Financial & Economic Crisis

Debt Crisis in Latin America

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 American countries reached a point where their foreign debt exceeded their earning power and they were unable to repay it.

Origins

During 1960s and 1970s many Latin American countries, notably Brazil, Argentina, and Mexico, borrowed huge sums of money from international creditors 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 banks 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 including 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 and its effects

When the world economy went into recession in the 1970s and 80s, and oil prices 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 and in Europe in 1979, debt payments also increased making it harder for borrowing countries to pay back their debts. While the dangerous accumulation of foreign debt had occurred over the years, the debt crisis began when the international capital markets became aware that Latin America would not be able to pay back its loans. This occurred in August of 1982 when Mexico's Finance Minister, Jesus Silva-Herzog declared that Mexico would no longer be able to service its debt. In the wake of Mexico's default, most commercial banks reduced significantly or halted new lending to Latin America. As most 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.

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 neo-liberal strategy encouraged by the IMF, although 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 rates, thereby raising the real interest rate. Real GDP growth rate for the region was only 2.3 percent during 1980-1985, but in per capita terms Latin America experienced negative growth of almost 9 percent.

The debt crisis was one of the factors that contributed to the collapse of some authoritarian dictatorships in the region, such as Brazil's military regime and the Argentine bureaucratic-authoritarian regime.

Current levels of external debt in Latin America

Since 1980 several countries in the region have experienced a surge in economic development and have initiated debt management programs in addition to debt relief 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 markets 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.

Rank
Country

External Debt
(million US$)
Information date
22
Brazil
211,400
30 June 2005 est.
24
Mexico
174,300
30 June 2005 est.
29
Argentina
119,000
June 2005 est.
39
Chile
44,800
31 October 2005 est.
43
Venezuela
39,790
2005 est.
45
Colombia
37,060
30 June 2005 est.
50
Peru
30,180
30 June 2005 est.
65
Ecuador
17,010
31 December 2004 est.
73
Cuba
13,100
2005 est.
79
Uruguay
9,931
30 June 2005 est.
81
Panama
9,859
2005 est.
85
El Salvador
8,273
30 June 2005 est.
88
Dominican Republic
7,907
2005 est.
95
Bolivia
6,430
2005 est.
98
Guatemala
5,503
2005 est.
103
Honduras
4,675
2005 est.
108
Nicaragua
4,054
2005 est.
110
Costa Rica
3,633
30 June 2005 est.
112
Paraguay
3,535
2005 est.

 

 

 
This article uses material from the Wikipedia article "Latin American Debt Crisis"

 

 

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