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Latin American Debt Crises

Latin American Debt Crises

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Published by rehan firdous

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Published by: rehan firdous on Apr 03, 2010
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Submitted To: - Mr Numar uubmitted By: - TeMBA- 15 CDate : December 2
Latin American Debt CrisesO RIGINS
1.In the 1960s and 1970s many Latin American countries, notably Brazil,Argentina, and Mexico, borrowed huge sums of money from internationalcreditors for industrialization; especially infrastructure programs. Thesecountries had soaring economies at the time so the creditors were happy tocontinue to provide loans. Between 1975 and 1982, Latin American debt tocommercial banks increased at a cumulative annual rate of 20.4 percent. Thisheightened 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 theregion's gross domestic product (GDP). Debt service (interest payments andthe repayment of principal) grew even faster, reaching $66 billion in 1982,up from $12 billion in 1975.
2.When the world economy went into recession in the 1970s and 80s,and oil prices skyrocketed, it created a breaking point for most countries inthe region. Developing countries also found themselves in a desperateliquidity crunch. Petroleum exporting countries – flush with cash after theoil price increases of 1973-74 – invested their money with internationalbanks, which 'recycled' a major portion of the capital as loans to LatinAmerican governments. As interest rates increased in the United States ofAmerica and in Europe in 1979, debt payments also increased making itharder for borrowing countries to pay back their debts. While the
dangerous accumulation of foreign debt occurred over a number of years,the debt crisis began when the international capital markets became awarethat Latin America would not be able to pay back its loans. This occurred inAugust 1982 when Mexico's Finance Minister, Jesus Silva-Herzog declaredthat Mexico would no longer be able to service its debt. In the wake ofMexico's default, most commercial banks reduced significantly or halted newlending to Latin America. As much of Latin America's loans were short-term,a crisis ensued when their refinancing was refused. Billions of dollars ofloans that previously would have been refinanced were now due immediately.3.However, some unorthodox economists like Stephen Kanitz attributethe debt crisis neither to the high level of indebtedness nor to thedisorganization of the continent's economy. They say that the cause of thecrisis was leverage limits such as U.S. government banking regulations whichforbid its banks from lending over ten times the amount of their capital, aregulation that, when the inflation eroded their lending limits, forced themto cut the access of underdeveloped countries to international savings.4.In response to the crisis most nations abandoned their importsubstitution industrialization (ISI) models of economy and adopted anexport-oriented industrialization strategy, usually the neoliberal strategyencouraged by the IMF, though there are exceptions such as Chile and CostaRica 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 regionwas only 2.3 percent between 1980 and 1985, but in per capita terms LatinAmerica experienced negative growth of almost 9 percent.

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