The Debt Crisis of the 1980s

12 Key excerpts on "The Debt Crisis of the 1980s"

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  International Political Economy and Globalization

  • S Javed Maswood(Author)
  • 2008(Publication Date)
  • WSPC

    (Publisher)

  In this chapter, I will discuss the 83 series of debt crises in terms of the specific causes and international man-agement strategies. The Latin American Debt Crisis The Latin American debt crisis began on Friday, August 13, 1982. On that inauspicious day, the Mexican Finance Minister Jesus Silva-Herzog met with Paul Volcker of the US Federal Reserve Bank and bluntly admitted Mexico’s inability to meet scheduled debt repayments. The crisis spread to other developing countries, in Latin America, Africa and elsewhere, but not, however, to the developing economies in East Asia. The contagion effect was a feature of other crises that followed. The difficulty in debt servicing (interest payments on accumulated debt) in Latin America was brought on by several factors, including higher interest rates, collapse of commodity prices, poor policy choices by debtor countries, and failings within the international banking community. The potential for widespread debt default threatened the viability of the international banking community that had, through the 1970s, increased its exposure in the developing countries. More than 80 percent of total third world debt was owed to about 200 western banks, but about half the debt was owed to only 20 banks, seven from the United States, four from the United Kingdom, three from Germany, three from France, two from Japan, and one from Canada. The vulnerability of the major western financial institutions and the attendant potential for serious eco-nomic disruption was the key to western strategies designed to prevent debt default. The debt, referred to as “sovereign debt” because it was incurred by sovereign countries, had been contracted with private bank which were simply recycling surplus dollars accumulated by the Organization of Petroleum Exporting Countries (OPEC) and deposited in western finan-cial institutions.

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  U.S. Foreign Economic Policy and the Latin American Debt Issue

  • C. Roe Goddard(Author)
  • 2017(Publication Date)
  • Taylor & Francis

    (Publisher)

  Chapter 1

  The International Debt Crisis Enters the 1980s

  The international debt crisis as it unfolded in the 1980s had a disastrous impact on the economies of the Latin American debtors. The debt problems of Mexico, Brazil and Argentina have wreaked havoc on their economies and dramatically reduced the standard of living of their populations. While there is widespread agreement concerning the results of the payments crises, there is considerable disagreement over the original causes.

  It is difficult to attribute the origins of the debt crisis to a single cause. Economics in general and international economics in particular lack the scientific precision that would allow us to recreate the debtor countries’ economic histories, distinguish among and assign weights to national and international economic and social factors, and rank these factors in terms of their positive or negative impacts on a country’s economic health. This inability to identify the causes of the debt crisis with scientific precision, let alone to reach an international consensus on how to address the debt problem, translates into an ongoing debate. The contending parties divide along ideological, national, and organizational lines.

  Even to catalogue the disparate views concerning the causes of the debt crisis is not an easy task. Classification schemes invariably lose much of the richness of the debate. However, for readers unfamiliar with the international debt issue and dynamics of the international financial marketplace as a whole, an exercise of this sort will serve a useful function. Although a virtually unlimited number of factors contributed to the debt problems of Mexico, Brazil and Argentina, they can be clustered into two general sets: national and international.

  National factors

  Many observers emphasize the national economic policies adopted by the Latin American governments, both past and present, as the major source of the debt problem. Those adopting this position trace the seeds of the crisis back to the region's spectacular growth of the 1960s and the desire to maintain that level of growth in the changed international environment of the 1970s. In the period from 1950 until the quadrupling of oil prices in 1973, Latin America was able to achieve a relatively high level of growth. In fact, between the years 1950 and 1980, Latin America’s growth averaged 5.5 percent annually. By the mid-1960s, Latin America’s percentage of world trade hit previously unmatched levels, encouraging further expansion and diversification of the export sector. By the time of the 1973-74 oil crisis, Latin America’s growth rate was higher than that of the industrialized world.1

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  Debt, the IMF, and the World Bank

  Sixty Questions, Sixty Answers

  • Eric Toussaint, Damien Millet(Authors)
  • 2010(Publication Date)
  • Monthly Review Press

    (Publisher)

  In August 1982, Mexico was the first country to announce that it was no longer able to repay. Other heavily indebted countries, such as Argentina and Brazil, followed. This was the debt crisis that rocked all the countries of the South, one after the other. Even countries of Eastern Europe were hit, especially Poland, and a little later Yugoslavia and Romania.

  The debt crisis resounded like a great clap of thunder. The international institutions, whose job it is to regulate the system and prevent crises, didn’t sound the alarm and acted as if everything was fine.

  It will be more difficult for developing countries to manage their debts, however, [current tendencies] do not indicate a general problem.

  —WORLD BANK, Global Development Report , 1981

  Although the World Bank and the IMF knew that clouds were gathering and a typhoon was forming, they didn’t want to advertise the real economic forecast. They wanted to give the major banks some time to pull out without harm.57 This was done with good reason, as the World Bank’s new president was none other than a former top man at one of the most important U.S. private banks, Bank of America, which had lent an arm and a leg to Mexico and Latin America.

  In short, the debt crisis had been caused by two phenomena, which occurred in quick succession: • an enormous increase in the amounts to be repaid, due to the sudden rise in interest rates decided in Washington;

  • an enormous price drop for products exported on the world market by the indebted countries, the proceeds of which were to repay their loans, and a halt in bank loans.58

  All the indebted countries in Africa and Latin America and several Asian countries (such as South Korea), regardless of the type of government, the degree of corruption or of democracy, were confronted with the debt crisis.

  The basic responsibilities are largely on the side of the industrialized countries, their central banks, their private banks, and their stock exchange (Chicago, London) that fix the prices of the raw materials. Corruption, megalomania, and the lack of democracy in the South (see Q10) certainly made matters worse but were not responsible for triggering

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  The Age of Global Economic Crises

  (1929-2022)

  • Juan Manuel Matés-Barco, María Vázquez-Fariñas, Juan Manuel Matés-Barco, María Vázquez-Fariñas(Authors)
  • 2023(Publication Date)
  • Routledge

    (Publisher)

  lost decade in Latin America (1980–1990)

  María José Vargas-Machuca Salido

  DOI: 10.4324/9781003388128-4

  4.1 Introduction

  During the 1970s, a significant number of developing countries used external borrowing as a strategy to boost their economic growth. The abundance of dollars in international financial markets, the inflationary context, the low real interest rates of the time, and the private banks’ own strategic approaches encouraged many developing countries, especially those in Latin America, to borrow money. Most of these operations took the form of short-term, dollar-denominated loans at variable interest rates.

  As discussed in the previous chapter, the oil price rises of 1973 and 1979 led to significant inflationary pressures in most developed economies. The restrictive monetary policies implemented to deal with this situation induced interest rate hikes. As a result, countries indebted in dollars began to find it difficult to meet their debt commitments.

  This marked the beginning of the so-called debt crisis, which had a particular impact on Latin America. The situation exploded in August 1982, when the Mexican government announced a unilateral moratorium on its foreign debt payments. This was to be followed by other countries in the region, triggering a major upheaval in the international financial system. The debt crisis affected, in general, all developing countries. However, only Latin America experienced the lost decade , which is why this episode is often identified with this region and not with other parts of the world.

  The aim of this chapter is to take a closer look at this period of crisis, which, although it had a more intense impact on Latin America, also had repercussions for the world economy as a whole. The chapter is divided into five parts. First, following this introduction, the basic characteristics of debt crises are summarised. After analysing the main factors that caused it in Latin America, we discuss the most significant features of this recession and the consequences that led to the so-called lost decade in the region. This is followed by an analysis of the solutions adopted at the international level to deal with debt problems. Finally, an overview of the effects of the crisis in other parts of the world is provided.

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  Reforming the Reforms in Latin America

  Macroeconomics, Trade, Finance

  • NA NA(Author)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Chapter 4 The great Latin American debt crisis: a decade of asymmetric adjustment* (a) Introduction In the 1980s, Latin America experienced the worst economic crisis since the world-wide depression of the 1930s. A common link running through this crisis was external indebtedness to the international private banking system. The crisis was spawned in the 1970s by a systemic process in which three parties - debtors, private creditors and governments and their multilateral institutions - were protagonists. The debtor party, which included most of the Latin American countries, incurred debt at a pace and at levels that were difficult to sustain: that is, they were guilty of short-sightedness. In effect, debtors fell into the trap of taking the easy way out of their flagging inward-looking development strategy by boosting their spending capacity (for consumption and/or investment) through use of external bank loans. This was a drawn- out, expanding process, which gained increasing momentum between 1976 and 1981. For LACs to incur debt, lenders had to be willing to provide the resources. They showed no reticence to do so; in fact, beginning in the 1970s market dynamics made them very eager lenders. This eager- ness became magnified when they actively sought to transform the abundant financial resources they were attracting from oil producing * Coauthored with Robert Devlin. First published in Gerry Helleiner et al. (eds), Poverty, Prosperity and the World Economy, Macmillan, London, 1995. 69 70 Reforming the Reforms in Latin America countries into LDC loans. Indeed, breaking the norms of traditional banking, they aggressively marketed themselves in the region in search of borrowers. It was during this process that prudential safe- guards and guarantees were gradually relaxed. Banks, then, clearly bore a share of the responsibility in the gestation of the crisis.

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  New Frontiers in Feminist Political Economy

  • Shirin Rai, Georgina Waylen, Shirin Rai, Georgina Waylen, Shirin M. Rai, Georgina Waylen(Authors)
  • 2013(Publication Date)
  • Taylor & Francis

    (Publisher)

  ECONOMIC CRISES FROM THE 1980S TO THE 2010S

  A gender analysis Diane Elson DOI: 10.4324/9781315884745-10

  Introduction

  In August 1982 Mexico announced a moratorium on repayment of its international debts, and what became known as the Latin American debt crisis began. Latin America suffered a ‘lost decade’ and did not recover until into the 1990s. Many Asian countries were not affected and grew rapidly, but in 1997 there was an ‘Asian’ financial crisis, particularly affecting South Korea, Indonesia, Thailand and the Philippines. Growth recovered quite quickly but inequality widened. Just over a decade later, in 2008, there was a global financial crisis, followed in 2010 by a European debt crisis. Three decades after the Mexican moratorium, Greece is the country that cannot repay its debt, with Ireland, Portugal, Spain and Italy also facing repayment difficulties.

  This chapter looks at these crises through a gender lens, with particular focus on the financial liberalization that provoked these crises and the austerity policies that were prescribed as the remedy for them, drawing on both my earlier and more recent writings. I reflect on the evolution of my theoretical frames and the challenges of empirical substantiation of hypotheses that involve the unpaid as well as the paid economy.

  In relation to the Latin American debt crisis, I was concerned to challenge the account given by neoclassical economic theory of the impact of austerity, which only took account of the market economy and paid work. I developed a theoretical frame that also took account of the impact on the non-market economy and unpaid work, and argued that the policymakers’ assumption of a relatively smooth reallocation of resources and resumption of economic growth depended on a hidden implicit assumption that women’s supply of labour was perfectly elastic. In relation to the Asian financial crisis, I extended my frame to include the development of the crisis through the liberalization of the financial system, and the creation and distribution of risks, highlighting the way in which women were implicitly called upon to provide the safety net of last resort. In relation to the European debt crisis, I developed a frame that could more fully take into account the gendered character of the spheres of finance, production and reproduction. Throughout the development of these frames, I was concerned to highlight the gender biases in policies that on the surface might appear to be gender neutral and to contextualize the accounts given by neoclassical economics.

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  Introduction to International Economics

  • Henk Jager, Catrinus Jepma(Authors)
  • 2017(Publication Date)
  • Red Globe Press

    (Publisher)

  9. By the end of the 1980s an acceptable financial position was restored on many bank balance sheets, which gave these banks the ability to deal realistically with their bad debts. Debt instruments for countries with heavy debts were sold at a loss by the banks on the secondary market. Debts were also rescheduled, not only by extend-ing the period of repayment but also in the form of partial remission. This process enabled heavily indebted countries to achieve a substantial improvement in their debt service ratio. The World Debt Crisis 341 10. This chapter on the world debt crisis of the 1980s contains several relevant, ongoing lessons for banks and governments. One such lesson is that countries can go bankrupt, even if they have extensive mineral resources. Furthermore, solvency is not a sufficient condition to prevent a country’s bankruptcy: solvency combined with illiquidity is already risky for a country and may be a trigger to start speculation against the country and to usher in economic collapse. 11. Another lesson is that the risks of banks that operate internationally cannot be over-estimated. The propensity to contagion across debtor countries and the propensity across banks to herd behaviour are at the root of systemic risk. This is strengthened further by the belief that governments – if necessary, with the help of international organizations – will rescue large (or system) banks. Bank equity will hardly ever be sufficient to cope with systemic risk. In this respect the world debt crisis of the 1980s provided some useful lessons for bank behaviour prior to – and governments’ reaction during – the world economic crisis of 2008–09. Questions 1. In the decade 1973–82 there were three years with negative economic growth for the industrial countries, according to Figure 17.1. Show that the frequency is high by tracing the other years since then that this happened.

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  In Good Times Prepare for Crisis

  From the Great Depression to the Great Recession: Sovereign Debt Crises and Their Resolution

  • Ira Lieberman(Author)
  • 2018(Publication Date)
  • Brookings Institution Press

    (Publisher)

  76 Many developing countries faced further combinations of excessive domestic in-flation and overvalued exchange rates that eroded their export competitiveness and implicitly encouraged capital flight into hard currencies. By the end of 1983, capital flight from developing countries, particularly Latin America, was estimated to be in excess of $50 billion. 77 Another problem was that as the low or negative real interest rates in the 1970s suddenly converted to high real rates of interest, investment projects that seemed attractive at the margin suddenly became unprofitable. Moreover, it appears that many investments were disguised forms of public consumption, while still others re-lied on market distortions that concealed low social rates of return. 78 A high rate of expenditure on armaments during this period was a substantial, normally hidden, component of the debt problem. The Stockholm International Peace Research Institute estimated that up to 25 percent of external credits could have been avoided had there been no imports of military technology and hardware during this period. 79 An aspect of these economic strategy and policy decisions that is often obscured by discussions of the debt crisis is that developing countries with relatively fragile econ-omies under the best of circumstances had little room for error. The difficult interna-tional economic environment during the decade of the oil crises narrowed that already thin margin considerably. Those countries that made correct decisions man-aged to ride out the crises. Those that failed to do so were forced to disrupt their debt service and adopt painful austerity programs when bank loans were abruptly cut off. The last major factor contributing to the difficulties of adjustment following the 1979–80 oil crisis was the position of the major suppliers of credit, the banks.

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  Sovereign Debt and the Financial Crisis

  Will This Time Be Different?

  • Carlos A. Primo Braga, Gallina A. Vincelette(Authors)
  • 2011(Publication Date)
  • World Bank

    (Publisher)

  Part II The Effects of the Crisis on Debt 129 6 Debt Sustainability and Debt Distress in the Wake of the Ongoing Financial Crisis: The Case of IDA-Only African Countries Leonardo Hernández and Boris Gamarra T he ongoing financial crisis differs from previous crises that have affected developing countries in recent decades. In particular, it origi- nated in the developed world, in sharp contrast to the debt crisis of the early 1980s, the Tequila Crisis of 1994, and the Asian Crisis of 1997–98, to name just a few. It is also 1 of 4 of the past 122 recessions that included a credit crunch, a housing price bust, and an equity price bust (Claessens, Kose, and Terrones 2008), which implies a more protracted recovery. Finally, it occurred at a time when developing countries had, on average, stronger fundamentals than in previous crisis episodes, as a result of having pursued sound monetary and fiscal policies in previous years. As a result of these factors, most developing countries were not severely affected during the first (that is, financial) phase of the crisis. Only a few countries were affected during this phase, most of them Eastern Euro- pean and Central Asian countries whose banking systems were directly or indirectly exposed (through their headquarters) to the same toxic assets as banks in Europe and the United States or countries that had enjoyed a period of rapid expansion and a real estate bubble in their domestic mar- kets. Developing countries in general were not severely affected during the 130 hernández and gamarra first phase of the crisis, except for a short-lived liquidity squeeze that was resolved by aggressive interventions by central banks around the world. Developing countries have been affected by the sharp fall in export volumes and commodity prices during the second phase of the crisis, which resulted from the decline in aggregate demand in the developed world.

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  The Russian Public Debt and Financial Meltdowns

  • A. Vavilov(Author)
  • 2010(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  These strategic issues became a subject of debt negotiations with the foreign governments that took the role of ‘creditors of last resort’ for the bank- rupting Soviet Empire. The Soviet authorities were neither prepared to begin the radical market reforms, nor had they any consistent strategy to solve the urgent problems of foreign payments. They recognized the seriousness of the problem, but this circumstance aggravated the situation in relation to external debt. In July 1990 Mikhail Gorbachev hinted publicly about the need to restructure the state’s external debts, and this was perceived by creditors and financial markets as an additional negative signal (Gaidar 2006, p. 268). Taking into account the long tradition of deep secrecy in Soviet policy making, an official recognition of severe problems with foreign debt was seen as clear evidence of very big troubles. The fundamental cause of the foreign debt crisis that began in 1990 was the chronic economic crisis of the centralized planned economy. The External Debt Crisis of the 1990s 21 Although it was hidden under official statistics, it clearly manifested from the middle of the 1980s through strengthening shortages and rising black market prices. The bust occurred in 1990, when the Soviet GDP declined by 4 per cent. When the Soviet Union collapsed in the last quarter of 1991, the chronic economic crisis was transformed into a full-scale economic disaster. The fall in industrial production in 1991 was catastrophic – 21 per cent, with GDP falling by 11 per cent. The ruble inflation was accelerating: nominal household incomes increased in that year by 300 per cent, although the CPI growth rate was ‘only’ 160 per cent since retail prices were still under state control. The money overhang ran alongside the debt overhang. In two preceding years, 1990–91, the volume of external debt increased by 26 per cent – by $8.6 billion in 1990 and $12.4 billion in 1991.

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  Available until 4 Dec |Learn more

  Global Political Economy

  Theory and Practice

  • Theodore H. Cohn, Anil Hira(Authors)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  37 At the UNCTAD V conference in 1979 the G77 sought to replace the Paris and London Clubs with an international debt commission more attuned to LDC interests. Although the creditor governments agreed to invite an UNCTAD observer to future Paris Club negotiations, it refused to create such a commission. Thus, the creditors continue to set the rules and procedures for Paris and London Club negotiations.

  Strategies to Deal With the 1980s Debt Crisis

  The debt crisis was more prolonged than expected, and the creditor states and international institutions adopted more activist strategies when milder measures proved to be insufficient. Although the IMF had lost some importance with the collapse of the pegged exchange rate system and the increase in private bank lending in the 1970s, the 1980s debt crisis put it “back at the center of the international financial system, first as a coordinator in a crisis, and then … as a source of information, advice, and warning on the mutual consistency of national policies.”38 The IMF’s central role stemmed largely from the U.S. view that multilateral institutions could best implement DC policies on debt issues. The IMF also could put pressure on LDC debtors and private banks without causing major protests over U.S. government interference. When G7 summit meetings began to address international debt issues in the late 1980s, the major economic powers to a degree replaced U.S. hegemony with collective responsibility for LDC debt problems.39

  The international debt strategies had three major goals: to prevent the collapse of the international banking system, to restore capital market access for debtor countries, and to restore economic growth in debtor states. The strategies to achieve these goals can be divided into four phases:

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  Monetary Economics in Developing Countries

  • Subrata Ghatak, José R. Sánchez-Fung(Authors)
  • 2017(Publication Date)
  • Red Globe Press

    (Publisher)

  First, the fall in aggregate demand in the DCs led to a fall in the terms of trade of developing countries vis-à-vis developed ones as the demand for products exported by developing countries fell sharply. Second, a fall in the demand in developed countries for exports from developing countries reduced the income and the real output of the developing countries. Third, the emergence of the protectionist policies pursued by many developed countries during the recession resulted Table 11.1 ANT to indicate developing countries (billions of US$) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1992 27 9 49 6 38 2 − 8 5 − 43 5 − 39 2 − 23 1 − 50 9 − 57 7 − 66 9 − 16 8 Sources : IMF, World Economic Outlook (1992); Krugman and Obstfeld (1993). ................................................................... 208 Monetary economics in developing countries in further loss of exports for developing countries, worsening their terms of trade even more during 1981–5. 11.6 Policy responses to the debt crisis of 1982 ..................................................................................... Policy responses to the dramatic debt crisis of 1982 have followed the following major avenues: Rescheduling of debt and the extension of new credit. After the debt crisis of August 1982, many smaller banks wanted to stop lending to developing countries, particu-larly to some Latin-American countries, such as Mexico. However, the large American banks decided in favour of ‘rolling over maturing debts’; that is, payments of prin-cipals were postponed and short-term debts were transformed into long-term ones. However, payments of the principal in rescheduled debt were charged extra interest. Also, to cover primary-account deficits in developing countries, banks offered new credit. The IMF played a very significant role in averting the debt crisis of 1982. Developing countries rescheduling debts also borrowed substantially from the IMF.

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