Latin American

Debt Crisis 1982

Presented by:-

Hina Khanna 22
Srijeeta Chowdhury 56
Supreet Kaur 57
Pinky Agarwal
Sayan Das 49
Abhay Nair
Mohit Solanki

Introduction
The debt crisis began in the mid-1970s when many of the
Organizations of Petroleum Exporting Countries (OPEC) amassed
wealth, and banks were eager to lend billions of dollars.
The Latin American crisis is often referred to as The Lost Decade
First came into view in 1982 when Mexico announced that it was
unable to pay what it owed when the US imposed stringent
monetary policies
Other developing countries (like Brazil & Argentina) around the
world borrowed large sums of money at low, but floating, interest
rates.
As a result of the irresponsibility of both creditor and debtor
governments, the countries did not use the money for productive
investment; rather, they spent these new dollars on immediate
consumption.
Consequently, these countries had no money to repay their loans.

Causes

Aristocrats controlled the government while the poor had

no voice in these loan matters, nor did they benefit from
them.
The sharp rise in crude oil prices that began in 1973
accelerated this expansion in lending generating
inflationary pressures around the industrial world, these
price movements caused serious BOP problems for
developing nations by raising the cost of oil and of
imported goods.
Interest loans skyrocketed in the early 1980s when the
United States attempted to reduce inflation by enforcing
stringent monetary policies while, at the same time, it also
increased its military spending
By 1983 the region had borrowed from other countries up
to 50% of its GDP or $315 billion
Around the Globe, raw material prices fell sharply, meaning
poor countries had even less money to repay their debts

Countries had to cut spending to decrease their debt and

stabilize their currency
Debt crisis stemmed from a liquidity squeeze
Developing countries, particularly in Latin America, were
also eager to borrow relatively cheap money from the
banks.

Effects
As Latin Americas economies stagnated or experienced negative
growth , per capita income plummeted, poverty increased, and the
already wide gap between the rich and the poor widened
Poverty was 50 percent in growing; malnutrition was 40 percent in
growing;
Children are increasingly recruited into the drug trade and prostitution;
Long-term unemployment and its adverse social effects are increasing;
The weakening of local communities and networks of mutual support
are being destroyed;
The growth of crime and an epidemic of homicides, are but a few of
the many dilemmas that this debt crisis has caused
The per capita GDP of the region fell from 112% to 98%
of the worlds average and from 34% to 26% of that of the
developed countries

The IMF lent money, but on conditions of:privatisation & Removal of tariff barriers switching from
import
substitution to export oriented trade policies
4

Management of the crisis

during the 80s

Debtors to extend finance & part of the countries to go into debt

= ended in an overextension of the international financial
system
Coordination of the creditors- delay or stop the defaults by Latin
America
Mexico defaulted in Aug, 1982
ILLR- function was to stabilize the financial system
Outgrowth of informal measurements by government of the
group of 7 (led by US), some of the larger lending banks, and
multilateral financial organizations especially IMF
IMF coordination with commercial banks negotiation- debtor
country
Adjust economy
Avoiding default- destabilized the international financial system

Phases in the Management of

the crisis
1 Phase : Strategy
of ILLR
August 1982 - September
1985
st

Unprecedented coordination among creditors

Adjustment in the debtor country
Reconstruction of debt service
Active role of official sector government and multilateral institutions

2nd Phase : September 1985 - September 1987

Baker Plan
Annual meeting IMF and World Bank- James Baker new scheme
Recessionary effects of 1st phase - structural adjustment with growth
Identical to 1st phase rescheduling debts due under regular
commercial loan terms and with new money
Continuous & significant erosion of 3 rounds of rescheduling
New role to the world bank relatively passive before
4th round of rescheduling began with Mexico (mid 1986)
More than half of bank loans to Mexico- Brazil, Argentina
Conditions or negotiated cost of credit continued to soften

 3rd Phase : September 1987 - March 1989

Baker Plan (B)
4th round of rescheduling continued
Market based menu approach rescheduling of new loans, discount to
buyback debt, exit bonds below market interest rate, debt swaps &
conversions
Creditors agreed regions bank debt partially unpayable (FV)
New schemes voluntary based on private market principles- without cost
to taxpayers (industrialized countries) & exclude official Paris Club Debt
(ECLAC,1990)

4th Phase : March 1989 to the present

Brady Plan Nicholas Brady (extension of Baker Plan)

Debt reduction operations
Debtor countries- less resources to buyback their debts even in discount
Mobilized loans in equal parts- World Bank, IMF, Govt. of Japan
Debt buybacks or conversion into bonds
Changes in the regulatory and tax regimes of the bank
Sign an adjustment program with IMF
5th round of debt reconstruction
Paris Club (rigid before) -Negotiated reduction up to 50% of
PV of debt reconstruction

12

Lessons Learned
Despite the many warning signs that the LDCs debt level
was unsustainable and that US banks were overexposed to
that debt.
Market participants did not seem to recognize the problem
until it had already erupted.
The result was a crisis that required a decade of
negotiations and multiple attempts at debt rescheduling to
resolve, at considerable cost to the citizens of Latin
America and other LDC countries.

13

Lessons Learned
When a debt crisis hits, the debt needs to be cut
rapidly. The continually failing system to deal with
debt crises bailout loans and austerity is a tool to
protect the lenders, and shift all the burden onto
debtor governments and their people.
Debt crises come from foreign lending and borrowing
in the "good times", whether by private companies,
public sector, or both. Preventing financial crises
requires far less lending and debt between countries.

Conclusion
From the debt strategy the adjustment of the current account
imbalances was rapid and impressive. The total current
account deficit of indebted developing countries fell from $113
billion in 1981 to $38 billion in 1984
The Brady Plan helped to alleviate the debt burden and to
restore confidence in the financial sustainability of many
emerging countries encouraged Foreign Direct Investment
which was limited in the 1980s.
The above reforms including various others gave Latin America
some breathing space but was insufficient
Vulnerability to private markets rose
Prudent fiscal policies, careful debt management aimed at
long-term sustainability, transparent monetary policy,
institutional and judicial reform
10

THANK YOU
151