Thursday, 7 February 2019

Finding The Lost Decade





The Latin American Debt Crisis is often referred to as the 'Lost Decade' or for those of you who are linguistically talented 'Crisis de la deuda Latinoamericana'. In the 1980's Latin American countries were in a position where their foreign debt exceeded their earning power so much so that they were unable to repay their foreign debt. This resulted in the Latin American Debt Crisis which has been described as the most traumatic economic event in Latin America’s economic history.

Before there can be a debt crisis, there must be an accumulation of debt.To fund industrialisation throughout the 1970s Latin American countries, mainly Mexico, Argentina and Brazil borrowed heavily from international creditors. Pre 1970s, there was not much international lending to Latin America as most countries in the region had defaulted on their debt back in the 1930s. However, there are 3 changes that I consider to be the main catalysts in fuelling the expansion of debt during the 1970s:
  1. Increasing oil prices led Middle Eastern countries to deposit new revenue in European banks, leading to a dramatic expansion in the eurodollar market.
  2. The innovation of loan syndication allowed banks to spread lending risk across many financial institutions. This meant banks were less worried about lending money to Latin American countries.
  3. Banks began using floating rate loans where the interest rate on loans depended on market conditions in rich countries. This reduced the risk that banks would have to pay depositors higher rates than they were receiving on their loan portfolio.
You may be wondering what changed to turn this debt accumulation into a debt crisis?  Well, circumstances took a turn as the world economy went into depression. Oil prices rose immensely by almost 300%. Most Latin American countries were importers of oil, so they had to bear this huge increase in import costs. After the economy slowed down their currencies depreciated, the amount that had to be repaid was increasing as their currency depreciated. International lenders of money began raising their interest rates in an attempt to bring down inflation. This caused an entire economic stagnation in Latin American countries as 65% of government debt in the region was tied to LIBOR, meaning their debt burden increased as interest rates increased.

In 1982 Mexico announced that it was unable to repay its financial debt in time. The video below shows how this announcement posed a large threat to the financial system. After Mexico's announcement, dozens of other countries followed suit. Mexico, Argentina, and Brazil together were about $200 billion in debt. The IMF agreed to lend money to Latin American countries in an attempt to help them to recover from this debt crisis. However, the loans were given on the conditions of privatisation and the removal of trade barriers.

                                                                

I am extremely interested in exploring this financial crisis further as it is an area that I have never covered in my studies to date. I want to learn more about the consequences of this crisis for the U.S and Latin American countries. I also want to uncover what we can learn from this crisis today. If you have an interest in exploring this financial crisis with me feel free to give my blog a follow.

1 comment:

  1. Thanks for writing this, Louise. I am assessing the current status of the Mexican peso, and the history is helpful.

    ReplyDelete

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