debt crisis". ABC-CLIO. Retrieved 22 May 2012.
- S2CID 144458701.
- ^ Palma, Gabriel. The Three Routes to Financial Crises: The Need for Capital Controls. SCEPA Working Paper. Schwartz Center for Economic Policy Analysis (SCEPA), The New School, 2000.
- ^ The World Factbook, 2015
Further reading
- Signoriello, Vincent J. (1991), Commercial Loan Practices and Operations, Chapter 8 Servicing Foreign Debt, Latin American Debt Crisis, Performing a Vital Service, ISBN 978-1-55520-134-0.
- Signoriello, Vincent J. (1985, Jan–Feb) International Correspondent Banker Magazine, London, England, Performing a Vital Service, The Future for Debt Rescheduling, 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.
- Pastor, Manuel (1993). "15: Managing the Latin American Debt Crisis: The International Monetary Fund and Beyond". In Gerald A. Epstein; Julie Graham; ISBN 978-1-56639-054-5.