Latin American debt crisis

Origins

In the 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 regions gross domestic product (GDP). Debt service (interest payments and the repayment of principle) grew even faster, reaching $66 billion in 1982, up from $12 billion in 1975.

Beginning of the Debt Crisis and 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.

While the dangerous accumulation of foreign debt occurred over a span of 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 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.

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 rates, 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.

The debt crisis is one of the elements which 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

Since the 1980s 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.

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