Latin American debt crisis
Encyclopedia
The Latin American debt crisis was a financial crisis
that occurred in the early 1980s (and for some countries starting in the 1970s), often known as the "lost decade
", when Latin America
n countries reached a point where their foreign debt
exceeded their earning power and they were not able to repay it.
n countries, notably Brazil
, Argentina
, and Mexico
, borrowed huge sums of money from international creditor
s for industrialization
; especially infrastructure
programs. These countries had soaring economies at the time so the creditors were happy to continue to provide loans. Between 1975 and 1982, Latin American debt to commercial bank
s increased at a cumulative annual rate of 20.4 percent. This heightened borrowing led Latin America to quadruple its external debt from $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, reaching $66 billion in 1982, up from $12 billion in 1975.
in the 1970s and 80s, and oil price
s skyrocketed, it created a breaking point for most countries in the region. Developing countries
also found themselves in a desperate liquidity crunch. Petroleum
exporting countries – flush with cash after the oil price increases of 1973-74 – invested their money with international banks, which 'recycled'
a major portion of the capital
as loans to Latin American governments. 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. Deterioration in the exchange rate with the US dollar meant that Latin American governments ended up owing tremendous quantities of their national currencies, as well as losing purchasing power. The contraction of world trade in 1981 caused the prices of primary resources (Latin America's largest export) to fall.
While the dangerous accumulation of foreign debt occurred over a number of years, the debt crisis began when the international capital market
s became aware that Latin America would not be able to pay back its loans. This occurred in August 1982 when Mexico's Finance Minister, Jesus Silva-Herzog declared that Mexico would no longer be able to service its debt. Mexico declared that it couldn't meet its payment due-dates, and announced unilaterally, a moratorium of 90 days; it also requested a renegotiation of payment periods and new loans in order to fulfill its prior obligations.
In the wake of Mexico's 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 that previously would have been refinanced, were now due immediately.
The banks had to somehow restructure the debts to avoid financial panic; this usually involved new loans with very strict conditions, as well as the requirement that the debtor countries accept the intervention of the International Monetary Fund
(IMF).
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 U.S. government banking regulations which forbid its banks from lending over ten times the amount of their capital, a regulation that, when the inflation eroded their lending limits, forced them to cut the access of underdeveloped countries to international savings. http://brazil.melhores.com.br/chapter2.html
In response to the crisis most nations abandoned their import substitution industrialization (ISI) models of economy and adopted an export-oriented industrialization
strategy, usually the neoliberal strategy encouraged by the IMF, though there are exceptions such as Chile
and Costa Rica
who adopted reformist strategies. A massive process of capital outflow, particularly to the United States, served to depreciate
the exchange rate
s, thereby raising the real interest rate
. Real GDP growth rate for the region was only 2.3 percent between 1980 and 1985, but in per capita terms Latin America experienced negative growth of almost 9 percent. Between 1982 and 1985, Latin America paid back 108 billion dollars.
The debt crisis is one of the elements which contributed to the collapse of some authoritarian dictatorship
s in the region, such as Brazil's military regime and the Argentine bureaucratic-authoritarian regime.
and debt rescheduling programs agreed to by their international creditors. However, the debt crisis continues to have enduring effects, including the USD 2.94 trillion of Latin American and Caribbean
debt traded globally in 2004, accounting for 63.2 % of total emerging market debt
traded worldwide that year. The following is a list of external debt
for Latin America based on a March 2006 report by The World Factbook
.
Financial crisis
The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these...
that occurred in the early 1980s (and for some countries starting in the 1970s), often known as the "lost decade
La Década Perdida
"La Década Perdida", meaning "the lost decade", is a designation to the financial period of crisis in Latin America during the 1980s...
", when Latin America
Latin America
Latin America is a region of the Americas where Romance languages – particularly Spanish and Portuguese, and variably French – are primarily spoken. Latin America has an area of approximately 21,069,500 km² , almost 3.9% of the Earth's surface or 14.1% of its land surface area...
n countries reached a point where their foreign debt
External debt
External debt is that part of the total debt in a country that is owed to creditors outside the country. The debtors can be the government, corporations or private households. The debt includes money owed to private commercial banks, other governments, or international financial institutions such...
exceeded their earning power and they were not able to repay it.
Origins
In the 1960s and 1970s many Latin AmericaLatin America
Latin America is a region of the Americas where Romance languages – particularly Spanish and Portuguese, and variably French – are primarily spoken. Latin America has an area of approximately 21,069,500 km² , almost 3.9% of the Earth's surface or 14.1% of its land surface area...
n countries, notably Brazil
Brazil
Brazil , officially the Federative Republic of Brazil , is the largest country in South America. It is the world's fifth largest country, both by geographical area and by population with over 192 million people...
, Argentina
Argentina
Argentina , officially the Argentine Republic , is the second largest country in South America by land area, after Brazil. It is constituted as a federation of 23 provinces and an autonomous city, Buenos Aires...
, and Mexico
Mexico
The United Mexican States , commonly known as Mexico , is a federal constitutional republic in North America. It is bordered on the north by the United States; on the south and west by the Pacific Ocean; on the southeast by Guatemala, Belize, and the Caribbean Sea; and on the east by the Gulf of...
, borrowed huge sums of money from international creditor
Creditor
A creditor is a party that has a claim to the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption that the second party will return an equivalent property or...
s for industrialization
Industrialisation
Industrialization is the process of social and economic change that transforms a human group from an agrarian society into an industrial one...
; especially infrastructure
Infrastructure
Infrastructure is basic physical and organizational structures needed for the operation of a society or enterprise, or the services and facilities necessary for an economy to function...
programs. These countries had soaring economies at the time so the creditors were happy to continue to provide loans. Between 1975 and 1982, Latin American debt to commercial bank
Commercial bank
After the implementation of the Glass–Steagall Act, the U.S. Congress required that banks engage only in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S...
s increased at a cumulative annual rate of 20.4 percent. This heightened borrowing led Latin America to quadruple its external debt from $75 billion in 1975 to more than $315 billion in 1983, or 50 percent of the region's gross domestic product
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
(GDP). Debt service (interest payments and the repayment of principal) grew even faster, reaching $66 billion in 1982, up from $12 billion in 1975.
Beginning of the debt crisis
When the world economy went into recessionRecession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
in the 1970s and 80s, and oil price
Price of petroleum
The price of petroleum as quoted in news generally refers to the spot price per barrel of either WTI/light crude as traded on the New York Mercantile Exchange for delivery at Cushing, Oklahoma, or of Brent as traded on the Intercontinental Exchange for delivery at Sullom Voe.The price...
s skyrocketed, it created a breaking point for most countries in the region. Developing countries
Developing country
A developing country, also known as a less-developed country, is a nation with a low level of material well-being. Since no single definition of the term developing country is recognized internationally, the levels of development may vary widely within so-called developing countries...
also found themselves in a desperate liquidity crunch. Petroleum
Petroleum
Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...
exporting countries – flush with cash after the oil price increases of 1973-74 – invested their money with international banks, which 'recycled'
Petrodollar recycling
Petrodollar recycling refers to the phenomenon of major oil-producing states mainly from OPEC earning more money from the export of oil than they could usefully invest in their own economies...
a major portion of the capital
Financial capital
Financial capital can refer to money used by entrepreneurs and businesses to buy what they need to make their products or provide their services or to that sector of the economy based on its operation, i.e. retail, corporate, investment banking, etc....
as loans to Latin American governments. As interest rates increased in the United States of America and in Europe
Europe
Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...
in 1979, debt payments also increased, making it harder for borrowing countries to pay back their debts. Deterioration in the exchange rate with the US dollar meant that Latin American governments ended up owing tremendous quantities of their national currencies, as well as losing purchasing power. The contraction of world trade in 1981 caused the prices of primary resources (Latin America's largest export) to fall.
While the dangerous accumulation of foreign debt occurred over a number of years, the debt crisis began when the international capital market
Capital market
A capital market is a market for securities , where business enterprises and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets...
s became aware that Latin America would not be able to pay back its loans. This occurred in August 1982 when Mexico's Finance Minister, Jesus Silva-Herzog declared that Mexico would no longer be able to service its debt. Mexico declared that it couldn't meet its payment due-dates, and announced unilaterally, a moratorium of 90 days; it also requested a renegotiation of payment periods and new loans in order to fulfill its prior obligations.
In the wake of Mexico's 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 that previously would have been refinanced, were now due immediately.
The banks had to somehow restructure the debts to avoid financial panic; this usually involved new loans with very strict conditions, as well as the requirement that the debtor countries accept the intervention of the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
(IMF).
However, some unorthodox economists like Stephen Kanitz
Stephen Kanitz
Stephen Charles Kanitz is a Brazilian economist, business consultant, lecturer, professor and writer.-Academic life:He holds a D.Sc...
attribute the debt crisis not to the high level of indebtedness nor to the disorganization of the continent's economy. They say that the cause of the crisis was leverage limits such as U.S. government banking regulations which forbid its banks from lending over ten times the amount of their capital, a regulation that, when the inflation eroded their lending limits, forced them to cut the access of underdeveloped countries to international savings. http://brazil.melhores.com.br/chapter2.html
Effects
The debt crisis of 1982 was the most serious of Latin America's history. Incomes dropped; economic growth stagnated; because of the need to reduce importations, unemployment rose to high levels; and inflation reduced the buying power of the middle classes.In response to the crisis most nations abandoned their import substitution industrialization (ISI) models of economy and adopted an export-oriented industrialization
Export-oriented industrialization
Export-oriented Industrialization sometimes called export substitution industrialization or export led industrialization is a trade and economic policy aiming to speed up the industrialization process of a country by exporting goods for which the nation has a comparative advantage...
strategy, usually the neoliberal strategy encouraged by the IMF, though there are exceptions such as Chile
Chile
Chile ,officially the Republic of Chile , is a country in South America occupying a long, narrow coastal strip between the Andes mountains to the east and the Pacific Ocean to the west. It borders Peru to the north, Bolivia to the northeast, Argentina to the east, and the Drake Passage in the far...
and Costa Rica
Costa Rica
Costa Rica , officially the Republic of Costa Rica is a multilingual, multiethnic and multicultural country in Central America, bordered by Nicaragua to the north, Panama to the southeast, the Pacific Ocean to the west and the Caribbean Sea to the east....
who adopted reformist strategies. A massive process of capital outflow, particularly to the United States, served to depreciate
Depreciation (currency)
Currency depreciation is the loss of value of a country's currency with respect to one or more foreign reference currencies, typically in a floating exchange rate system. It is most often used for the unofficial increase of the exchange rate due to market forces, though sometimes it appears...
the exchange rate
Exchange rate
In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency...
s, thereby raising the real interest rate
Real interest rate
The "real interest rate" is the rate of interest an investor expects to receive after allowing for inflation. It can be described more formally by the Fisher equation, which states that the real interest rate is approximately the nominal interest rate minus the inflation rate...
. Real GDP growth rate for the region was only 2.3 percent between 1980 and 1985, but in per capita terms Latin America experienced negative growth of almost 9 percent. Between 1982 and 1985, Latin America paid back 108 billion dollars.
The debt crisis is one of the elements which contributed to the collapse of some authoritarian dictatorship
Dictatorship
A dictatorship is defined as an autocratic form of government in which the government is ruled by an individual, the dictator. It has three possible meanings:...
s in the region, such as Brazil's military regime and the Argentine bureaucratic-authoritarian regime.
Current levels of external debt
Since the 1980 several countries in the region have experienced a surge in economic development and have initiated debt management programs in addition to debt reliefDebt relief
Debt relief is the partial or total forgiveness of debt, or the slowing or stopping of debt growth, owed by individuals, corporations, or nations. From antiquity through the 19th century, it refers to domestic debts, in particular agricultural debts and freeing of debt slaves...
and debt rescheduling programs agreed to by their international creditors. However, the debt crisis continues to have enduring effects, including the USD 2.94 trillion of Latin American and Caribbean
Caribbean
The Caribbean is a crescent-shaped group of islands more than 2,000 miles long separating the Gulf of Mexico and the Caribbean Sea, to the west and south, from the Atlantic Ocean, to the east and north...
debt traded globally in 2004, accounting for 63.2 % of total emerging market debt
Emerging Market Debt
Emerging market debt is a term used to encompass bonds issued by less developed countries. It does not include borrowing from government, supranational organizations such as the IMF or private sources, though loans that are securitized and issued to the markets would be included...
traded worldwide that year. The following is a list of external debt
External debt
External debt is that part of the total debt in a country that is owed to creditors outside the country. The debtors can be the government, corporations or private households. The debt includes money owed to private commercial banks, other governments, or international financial institutions such...
for Latin America based on a March 2006 report by The World Factbook
The World Factbook
The World Factbook is a reference resource produced by the Central Intelligence Agency of the United States with almanac-style information about the countries of the world. The official paper copy version is available from the National Technical Information Service and the Government Printing Office...
.
| Rank | Country - Entity | External Debt (million US$) | Date of information |
|---|---|---|---|
| 22 | Brazil Brazil Brazil , officially the Federative Republic of Brazil , is the largest country in South America. It is the world's fifth largest country, both by geographical area and by population with over 192 million people... |
211,400 | 30 June 2005 est. |
| 24 | Mexico Mexico The United Mexican States , commonly known as Mexico , is a federal constitutional republic in North America. It is bordered on the north by the United States; on the south and west by the Pacific Ocean; on the southeast by Guatemala, Belize, and the Caribbean Sea; and on the east by the Gulf of... |
174,300 | 30 June 2005 est. |
| 29 | Argentina Argentina Argentina , officially the Argentine Republic , is the second largest country in South America by land area, after Brazil. It is constituted as a federation of 23 provinces and an autonomous city, Buenos Aires... |
119,000 | June 2005 est. |
| 39 | Chile Chile Chile ,officially the Republic of Chile , is a country in South America occupying a long, narrow coastal strip between the Andes mountains to the east and the Pacific Ocean to the west. It borders Peru to the north, Bolivia to the northeast, Argentina to the east, and the Drake Passage in the far... |
44,800 | 31 October 2005 est. |
| 43 | Venezuela Venezuela Venezuela , officially called the Bolivarian Republic of Venezuela , is a tropical country on the northern coast of South America. It borders Colombia to the west, Guyana to the east, and Brazil to the south... |
39,790 | 2005 est. |
| 45 | Colombia Colombia Colombia, officially the Republic of Colombia , is a unitary constitutional republic comprising thirty-two departments. The country is located in northwestern South America, bordered to the east by Venezuela and Brazil; to the south by Ecuador and Peru; to the north by the Caribbean Sea; to the... |
37,060 | 30 June 2005 est. |
| 50 | Peru Peru Peru , officially the Republic of Peru , is a country in western South America. It is bordered on the north by Ecuador and Colombia, on the east by Brazil, on the southeast by Bolivia, on the south by Chile, and on the west by the Pacific Ocean.... |
30,180 | 30 June 2005 est. |
| 65 | Ecuador Ecuador Ecuador , officially the Republic of Ecuador is a representative democratic republic in South America, bordered by Colombia on the north, Peru on the east and south, and by the Pacific Ocean to the west. It is one of only two countries in South America, along with Chile, that do not have a border... |
17,010 | 31 December 2004 est. |
| 73 | Cuba Cuba The Republic of Cuba is an island nation in the Caribbean. The nation of Cuba consists of the main island of Cuba, the Isla de la Juventud, and several archipelagos. Havana is the largest city in Cuba and the country's capital. Santiago de Cuba is the second largest city... |
13,100 | 2005 est. |
| 79 | Uruguay Uruguay Uruguay ,officially the Oriental Republic of Uruguay,sometimes the Eastern Republic of Uruguay; ) is a country in the southeastern part of South America. It is home to some 3.5 million people, of whom 1.8 million live in the capital Montevideo and its metropolitan area... |
9,931 | 30 June 2005 est. |
| 81 | Panama Panama Panama , officially the Republic of Panama , is the southernmost country of Central America. Situated on the isthmus connecting North and South America, it is bordered by Costa Rica to the northwest, Colombia to the southeast, the Caribbean Sea to the north and the Pacific Ocean to the south. The... |
9,859 | 2005 est. |
| 85 | El Salvador El Salvador El Salvador or simply Salvador is the smallest and the most densely populated country in Central America. The country's capital city and largest city is San Salvador; Santa Ana and San Miguel are also important cultural and commercial centers in the country and in all of Central America... |
8,273 | 30 June 2005 est. |
| 88 | Dominican Republic Dominican Republic The Dominican Republic is a nation on the island of La Hispaniola, part of the Greater Antilles archipelago in the Caribbean region. The western third of the island is occupied by the nation of Haiti, making Hispaniola one of two Caribbean islands that are shared by two countries... |
7,907 | 2005 est. |
| 95 | Bolivia Bolivia Bolivia officially known as Plurinational State of Bolivia , is a landlocked country in central South America. It is the poorest country in South America... |
6,430 | 2005 est. |
| 98 | Guatemala Guatemala Guatemala is a country in Central America bordered by Mexico to the north and west, the Pacific Ocean to the southwest, Belize to the northeast, the Caribbean to the east, and Honduras and El Salvador to the southeast... |
5,503 | 2005 est. |
| 103 | Honduras Honduras Honduras is a republic in Central America. It was previously known as Spanish Honduras to differentiate it from British Honduras, which became the modern-day state of Belize... |
4,675 | 2005 est. |
| 108 | Nicaragua Nicaragua Nicaragua is the largest country in the Central American American isthmus, bordered by Honduras to the north and Costa Rica to the south. The country is situated between 11 and 14 degrees north of the Equator in the Northern Hemisphere, which places it entirely within the tropics. The Pacific Ocean... |
4,054 | 2005 est. |
| 110 | Costa Rica Costa Rica Costa Rica , officially the Republic of Costa Rica is a multilingual, multiethnic and multicultural country in Central America, bordered by Nicaragua to the north, Panama to the southeast, the Pacific Ocean to the west and the Caribbean Sea to the east.... |
3,633 | 30 June 2005 est. |
| 112 | Paraguay Paraguay Paraguay , officially the Republic of Paraguay , is a landlocked country in South America. It is bordered by Argentina to the south and southwest, Brazil to the east and northeast, and Bolivia to the northwest. Paraguay lies on both banks of the Paraguay River, which runs through the center of the... |
3,535 | 2005 est. |
See also
- La Década PerdidaLa Década Perdida"La Década Perdida", meaning "the lost decade", is a designation to the financial period of crisis in Latin America during the 1980s...
- Developing countries' debtDeveloping countries' debtThe debt of developing countries is external debt incurred by governments of developing countries, generally in quantities beyond the governments' political ability to repay...
- Odious debtOdious debtIn international law, odious debt is a legal theory that holds that the national debt incurred by a regime for purposes that do not serve the best interests of the nation, should not be enforceable. Such debts are, thus, considered by this doctrine to be personal debts of the regime that incurred...
- Sovereign defaultSovereign defaultA sovereign default is the failure or refusal of the government of a sovereign state to pay back its debt in full. It may be accompanied by a formal declaration of a government not to pay or only partially pay its debts , or the de facto cessation of due payments...
Further reading
- Sunkel, Osvald and Stephany Griffith-JonesStephany Griffith-JonesStephany Griffith-Jones is an economist specialising in international finance and development, with emphasis on reform of the international financial system, specifically in relation to financial regulation, global governance and international capital flows...
(1986), Debt and Development Crises in Latin America: The End of An Illusion, Oxford University Press