Transcript LatinAmerica

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?