It is no secret that Latin American countries have a turbulent history of economic booms and busts, accompanied by international lending. There have been numerous instances of defaults on these debts. However, no crisis was as widespread and severe as the debt crisis of the 1980s.
The Latin American Debt Crisis spread to virtually all corners of the region having a detrimental effect on many countries. The crisis also had a huge effect on countries beyond the Latin American region. At one point the crisis became so serious that it nearly brought down some of Wall Street’s biggest banks.
As ridiculous as it sounds, most banks had no idea what they were making all of these loans for.
In his 1985 book "Debt Shock" Darrell Delamaide states that approximately 60% of the loans made by U.S banks in the 70s were categorized by “general” or “purpose unknown” or “refinancing”. The threat of an outright default by Latin American debtors had serious implications for these banks. As a result, public concern for the structural soundness and solvency of the international banking system was obviously raised.
Following the debt crisis, many of the major debtor countries adopted stronger measures for structural adjustment in their economies and banks have also strengthened their capital base and boosted their reserves against losses on loans to developing countries.
That's wild that such a huge percent of those loans could be underwritten without a better-defined characterization. I would be curious to see what your thoughts are on Argentina sometime. Check out this Bloomberg segment from today on the Argentine economy: https://www.bloomberg.com/news/articles/2019-02-28/argentina-s-balance-sheet-looks-better-the-real-economy-doesn-t
ReplyDeleteHey Joseph, thanks for reading! I know, it's so hard to believe that banks got away with such behaviour. Have a read of my latest blog post to see my views on how Argentina fared after the Latin American Debt Crisis.
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