Financia Presented by :-TEAM 3

l Crisis
 Team 3
 NAME Roll no.
Abhinav Shukla (01)
Pranav Prashant (32)
Ronak Doshi (39)
Ruchi (40)
Sneha Verma (47)
Subhasree Sahoo (49)
Swaroop C Mohan (52)
Swati Bhardwaaj (53)
Lost Decade
Latin American Debt
Crisis
Introduction

Occurred in 1970s and 1980s.


Occurred when debt obligation of Latin
American countries exceeded their
earning capacity.

Background (1970s)
PETRO-DOLLAR
RECYCLING

In 1973 oil prices quadrupled


OPEC deposited huge amounts in
banks


Bank 'recycled' deposits as loans to
Latin American governments.

Crisis (early 1980s)
Due to American monetary policy
 Interest rates rose and Dollar become
stronger.
 Demand for their exports fell.

1975 to1982: Debt increased @ 20.4 %

pa.
 LOAN: $70 bn (1975) $340 bn (1983)
 DEBT SERVICES: $12 bn (1975) $66 bn (1982)


August 1982 Mexico defaulted to service

its debt
 Recovery strategies:
Debt Restructure (1983 to
1989)
 MUDDLING THROUGH:


IMF and World bank’s rescue loans


Loans with conditionality

 THE BAKER PLAN


1985 by US Treasury Secretary James Baker



Based on the assumption of illiquidity



Targeted 15 countries for $29 billion of new

money
 $20 billion (commercial banks)
 $9 billion (IMF and World Bank)


 Recovery Strategies:
Debt Reduction (1989)
BRADY BONDS


1989 by US Treasury Secretary Nicholas

Brady


Indebted countries bought their own debt

 Debt buy-back and debt-equity swap


It aimed to:

 – decreasing the face value of debt
 – extending the time period of
obligations
 – Infusion of new money
End of Crisis
In 1991, capital inflows > outflows for the
first time since the onset of the debt
crisis.


Mexico was the first country to retire its
Brady bonds in 2003.


Ecuador was the only one country that
defaulted on Brady Bonds.

Causes of crisis
Weak fiscal policies.

Oil prices sky-rocketed leaving a liquidity
crunch.

Recession in World economy.

Short term loans at high rate of interest.

Interest rates increased.

Debts were used for non-productive
Contraction of export

Stronger dollar

Capital flight

Commercial banks stopped new money
that created difficulty in refinancing of
loans

Floating interest rates
Year loan amount(in $bn) Growth rate
1970 25
1971 25 0.00%
1972 30 20.00%
1973 40 33.33%
1974 60 50.00%
1975 70 16.67%
1976 80 14.29%
1977 120 50.00%
1978 150 25.00%
1979 190 26.67%
1980 220 15.79%
1981 280 27.27%
1982 330 17.86%
1983 350 6.06%
1984 370 5.71%
1985 380 2.70%
1986 420 10.53%
1987 480 14.29%
1988 450 -6.25%
 Gross Domestic Product    (Average Yearly Growth) 
  1965-80 1980-90  % change
Argentina  3.4  -0.4  -111.76%
Bolivia  4.4  -0.1  -102.27%
Brazil  9.0  2.7  -70.00%
Congo  6.2  3.6  -41.94%
Cote d'Ivoire  6.8  0.5  -92.65%
Ecuador  8.8  2.0  -77.27%
Mexico  6.5  1.0  -84.62%
Morocco  5.7  4.0  -29.82%
Nicaragua  2.5  -2.2  -188.00%
Peru  3.9  -0.3  -107.69%
Syria  9.1  2.1  -76.92%
Venezuela  3.7  1.0  -72.97%
Averages  6.3  1.7  -73.02%
 Conclusion


Recovery from crisis long and painful



Strong economic fundamentals matters.
