1982 Mexican Financial Crisis

1982, 2001 Donald J. Mabry

The purposes of this presentation are limited just as its contents are tentative. One goal is to
outline the chronology of the Mexican financial crisis By doing so, it may help
one,understand better what has happened in Mexico in 1982. The other purpose is to
suggest some of the consequences of the crisis for the United States. Mexicans will pay the
greatest price for the fiscal mismanagent by and greed of a few but U.S. citizens will also
pay.
One fundamental problem for the Mexican economy is that it is a satellite of the United
States economy. Mexico is the third largest trading partner of the United States, which buys
over 65% of Mexico's exports and accounts for a similar percentage of Mexico's imports.
Tourism from the United States and border transaction produce billions of dollars for Mexico
even after subtracting the large amounts spent by Mexican tourists in the United States
Remittances by Mexicans working tn the U.S. contribute more billions to the Mexican
economy. More subtle, perhaps, but of critical importance to the financial crisis is that
Mexico borrows extensively from US citizens.
The US economy has been sick and the germs have spread southward with a marked
virulence. Mexico has caught pneumonia from the US head cold. The US recession
eventually caught up with Mexico, which had previously countered international trends in
1977-1981 by increasing its gross domestic product by an average of 7% a year. As interest
rates rose, money supplies contracted, inventories grew, and unemployment increased in
the United States. The US purchased less and charged more for its exports. The cost to
Mexico of imports and capital increased sharply while the value of its exports fell. For more
than a year, the prices of petroleum, silver, coffee, cotton, copper and other important
Mexican exports declined. In 1981, for example, Mexico projected some $20 billion in oil
revenues but received about $12 billion. This year brought similar short-falls as petroleum
prices continued to decline. The value of tourism to Mexico fell some $900 million. The
staggering budget deficit programmed by the Reagan administration and Congress and the
decision of the Federal Reserve System to charge more for money drove interest rates up
(the prime rate went up to 17%) and increased Mexico's debt burden by some $2.5 billion.
The Mexican government, for its part, had chosen an economic development strategy which
increased its exposure to the ills of the United States economy. It borrowed extensively from
foreign, principally US sources to finance investments in infrastructure and industry, social
services, and debt service. The projected national budget of 1982 called for 34% of its
revenues to come from borrowing. Mexico gambled that its income from tourism and
exports, particularly petroleum, would enable it to service its debt and that banks, cognizant
of Mexico's position as a major oil power, would continue to rollover the debt if difficulties
developed. The very size of the debt which was approximately $70 billion in January,
1982.and some $80 billion in October, seemed to demand cooperation from international
bankers. After all, the United States and others had anguished for months about possible
default on the Polish national debt of $25 billion, puny compared to Mexico's.
Mexico lost this gamble, The United States government raised the cost of dollars to slow
down the rate of inflation and, in the process, inflated the Mexican economy, which
depended so much on borrowing. Interest costs to both. the public and private sectors of
Mexico skyrocketed.. In 1978, these charges had been $2.606 billion; in 1981, they were
$8.2 billion. They continued to climb in 1982. The Mexican economy, already heated up by

President Jos Lpez Portillo's policies, overheated. By January, 1982, Mexican economists
were projecting a 60% inflation rate for 1982. Trying to obtain enough dollars to service the
foreign debt became critical.
Private citizens in Mexico had not been as optimistic as their government and had been
taking steps to insure the integrity of their wealth. They began switching from pesos to
dollars. In January, 1982, they had $9 billion deposited in bank accounts in Mexico; by
August, they had converted another $3 billion from pesos to dollars and stashed them in
such accounts. Ninety percent , of the bank accounts in Mexico were in dollars even though
peso accounts paid 23% higher interest. Less optimistic Mexicans sent money out of the
country or never brought it in. By July, 1982, some $14 billion had gone into foreign bank
accounts and another $25 billion invested in US real estate. Some $6 billion was invested in
Texas alone and Texas banks held $16 billion in accounts. It is perhaps no coincidence that
the recent downturn in the Texas economy paralleled Mexico's financial troubles in August.
Mexicans were betting that the peso would be devalued and, in February, the government
did so. On February 17th, the Banco de Mxico allowed the peso to float; the devaluation
that followed eventually amounted to 43%. Besides stimulating exports, the government
hoped that devaluation would slow capital flight. The government also cut its own spending
and put a price freeze on fifty additional items to mitigate the effects of the subsequent
inflation. In March., to pacify workers, the government granted its employees pay raises
ranging from 10-30%, retroactive to February 18th. Private employers normally follow suit.
The difficulties in which Mexico was finding itself can be illustrated by the experience of the
Grupo Industrial Alfa, the largest private business in Mexico. This Monterrey conglomerate
owned a variety of enterprises including steel mills, breweries, food processing plants, and
tourist facilities, The company bit off more than it could chew and lost $124 million in 1981
and forecast losses of $304 million in 1982, considerable amounts for a $1.9 billion
company. Alfa had also borrowed extensively and was having trouble servicing its debt. On
April 21st, the company announced that it was suspending payment on the $2.3 billion debt
principal owed to domestic and foreign banks. On April 30th, its representatives met in
Houston with representatives of 135 US banks to discuss solutions to the debt problem. The
February peso devaluation had increased the company's dollar debt by $140 million, more
than it could bear.
US banks were also vulnerable. Citibank and Continental Illinois had each loaned $100
million to Alfa. On August 5th, the company proposed a six-month suspension on 70% of the
interest payments on its debt. So, by April, Mexico's largest private enterprise was close to
bankruptcy; its shakiness certainly must have encouraged capital flight.
The Mexican government continued to cut back its expenditures but attempted no drastic
measures, perhaps because elections were to be held in July. By the end of April, the national
budget had been cut 8%; in May, the expensive nuclear energy program was suspended. In
August, continued capital flight and shortfalls in dollar reserves forced the government to
act. On August 5th, the peso was again devalued, bringing the total decline in the value of
the peso in 1982 to 67%. In addition, the government created a two-tier exchange system.
To pay international debts and pay for necessary imports, the exchange rate would be 49
pesos to the dollar. For non-essential imports, the rate would be 69.5 to the dollar. On
August 12th, the government ordered all bank accounts to be paid out in pesos, thus
"freezing" the accounts and eventually recapturing the $12 billion deposited. Trading in
foreign currency was suspended, To offset criticism, income taxes were lowered but the
government also raised the prices of the basic consumer commodities it had been
subsidizing, thus passing some of its financial burden to the consumer. On August 20th, the

government got a 90-day extension on repayment of short- and medium term-loans from
115 international banks. Dollar flight was temporarily halted and the government had
bought time to negotiate foreign banks
President Lpez Portillo took drastic steps to reorganize the Mexican financial system with
one decisive blow. On September 1st, he nationalized all private, Mexican banks and
converted the Banco de Mxico into a decentralized government agency. Strict currency
controls were adopted. The president accused Mexican financial speculators, aided and
abetted by these banks, of having looted the country and brought the nation close to
financial collapse by withdrawing some $50 billion from the economy (the Mexican GNP in
1981 was $120 billion). Henceforth, the government would control domestic credit, and, of
course, the flow of dollars. Some 80% of the economy was now in government hands, a
situation which would force the international bankers to cooperate with Mexico. On
September 6th, Mexico suspended payment on all debt principal until the end of 1983.
Washington, for its part, has little choice but to help Mexico. It started helping in August by
making a $1 billion advance payment for petroleum and by arranging a near one bi ion
dollar loan from the Commodity Credit Corporation. Mexico's importance to the US as a trade
partner means that the US needs a healthy Mexico. Congress was considering ways to stop
the flow of illegal aliens, most of whom are Mexican, but any hope of expelling those
currently in the US were dashed because Mexico needed the $4-7 billion they remit each
year. Equally, if not more, important for US policy is the fact that the nine largest banks, in
the United States had the equivalent of 40% of their capital and reserves loaned to Mexico.
If Mexico defaulted, these banks would collapse and other countries might default as well.
The United States has little choice but to cooperate with Mexico and perhaps there is justice
in that. It was US tight money policies that squeezed Mexico and the bad judgment of US
bankers in continuing to loan money to Mexico that contributed to the crisis.
New president Miguel de la Madrid took office on December 1st and had to clean up the
mess left by his predecessor's irrationality. Most of what Lpez Portillo had done in August
was reversed. Mexico could not continue those policies if it wanted foreign investment.
11101

To understand the nature of the financial crisis of Mexico in the 1980's it is

necessary to consider what was happening in the petroleum industry in the
1970's and the effect those events had on the world's economies in the 1980's. The
story of the emergence of the industries for finding, refining and marketing
petroleum is told elsewhere. By the 1960's the countries of the Middle East
decided that they wanted a bigger share of the value of the petroleum that
multinational oil companies had found in their countries. Those countries and
others formed in 1960 the Organization of Petroleum Exporting Countries
(OPEC) to try to create a cartel. Not all petroleum exporting countries joined
OPEC. In particular, the Soviet Union and Mexico did not join. OPEC was
largely ineffective in gaining any larger payment from the petroleum being

produced in their countries until about 1973. In 1973 the Shah of Iran led a
movement to increase the price of petroleum by several hundred percent. In
order to increase the price of petroleum OPEC would have to reduce the amount
which was being put on the market. It was not easy to arrange a cutback in
production because most of the countries in OPEC wanted to sell more if the
price was going to be higher rather than less. The petroleum-exporting countries
which were not in OPEC would expand their production in response to any
higher price. This is why it took from 1960 to 1973 for OPEC to have an impact
on the price of petroleum. The cutback in production and price rise in 1973 only
was possible because Saudi Arabia agreed to take the lion's share of the cutbacks.
With the rise in petroleum prices in the mid1970's came a flood of dollars to
the petroleum-exporting countries, OPEC countries and non-OPEC countries. In
some of those countries there was more funds available than could be utilized
within the country so the excess was channeled into American and Western
European banks where they were known as petrodollars. The banks in turn were
flooded with petrodollars and were scrambling to find places to put the money to
work to earn interest.
Countries such as Mexico which were petroleum exprters found it very easy to
gain loans. the Government of Mexico found that it not only had vastly more
revenue from its petroleum exports but it also could borrow vast amounts from
international banks. Mexico has a great need for capital investments, both public
and private. With the aboundance of funds that were available there seemed to
be no need to turn down any investment project.
Many projects were funded of doubtful validity; i.e., some projects were not
well conceived or properly executed. Some, even if they were honestly
administered, would not generate more benefits than their costs. Some projects
were executed to allow bad economic policies to continue. For example, Mexico
City had a problem with water shortage and water development projects were
created to bring water to Mexico City from farther and farther away. The real
problem is that residential water use in Mexico City was not metered. Residents
paid a flat fee and the fee did not go as they used more and more water. There
was nothing to discourage middle and upper income families from creating
landscaping that required vast amounts of water. To make matters worse the
more water the city used the more waste water there was to dispose of. Mexico
City lies at the bottom of a basin so the waste water had to be pumped uphill to
dispose of it. This required electrical power.
The policy of providing water to Mexico City residents at zero marginal cost is
a bad policy. Solution is to install water meters to impose the real cost of water on

the users. The solution definitely was not one of paying for more and more
expensive water to market to the residents at zero marginal cost. Yet that was
what Mexico was doing in the late 1970's.
The rise in petroleum prices became even larger in 1979 when the Iranian
Revolution took Iran's petroleum production off the market for a few years. That
price rise accelerated Mexico's borrowing. Mexico's debt mounted and the
interest payments on it grew. This did not seem to be a problem.
Suddenly Paul Volcker, the Chairman of the Board of Governors of the
Federal Reserve Bank of the United States, implement a new, tight monetary
policy. The rise in petroleum prices drove up the rate of inflation. Moderate
measures of anti-inflation policy were not working and so Paul Volcker decided
to institute strict monetarist monetary policy no matter what happened to
interest rates. Restrictions on the growth rate of the money supply brought the
prime interest rate, the interest rate banks charge their best commercial
customers, from a level of about twelve percent to a level of about 24 percent.
Borrowers who had adjustable or floating interest rate loans found suddenly that
their interest payment had doubled.
One of the borrowers who had escalating interest payments was Mexico. At the
same time that Mexico's interest costs went up its income from petroleum sales
started to go down.
The quantity of petroleum supplied to the market went up due to, in part,
Iranian production coming back on the market. Non-OPEC countries were
expanding their production. The price of petroleum began to fall.
There were two other effects of Volcker's tight monetary policy that affected
Mexico. The high interest rates in the U.S. discouraged investment and produced
a recession. It is said that when the U.S. economy catches a cold the economies of
its Third World trading partners come down with pneumonia. The recession in
the U.S. produced a downturn in the economy of Mexico. Furthermore, the high
real interest rates in the U.S. encouraged those with investible funds to convert
them into dollars for investment in the U.S. financial markets. The end result is
that the value of the dollar increased with respect to foreign currencies such as
the Mexican peso. If the loan payments for Mexico were denominated in dollars
then the decreased value of the peso with respect to the dollar meant that it took
more pesos make the same dollar payment. With increased dollar payments to
cover the higher interest rates it meant a lot more pesos were required. In 1982
Mexico was in deep financial crisis.

To be continued.

HOME PAGE of Thayer Watkins

The cost to Mexico of imports and capital increased sharply while the value of its exports
fell. For more than a year, the prices of petroleum, silver, coffee, cotton, copper and other
important Mexican exports declined. In 1981, for example, Mexico projected some $20
billion in oil revenues but received about $12 billion. This year brought similar short-falls as
petroleum prices continued to decline. The value of tourism to Mexico fell some $900
million. The staggering budget deficit programmed by the Reagan administration and
Congress and the decision of the Federal Reserve System to charge more for money drove
interest rates up (the prime rate went up to 17%) and increased Mexico's debt burden by
some $2.5 billion.
The Mexican government, for its part, had chosen an economic development strategy which
increased its exposure to the ills of the United States economy. It borrowed extensively from
foreign, principally US sources to finance investments in infrastructure and industry, social
services, and debt service. The projected national budget of 1982 called for 34% of its
revenues to come from borrowing. Mexico gambled that its income from tourism and
exports, particularly petroleum, would enable it to service its debt and that banks, cognizant
of Mexico's position as a major oil power, would continue to rollover the debt if difficulties
developed. The very size of the debt which was approximately $70 billion in January,
1982.and some $80 billion in October, seemed to demand cooperation from international
bankers. After all, the United States and others had anguished for months about possible
default on the Polish national debt of $25 billion, puny compared to Mexico's.

1994 economic crisis in Mexico

From Wikipedia, the free encyclopedia

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citations to reliable sources. Unsourced material may be challenged and removed.(December 2007)

History of Mexico

Pre-Columbian

Spanish rule[show]

First Republic[show]

Second Federal Republic[show]

1864 1928[show]

Modern[hide]

Maximato (19281934)

Petroleum nationalization

Mexican miracle

Students of 1968

La Dcada Perdida

1982 economic crisis

Zapatista insurgency

1994 economic crisis

PRI downfall

Mexican Drug War

Timeline

The 1994 economic crisis in Mexico, widely known as the Mexican peso crisis or the Tequila crisis, was
caused by the sudden devaluation of the Mexican peso in December 1994.
The impact of the Mexican economic crisis on the Southern Cone and Brazil was labeled the "Tequila effect"
(Spanish: efecto tequila).
Contents
[hide]

1 Precursors
o

1.1 Crisis
2 Financial assistance package
3 See also
4 References
5 External links

[edit]Precursors
The crisis is also known in Spanish as el error de diciembreThe December Mistakea term coined by
outgoing president Carlos Salinas de Gortari in reference to his successor Ernesto Zedillo's sudden reversal of
the former administration's policy of tight currency controls. While most analysts agree that devaluation was
necessary for economic reasons,[who?] Salinas supporters argue that the process was mishandled at the political
level.
The root causes of the crisis are usually attributed to Salinas de Gortari's policy decisions while in office, which
ultimately strained the nation's finances. As in prior election cycles, a pre-election disposition to stimulate the
economy, temporarily and unsustainably, led to post-election economic instability. There were concerns about
the level and quality of credit extended by banks during the preceding low-interest rate period, as well as the
standards for extending credit.

The country's risk premium was affected by an armed rebellion in Chiapas, causing investors to be wary of
investing their money in an unstable region. The Mexican government's finances and cash availability were
further hampered by two decades of increasing spending, a period of hyperinflation from 1985 to 1993, debt
loads, and low oil prices. Its ability to absorb shocks was hampered by its commitments to finance past
spending.
Economists Hufbauer and Schott (2005) from the Institute for International Economics have commented on the
macroeconomic policy mistakes that precipitated the crisis:

1994 was the last year of the sexenio, or six-year administration of Carlos Salinas de Gortari who,
following the Partido Revolucionario Institucional (PRI) tradition on an election year, launched a high
spending splurge and a high deficit.

To finance the deficit (7% of GDP current account deficit), Salinas issued the Tesobonos, a type of
debt instrument denominated in pesos but indexed to dollars.

Mexico experienced lax banking or corrupt practices; moreover, some members of the Salinas family
collected enormous illicit payoffs.

The EZLN, an insurgent rebellion, officially declared war on the government on January 1; even
though the armed conflict ended two weeks later, the grievances and petitions remained a cause of
concern, especially amongst some investors. [1]

Macroeconomics 5th Edition by N. Gregory Mankiw explains the country-risk issues precipitating the crisis:

The EZLN's violent uprising in Chiapas in 1994 along with the assassination of presidential
candidate Luis Donaldo Colosio made the nation's political future look less certain to investors, who then
started placing a larger risk premium on Mexican assets.

Mexico had a fixed exchange rate system that accepted pesos during the reaction of investors to a
higher perceived country risk premium and paid out dollars. However, Mexico lacked sufficient foreign
reserves to maintain the fixed exchange rate and was running out of dollars at the end of 1994. The peso
then had to be allowed to devalue despite the government's previous assurances to the contrary, thereby
scaring investors away and further raising its risk profile.

When the government tried to roll over some of its debt that was coming due, investors were unwilling
to buy the debt and default became one of few options.

A crisis of confidence damaged the banking system, which in turn fed a vicious cycle further affecting
investor confidence.[2]

[edit]Crisis
All of the above concerns, along with increasing current account deficit fostered by consumer binding and
government spending, caused alarm among those who bought the tesobonos. The investors sold
the tesobonos rapidly, depleting the already low central bank reserves. Given the fact that it was an election
year, whose outcome might have changed as a result of a pre-election day economic downturn, Banco de
Mxico decided to buy Mexican Treasury Securities to maintain the monetary base, thus keeping the interest
rates from rising.
This caused an even bigger decline in the dollar reserves. However, nothing was done during the last five
months of Salinas' administration. Some critics affirm this maintained Salinas' popularity, as he was seeking
international support to become director general of the World Trade Organization. Zedillo took office on
December 1, 1994.
A few days after a private meeting with major Mexican entrepreneurs, in which his administration asked them
for their opinion of a planned devaluation; Zedillo announced his government would let the fixed rate band
increase to 15 percent (up to four pesos per US dollar), by stopping the previous administration's measures to
keep it at the previous fixed level. The government, being unable even to hold this line, decided to let it float.
The peso crashed under a floating regime from four pesos to the dollar to 7.2 to the dollar in the space of a
week. The United States intervened rapidly, first by buying pesos in the open market, and then by granting
assistance in the form of $50 billion in loan guarantees. The dollar stabilized at the rate of six pesos per dollar.
By 1996, the economy was growing (peaked at 7% growth in 1999). In 1997, Mexico repaid, ahead of
schedule, all US Treasury loans.

[edit]Financial

assistance package

A week of intense currency crisis stabilized some time after US president Bill Clinton, in concert with
international organizations, granted a loan to the Mexican government. [3]
Loans and guarantees to Mexico totaled almost $50 billion, with the following contributions:

The United States arranged currency swaps and loan guarantees with a $20 billion total value.

The International Monetary Fund promised an 18 month Stand-by Credit Agreement of around
US$17.7 billion.

The Bank for International Settlements offered a $10 billion line of credit.

The Bank of Canada offered short term swaps of around US$1 billion.

The Mexican "bailout" attracted criticism in the US Congress and the press for the central role of the former CoChairman of Goldman Sachs, U.S. Treasury Secretary Robert Rubin. Rubin used a Treasury
Department account under his personal control to distribute $20 billion to bail out Mexican bonds, of which
Goldman was a key distributor.[4] In late 1995, Patrick Buchanan wrote "[n]ewly installed President Ernesto
Zedillo said he needed the cash to pay off bonds held by Citibank and Goldman Sachs, lest the New World
Order come crashing down around the ears of its panicked acolytes." [5]
According to Hannibal Travis, the "former manager of $5 billion in Mexican investments at Goldman Sachs
became U.S. Secretary of the Treasury and lobbied for legislation that forced U.S. taxpayers to contribute in
excess of $20 billion to bail out investors in Mexican securities, in a form of 'corporate socialism'". [6]
The United States' assistance was provided via the treasury's Exchange Stabilization Fund. This was slightly
controversial, as President Bill Clinton tried and failed to pass the Mexican Stabilization Act through Congress.
However, use of the ESF allowed the provision of funds without the approval of the legislative branch. By the
end of the crisis, the U.S. actually had made a $500 million profit on the loans. [7]

[edit]See

also

1998 Russian financial crisis

Economy of Mexico

Late 2000s recession

Mexico

North American Free Trade Agreement

Sudden stop (economics)

[edit]References
1.

^ Hufbauer, G. C., J. Schott, NAFTA Revisited: Achievements and Challenges, Institute for
International Economics, Washington, D.C., October 2005

2.

^ Mankiw:Macroeconomics

3.

^ http://www.usdoj.gov/olc/esf2.htm

4.

^ Bradsher, Keith (March 2, 1994). "House Votes to Request Clinton Data on Mexico". The New
York Times. Retrieved June 4, 2010.

5.

^ Buchanan, Patrick (August 25, 1995). "Mexico: Who Was Right?". The New York Times.
Retrieved June 4, 2010.

6.

^ Travis, Hannibal (2007). "Of Blogs, eBooks, and Broadband: Access to Digital Media as a First
Amendment Right". Hofstra Law Review 35: 148. Retrieved June 4, 2010.

7.

^ Alan Greenspan (September 17, 2007). The Age of Turbulence. The Penguin Press.
p. 159. ISBN 1-59420-131-5.

[edit]External

links

Abstract

The debt crisis exploded into public view in August of 1982 when Mexico announced
to the world that it was unable to pay what it owed to its international creditors. The
rapid rise in large-scale loans to the Third World, especially to the largest and most
rapidly growing countries such as Mexico, Brazil and Argentina, had occurred in the
1970s under conditions of rapid inflation and increasingly floating interest rates. In
principle, as long as these loans could be repaid there was no crisis, just business as
usual. The sudden onset of recession in 1980 and then again in 1981 in response to
Paul Volcker and the Fed.s tightening of the money supply and rapid rise in interest
rates dramatically changed the situation of the debtor countries. The engineered rise in
interest rates aimed at inflation, raised the cost of the loans and the recession, by
reducing world output and trade reduced the debtor countries ability to earn the
foreign exchange necessary to repay the loans. These were the direct and obvious
causes of the crisis announced by Mexico in 1982 and subsequent defaults and

reschedulings by a great many other countries. But behind this bottom-line crisis lie a
continuing series of social crisis in both the debtor in creditor countries. The
international debt crisis has continued to worsen since it erupted in the early 1980s.
Currently, developing countries as a whole in Latin America owe over $600 billion. In
a world where 20 percent of the people hold 83 percent of the world wealth while the
poorest 20 percent received only 1.4 percent of the total income, over one billion poor
people in the worlds impoverished countries suffer because of the debt. The debt
crisis is far from over. You will see the causes mainly a liquidity crunch as well as
some of the measures that were taken to try to resolve this crisis. You will also see the
players in this tragedy; the debtor countries, the creditor countries, the creditor banks
along with other third party banks. In conclusion I will offer possible remedies to the
debt crisis, a crisis that has been ongoing for two decades.

Part A

1. 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. Other developing countries around a 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. Aristocrats controlled the government
while the poor had no voice in these loan matters, nor did they benefit from them.
These adjustable 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. The Reagan Administration did all
of this while also cutting United States income tax rates. Around the Globe, raw
material prices fell sharply, meaning poor countries had even less money to repay
their debts. For example, both Brazil and Mexico nearly defaulted on their loans; and,
according to international law, there was no option for these poor countries to declare
bankruptcy. Commercial banks rescued their own situations and prevented default.
However, many developing countries were left in great debt, and as a result, could no
longer get loans. With nowhere else to turn, these nations have relied heavily on the
World Bank or the International Monetary Fund.

The IMF required structural adjustment programs in these countries. Debtor countries
had to agree to impose very strict economic programs on their countries in order to
reschedule their debts and/or borrow more money. Put simply, countries had to cut
spending to decrease their debt and stabilize their currency. The governments limited
their costs by slashing social spending; education, health, social services, etc..,
devaluing the national currency via lowering export earnings and increasing import
costs, creating strict limits on food subsidies, cutting workers jobs and wages, taking
over small subsistence farms for large-scale export crop farming and promoting the
privatization of public industries. Most countries have suffered a recession and often
depression; and the poorest of the poor are most affected. It is not hard to find
evidence showing that the poor, women, children and other groups suffered
disproportionately as a result of structural adjustment programs during the 1980s. As
Latin Americas economies stagnated, per capita income plummeted, poverty
increased, and the already wide gap between the rich and the poor widened further.
The debt crisis seriously eroded whatever gains had been made in reducing poverty
through improved social welfare measures over the preceding three decades. Poverty
is 50 percent in growing; malnutrition is 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; and the growth of crime and an
epidemic of homicides, are but a few of the many dilemmas that this debt crisis has
caused.
I believe the debt crisis stemmed from a liquidity squeeze. Consider the role of the
official sector in the crisis prevention and management. I maintain that many
explanations of the Mexican crisis give insufficient emphasis to financial
vulnerabilities, particularly mounting maturity and currency mismatches in public
debt and in the banking system that together rendered the Mexican government
illiquid and produced not only a currency crisis but a debt crisis. In my view, both host
countries and international surveillance exercises need to pay closer attention to such
indicators of financial vulnerability. I am also in favor of the IMF publishing its
appraisals of country policy, deepening its contacts with private capital markets, and
conveying a frank view on appropriate exchange-rate policy to its members.
In August 1982 Mexico announced to the international financial community that it did
not have enough external liquidity to fulfill its financial obligations and requested a 90
day rollover of the payments of the principal to prepare toward definite restructuring
financial package. Just a few weeks later, the problem spread all throughout Latin
America and to other debtor countries. The impact from Mexicos statement was farreaching. This created an atmosphere that caused many people to issue dire forecasts,
which thankfully were never realized. Most observers believe the petrodollar
recycling of the 1970s gave rise to this debt crisis. During that period, the price of oil

rose dramatically. As was stated before, oil-exporting countries in the Middle East
deposited billions of dollars in profits they received from the price hike in United
States and European banks. Commercial banks were eager to make profitable loans to
governments and state-owned entities in developing countries, using the dollars
flowing from the Middle Eastern countries. Developing countries, particularly in Latin
America, were also eager to borrow relatively cheap money from the banks.
Decreased exports and high interest rates in the early 1980s caused debtor countries to
default on their foreign loans. The frenzied lending and borrowing came to a halt with
the global recession in the early 1980s. The significant drop in debtor country exports,
combined with a strong dollar and high global interest rates, depleted foreign
exchange reserves that debtor countries relied upon for international financial
transactions. Debtor countries consequently began to feel the strain of having to make
timely payments on their foreign debt, which became much more expensive to pay off
because the loans carried floating interest rates that increased along with global rates.
These problems were compounded by massive capital flight of outward transfers of
money by private individuals and entities in developing countries.
The prospect of massive defaults posed grave problems for creditor countries, such as
the United States. Government regulators discovered that commercial bank creditors,
particularly the big U.S. money center banks, had dangerously low levels of capital
that could be used to absorb losses resulting from massive loan defaults. Policymakers
were also worried that there was no authority or forum that could oversee and orderly
resolution of the crisis, such as a global bankruptcy system.
A case-by-case debt restructuring negotiations saved the international financial system
from collapse. Yet the principal players in the crisis, mainly governments, banks, the
IMF and the World Bank, averted a collapse of the international financial system by
resorting to slow and cumbersome approaches. The approach entailed engaging in a
series of workouts with hundreds of commercial bank creditors throughout the world
via Bank Advisory Committees, which were composed of banks with the greatest
exposures to debtor countries. Under this approach, commercial banks agreed: (I) to
provide new loans to debtor countries, and (ii) to stretch out external debt payments.
In return, debtor countries agreed to abide by IMF and World Bank stabilization and
structural adjustment programs intended to correct domestic economic problems that
gave rise to the crisis. IMF stabilization programs typically included drastic reductions
in government spending in order to reduce fiscal deficits, a tight monetary policy to
curb inflation, and steep currency devaluations in order to increase exports. World
Bank structural adjustment programs focused on longer-term and deeper structural
reforms in debtor countries.

Debt fatigue appeared in the mid-1980s. After a few years of repeated restructuring
deals, debt fatigue began to appear. New loans to debtor countries plummeted as
commercial bank creditors contemplated the possibility that debtor countries were
facing insolvency rather than a temporary drop in their ability to pay back the foreign
debt.
In October 1985, U.S. Treasury Secretary James Baker proposed a strategy, dubbed
the Baker plan, which attempted to alleviate the debt fatigue. The plan was designed
to renew growth in 15 highly indebted countries through 29 billion dollars in new
lending by commercial banks and multilateral institutions in return for structural
economic reforms such as privatization of state-owned entities and deregulation of the
economy. The strategy failed, however, because the projected financing did not
materialize and, to the extent it did, the new lending merely added to debtor countries
already crushing debt burden. During this period, Latin American debtor countries
were making massive net outward transfers of resources. I will touch upon the Baker
plan in greater detail later in my report.
In light of what appeared to be a non-correctable problem, government officials,
academics, and private entities began to propose plans that would provide debtor
countries with debt relief rather than debt restructuring. In the meantime, various
debtor countries suspended debt payments and fell out of compliance with, or
otherwise refused to adopt, IMF adjustment programs. This eventually prompted the
big creditor banks to admit publicly that many of the loans to debtor countries would
not be paid.
The Brady initiative in 1989 focused on debt reduction tragedies. The Brady initiative,
announced in March 1989 by U.S. Treasury Secretary Nicholas F. Brady, marked a
change in U.S. policy towards the debt crisis. Given the persistently high levels of
foreign debt, the initiative shifted the focus of the strategy from increased lending to
voluntary, market based debt reduction and debt service reduction in exchange for
continued economic reform by debtor countries.
Debtor countries obtained significant debt relief under the Brady initiative through: (I)
direct cash buy backs; (ii) exchange of existing debt for discount bonds, which are
bonds issued by the debtor countries with a reduced face value but carrying a market
rate of interest; (iii) exchange of existing debt for par bonds, which carry the same
face value as the old loans but carry a below market interest rate; and (iv), interest rate
reduction bonds, which initially carry a below market interest rate that rises eventually
to the market rate. Commercial bank creditors that did not wish to participate in a debt
or debt service reduction option could choose to give debtor countries new loans or
receive bonds created from interest payments owed by debtor countries. Debtor
countries sweetened the deals by providing enhancements, such as principal and

interest collateral. I will touch upon the Brady initiative in more detail later in a
report.
The Brady deal combined with economic reforms and increased flows of capital to
debtor countries led some people in the early 1990s to declare that the debt crisis was
over. Commercial bank creditors agreed to Brady deals with a good handful of
countries, including Argentina, Costa Rica, Mexico, Venezuela, Uruguay and Brazil.
In the meantime, Latin American countries implemented substantial economic
reforms. In 1991, the region registered capital inflows that exceeded outflows for the
first time since the onset of the debt crisis. This led some observers to proclaim that
the debt crisis was over for major Latin American debtor countries. As we will see,
my report will show that the debt crisis was far from over.
With the resolve and atmosphere that fears of financial collapse can generate, creditor
governments and multilateral institutions offered loan guarantees, debt equity swaps
and debt rescheduling to countries willing to rapidly privatize, deregulate and open
their economies to world trade and investment. After these and other measures were
done, the creditors were somewhat off the hook, the crisis was downgraded to a
problem and quickly disappeared from view. Once the debt became serviceable again,
it was no longer a crisis for the world. It turned out to only be a crisis for the debtors
who could not pay and develop at the same time.
When the debt disappeared from the political agenda of creditor countries, it
disappeared from the debtors agenda as well, illustrating the degree to which the
creditors came to define and thus dominate the terms of discussion. Putting the debt
on the agenda, would have meant calling the very relationship between the U.S. and
Latin America into question. The reluctance to do so may very well reflect the
disappearance of an effective radical opposition within Latin America. Back in 1997,
in a sign that this reluctance may have been just a temporary break, a group of Latin
American parliamentarians gathered some two thousand people together in Caracas,
Venezuela with the aim of reinserting the debt in the debate about Latin American
development. At the gathering it was quoted that the character of most of our
economies, is today determined by debts incurred through the errors and economic
misjudgments of our governments, as well as through creditor countries abuse of the
conditions of negotiation. The political problem, is that the debt, limits the ability of
the indebted governments to make their own decisions.
The combined foreign debt owed by Latin American nations now stands at somewhat
over 600 billion, up from 425 billion at the height of the crisis in 1987. It is not only
the absolute size that hurts but also the size relative to the ability to pay. The region
pays just under 30 percent of its export earnings to service those debts, and owes
about 45 percent of its combined gross domestic product to foreign creditors. It is this

drain on resources that feeds the growing social dislocation of so much of the
continent and eats away at the ability of Latin American countries to make their own
decisions at home.
When doing my research for this paper I came across an interesting quote from
Congresswoman Ifigenia Martinez of Mexico. She summed up the problem in an
interesting way. She said, to say that a debt is unpayable, is to say that one cannot
pay and continue to generate the income necessary to make further payments. This is
now the case in Latin America, she asserts to no ones disagreement, where in 1982,
the chief goal of economic policy ceased to be long-term growth, and instead became
payment of the debt. What, then, is the real value of the debt? It is that value, she says,
that permits a country to grow and continue paying. The debt, proposes the Mexican
Deputy, should be adjusted precisely to that real value. If not, the U.S. will continue to
be collecting tribute from the South rather than earning a return on its investment.
For developed country creditor institutions, namely the ones who counted on timely
debt service payments for at least a part of their duration, a massive Latin American
default, or even a significant interruption of payments, would have constituted a major
hardship, and perhaps even called the possibility for the end of the international
financial system. For the debtors, servicing the debt has become an insurmountable
obstacle to growth and development. Since the eruption of the debt crisis, there is no
question that we have avoided a major international financial crisis and that we have
gained time and breathing space. But the problem is far from being over. Debt service
payments are still too high, and this is hindering the prospects of growth, and with
growth and significant forgiveness of debt that has been recently talked about, the
possibilities do exist for this crisis to once and for all come to a halt.

Part B

What was done to try to correct the problem?

1. The Baker Plan Growth, the Key to Breaking the Debt Crisis.
The Baker Plan proposals begun in 1985 by then Secretary Treasurer Baker, in
response to the mounting debt crisis that had started back in 1982. At Seoul in October
1985, U.S. Treasury Secretary James Baker reshaped the strategy for dealing with
Third World debt. The Baker plan emphasized that the debt crisis could only be

resolved through sustained growth by the debtor countries. To achieve the desired
growth, the plan recommended programs of economic reform and structural
adjustment for the debtor countries, including greater reliance on the private sector,
curtailment of state subsidies and price controls, steps to stimulate both foreign and
domestic investment, and export promotion and trade liberalization. Secretary Baker
emphasized that the cornerstone of sustained growth must be greater domestic
savings, and the investment of the savings at home. He stressed the importance of
foreign investment as non-debt-creating. He also pointed out that equity investment
has a high degree of permanence and is not debt-creating. Moreover he pointed out, it
can have a compounding effect on growth, bring innovation and technology, and help
to keep capital at home. The plan also called for private banks and multinational
institutions to step up sharply their lending to the indebted countries. The banks were
urged to provide new commercial credits of $20 billion over a three year period while
World Bank and the Inter-American Development Bank would contribute an
additional $9 billion in loans. The Baker plan called for an annual increase of around
2.5% in commercial lending. What did not change in Mr. Bakers proposals was the
reliance on continuing accumulating debt to finance growth. However, bankers were
uneasy with this request, mainly from their exposure to existing loans and from angry
shareholders. At the time of this request, many banks were under severe pressure to
cut loose their existing loans, even at a lose, rather than increase their exposure.
Without strong assurances on the new loans, it would be very difficult if not
impossible to justify increased international spending.
The global banking community carefully examined the proposal through meetings and
briefings by all the players in this tragedy from a financing standpoint. Mainly; the
Treasury, the IMF, the World Bank and other creditor governments. Many of the banks
formed large cohesive groups in order to collectively protect or try to protect their
interests. These groups were the Institute of International Finance (IIF); the G-14
group of major international commercial banks, and later, national banking groups.
The IIF is a non-profit bank-financed organization comprising more than 185 banks.
Its function is mainly informative by providing country analysis on some 40
borrowing countries to its members and serves as a forum for discussing international
lending issues. Because the IIF members hold more than 85% of all overseas lending,
they were the first group to oversee the Baker plan. The other forum, the G-14, which
consisted of the largest international banks, also looked over the plan, and not to many
peoples surprise, they both came out with more questions than answers. They
endorsed the concepts of the plan, but noted that each bank would have to formulate
their own response. Its not surprising why the crisis continued to linger.
The part to play by the IMF was still in doubt. Mr. Baker gave it a central role, but
some countries have drawn up their IMF access limits, and will soon have to start

repaying. The role of the IMF will be somewhat more subdued if those countries that
are not borrowing more decide not to listen to the IMF demands. It will be harder to
impose strict IMF conditions where countries are not drawing additional credits, but
only rolling over and repaying existing lines of credit.
The Baker plan gives new importance to the World Bank and other Multilateral
Development Banks (MDBs), mainly the Inter-American Development Bank, both by
increasing their disbursements and, as a condition of this, by giving them a bigger
share of policy formation. The World Bank will be expected to increase from 11% to
about 20% of total credits its non-project lending, in the form of structural or sectoral
adjustment loans, aimed at improving either the whole economy, or key sectors such
as foreign trade. In the past these loans have been linked with IMF programs. But
countries such as Brazil were anxious not to be tied to two sets of conditions, and may
regard the World Bank as more sympathetic to their pleas for gradualism and
flexibility than the IMF.
The World Bank and the other MDBs will have to increase their outstanding credits
far more rapidly than the commercial banks, even though each group of institutions is
expected to contribute $20 billion over the next three years.
Its also important to stress the role of non-U.S. banks in international lending. They
hold two thirds of the outstanding paper, and their commitment to the Baker plan was
essential for its success. Also, in the U.S., the pledge was not communicated by the
American Bankers Association, the largest association of U.S. banks. It was quit
obvious from the outset, that even though the plan was aimed right, Latin American
Growth, it turned out to be a smoking gun, only adding more fuel to the fire and
piling more debt on top of the already unmanageable levels of existing debt.
The basic idea, that Mr. Baker finally recognized the severity of the problem was
great, but the fact of the matter was, the plan fell short of any substantive successes in
alleviating the debt problem. The problems with the plan lie with the details. The
amount of new lending proposed was insufficient. The recommended policy reforms
were insensitive to the political and economic situation of each country. The
debilitating effects of high interest rates and low commodity prices were not
addressed. The plan was geared towards the 15 largest debtors and neglected the
needs of smaller countries. And finally, the problems caused by the huge U.S. budget
deficit were ignored.
In order for Mr. Bakers plan to work, all participants needed to be actively involved.
One of the problems with this assumption lies in the fact that creditor banks were not
as interested in the problem as they were back in the early 1980s. In the five years
since the Mexican crisis in 1982, the capacity and resilience of the global banking

system has been bolstered substantially. Something positive has been achieved, but on
the side of the creditors and at great costs to the debtors. Developing country debt
accounted for less than 7% of the total assets by 1986 in U.S. banks while in 1981 it
accounted for over 10%. The equity capital of the U.S. banking system has increased
from about $80 billion in 1981 to nearly $150 billion in 1986 while LDCs assets have
increased from $131 billion to $154 billion. Because of this, banks are in a much
better position because of their writedowns and increased equity buildups in their
portfolios, and as such, their willingness to participate in the Baker plan was not as
intense as it would have been, if it were proposed back in 1983 for instance.
In the years that followed the Baker plan, there has not been one significant
contribution that it has been shown that the plan has indeed alleviated debt or restored
growth. The Baker plan was certainly motivated more by a growing threat to creditors
than by a worsening of economic problems of the debtor countries. It does not seem,
however, that the plan was a complete falsehood. It was not designed merely to quiet
the restrictiveness of the borrowing countries and induce them to continue along a
path they no longer found acceptable, even though it seems, that it has effectively
done just that. The reasons that the Baker plan failed can be found within all the
participants; the reluctant banks, the passive debtors, and the confused and nervous
creditor governments. The plan does not offer any regulatory or tax incentives to
banks to continue their lending. Nor does it promise borrowing countries new lending
without the adherence to traditional economic adjustment policies. Unilateral
approaches like the Baker plan is difficult to implement, no matter how well thought
out. Only a strategy that is formulated, endorsed, and managed by both the debtor and
creditor countries will have any hope of succeeding.
The Baker plan has had mixed results at best. A number of the worst indebted
countries had made progress in adjusting their external sector during 1986-88 and the
threat to the international banking system has subsided, for the time being. But
external financing in support of adjustment programs remained scarce. Net resource
flows to developing countries, particularly from commercial banks, continued to fall.
More importantly, they were insufficient in meeting the investment needs of these
countries and in helping them meet their debt obligations. Because of all these facts,
indebted countries had to cut back on investment. Their growth did not resume and
living standards either stagnated or fell. The heavy debt burden continued to obstruct
the mobilization of domestic resources, discourage repatriation of flight capital and
direct foreign investment, and undermined the credibility of adjustment programs. I
give the overall grade of the Baker plan, C, at least it started the discussion about the
mounting debt problem.
2. The Brady Plan. The Key to The Crisis is Debt Reduction

On March 10, 1989 the United States approach to managing the Third World debt
took a dramatic turn. Treasury Secretary Nicholas F. Brady acknowledged that serious
problems and impediments to a successful resolution of the debt crisis still remains.
He declared that, the path toward greater creditworthiness and a return to the markets
for many debtor countries needs to involve debt reduction.
The framework that Brady outlined in his speech is only a first step toward designing
and implementing a more effective approach to dealing with the problem. The major
elements of the Brady initiative are as follows. First, in order to qualify for debt
reduction, debtor nations under the IMF and World Bank economic programs must
undertake sound growth oriented policy measures to encourage foreign investment
flows, strengthening domestic savings, and promote the return of flight of capital.
Second, to accelerate the pace of voluntary market based debt reduction and pass the
benefits directly to the qualifying debtor nations, commercial banks should negotiate a
joint waiver of the sharing and the negative pledge clauses included in existing loan
agreements for a three-year period. Third, the IMF and World Bank would provide
financial support for two types of debt reduction transactions, which could be the form
of converting the bank loans into new bonds with reduced principal or reduced
interest rates, and debt buy backs with cash. Fourth, in order to provide more timely
and more flexible financial support to the reforming debtors, the international
financial institutions should not hold hostage initial disbursements to firm
commitments of other creditors to fill the estimated financing gaps. Fifth, debtor
nations should maintain reliable debt to equity swap programs and permit domestic
investors to engage in such transactions to encourage the repatriation of flight of
capital. Sixth, the return of the use of public funds to enhance the quality of their L.
D.C. exposure and for being able to engage in debt to equity swap programs,
commercial banks should provide new money in the form of trade credits, project
loans, as well as voluntary and concerted lending. And finally, creditor governments
should continue to restructure their own claims through the Paris Club, provide
additional financial support to debtors pursuing debt reduction, and maintain open and
growing markets with sound policies. They should also ease existing regulatory,
accounting, and tax impediments to debt reduction.
There seems to be many flaws with the Brady plan. Countries that need debt reduction
need it because they have too much debt to start with. A country can reduce its current
resource transfer with new money from banks, but only at the expense of worsening
its future capacity of paying off the debts. Its like throwing fuel on the fire. The seeds
of todays debt problem were planted back in the 1970s when commercial banks were
actively encouraged to finance the balance of payments deficits of Third World
countries. Any new idea of debt reduction should encourage banks to reduce their
claims so that the countries do not need new bank money to service old bank debts.

The Brady plan does not seem to share this same view on bank activities. Mr. Bradys
view seems not to be too much old bank debt, but too little new bank money. Looking
at the plan, at this angle, one can see that the plan has not alleviated the debt problem,
but only made it worse. Countries needed debt reduction even more because the
commercial banks cut back on their loans and thus made it even harder for banks to
pay their loans. By trying to force the banks and the debtor countries to remain in the
debt trap that they got into during the irresponsible overborrowing and overlending of
the 1970s, the new approach may increase the possibility of the counterproductive
process of subjecting development finance to the distortions and imbalances of a
historical accident that could have been avoided.
Another weakness of the plan lies in the fact that the proposal involves only a part of
the total debt of the troubled nations, the part that is owed to commercial banks. But
one must remember that the banks have, in large part, lowered their exposures to the
debt balance outstanding by writedowns and equity inflows to their balance sheet.
Also the spotlight of the proposals has been on debt reduction rather than interest rate
reduction. If Mr. Brady wanted to help the cause, he should have proposed interest
rate reductions rather than debt reductions for obvious reasons. Debt reduction that a
country may get from a principal reduction can easily be offset by increases in
international interest rates. For example, the 20 percent average debt reduction that the
Treasury estimates the 39 debtor countries may receive under the plan, if provided in
the form of principle reduction, is equilivant to a 2 percentage point reduction in their
cost of borrowing. A much more substantive approach to the crisis that was mentioned
involves, providing relief to countries to convert their variable rate loans into fixedrate loans or bonds with market discount rates. It is very important that the interest
rate be not only reduced below the market rate, but that the rates remain fixed during
the life of the loan.
The Treasury suggests three major instruments for debt reduction: exchanges of loans
for bonds with reduced principal or reduced interest, buybacks of loans with cash, and
debt/equity swaps. The IMF and the World Bank are expected to support the first two
types of reductions, to make them attractive for the banks. The third item, debt/equity
swaps, do not need any sweeteners, because the constraint is not with the banks but
with the debtor governments. In this type of swap, a foreign investor buys the debt at a
discount, converts it to local currency, and invests it back into local business or
property. These swaps reduce external debt of a country in a way that may not be
desirable on the grounds of stabilization, efficiency, and equity. These swaps increase
inflationary pressures, and they do not increase new capital inflows. While debt/equity
swaps could be of limited use if carefully controlled, they do not represent stabilizing,
efficient, and equitable debt reduction, and as such, should be dropped by the Brady
plan. Cash buybacks make sense only if the following three conditions are met. First,
the secondary market price must be very low. Second, the buyback applies to all

longer-term bank debt where both the buyback price and full participation by all banks
are negotiated rather than left to a market auction. And third, the resources to purchase
debt are donated by third parties such as the creditor governments and the multilateral
development banks.
The main goal of a new debt strategy should be to revive growth in the debtor
countries by cutting their debt service burden substantially, and not to encourage
large-scale bank lending to the developing countries for financing their balance of
payment deficits. It is unrestrained lending and borrowing by the banks and the
developing countries in the wake of the oil shock that led to the debt crisis in the first
place. It would be a shame if that lesson is not heeded in meeting the future external
financing needs of the developing countries as efforts are made to resolve the current
crisis. In terms of total debt stock this plan has not helped debtor countries. As
commercial debts have fallen, multilateral debts have risen. Resources continue to
flow out of these countries to pay interest on Brady Bonds. Debt service was lowered
to levels, which were already being paid, so no actual benefit accrued to the debtor
country. The Brady plan was much more close the problem than was the Baker plan.
Because of this, my overall grade for this initiative, B.
3. The Highly Indebted Poor Country Initiative (HIPC) Debt Forgiveness is The
Key
After the Baker plan and its call for growth failed, and then the Brady plan and its call
for debt reduction failed, HIPC came along and proposed the ever popular proposal
for debt forgiveness. In October 1996, there was a major shift by the IMF and the
World Bank when they produced a debt relief initiative, which contemplated for the
first time the cancellation of debts, owed to them. The agreement also recommended a
strategy to enable countries to exit from unsustainable debt burdens. Britons
Chancellor proposed that the Initiative should be financed through the sale of IMF
gold. The Initiative proposed 80% debt relief by the key creditor countries (Japan,
U.S., Germany, France and Briton). The World Bank announced the establishment of a
Trust Fund to finance the Initiative.
The World Bank has committed resources to the Trust Fund, while the IMF has not.
Instead it will offer cheaper loans to pay off expensive loans. There has been no
agreement to sell IMF gold. And the Paris Club of key creditor countries has been
reluctant to give the necessary minimum 80% debt relief. In practice, HIPC has been
very limited in effect.
While many believe that the dreaded forgiveness word, should never have been
spoken, others believe that the actions over the past 17 years show that is precisely
where we are headed. Look at what the banks have been consciously or unconsciously

doing. They have been reserving billions of dollars in the face of potential mounting
unpaid debts. They have been selling loans using debt/equity swaps in the tune of
several billions of dollars. They have been outright selling and writing off bad
performing portfolios of debt. This seems to be showing that, debt forgiveness is not
only conceivable, it is also unavoidable.
Some feel that debt forgiveness is not necessary and could even be counterproductive.
They bring up that defaults in Latin America in the 1930s locked countries out of the
capital markets for 30 years, and they say that doing the same now, could possibly do
the same thing. I for one do not believe that scenario. The facts are completely
different than they are now. In the 1930s the whole world economy was in a deep
depression, and it was very difficult for any financial institution to step in, and help
them out. Also the financial system was not at all the same with regards to the world
economies. The economies back in the 30s were tied to the gold standard, while today
we come under the Bretton-Woods system of economic stability.
So far creditor governments have fiercely resisted making outright donations to LDCs
or guaranteeing portions of their debt. But a growing number of debt consultants and
bankers believe that this will have to change if the next stage of the debt crisis is to be
manageable. Budget deficits are one major reason for the resistance, especially in the
United States. But as Latin America continues to groan under the debt burden, more
people are questioning whether the industrialized governments shouldnt do more to
ease the debt load. Bankers and debt experts point to West Germany and Japan as two
surplus running countries that should be doing more, especially when the U.S. helped
them rebuild their own economies after World War II ravaged their country. This is the
closest idea thus far to attempt to end the debt crisis. At least the crisis is being looked
at realistically, and because of that I give it the highest mark so far, B+.

Part C

Mexico Rocks the Financial World Again in 1994 With the Mexican Peso Crisis.
Showing the World that The Financial Crisis Is Far From Over.
Mixed results characterized economic performance in the countries of Latin America
in 1995. While the total regional economy grew by only .8%, sharp distinctions
persisted among the countries of the region. The December 1994 peso crisis in
Mexico led to a substantial 6.9% decline in GDP in 1995. In Argentina and Uruguay,

the main countries affected by carryover from the Mexican crisis, their economies
contracted by 4.4% and 2.5% respectfully.
The crisis in 1994 underlined the significant fragility and vulnerability in many of the
regions financial and banking systems, not only in Mexico but also in Argentina and a
number of other countries. In both Mexico and Argentina, the weak position of the
banking system contributed to the poor GDP performance. Investors, both
international and domestic, feared that a collapse of important banks could result in
major economic dislocations, massive and costly bailout programs, and a resurgence
of inflation. Argentinas weakness in their banking system tested the convertibility
program and, the exchange rate regime. In Brazil, the weakness of their banking
system, and especially the state owned banks, has added significant uncertainty to the
public deficit picture. Central bank moves to provide liquidity to private banks in
distress and treasury obligations to recapitalize public banks will add significant
amounts of public debt over the next few years.
There are many problems that lie ahead for Latin America. The Latin American region
is capable of achieving a growth rate of 6% by the turn of the century, under
reasonable assumptions about the evolution of the external environment and of
appropriate domestic policies. Increased domestic savings rates will be crucial for
more robust growth to occur. One of the important lessons of the Mexican crisis is that
domestic savings matter greatly. They are important because they help finance the
accumulation of capital and, because of that, facilitate growth, and also because of
high domestic savings are associated with lower current-account deficits. Latin
America, however, has traditionally had very low saving rates. In 1980 the region
saved on average only 19% of its GDP, by 1994 this ratio was basically unaltered.
This contrasts sharply with fast growing regions of the world that save 35% or more
of GDP.
On January 14, 1999, Financial markets plunged because Brazil devalued its currency.
Still we see the financial difficulties facing this region. Brazil devalued the real by
7.5%. The action was followed by the resignation of the president of Brazils Central
Bank, Gustavo Franco, a leading advocate of the harsh austerity policies which Brazil
has pursued over the past four years. The devaluation was triggered by a political
crisis within Brazil, arising from domestic opposition to the austerity measures
demanded by the IMF as the price of the $42 billion loan package agreed on back in
November 1998, to provide a financial cushion for the Brazilian markets and its
currency. 1998 was Brazils worst economic performance in six years, pushing into a
recession and the worst could be yet to come. Latin Americas biggest economy
shrank by 1.89% in the fourth quarter 1998, from the same quarter a year earlier. For
all of 1998, the economy grew just .15% after a 3.68% expansion in 1997. That
showing was the weakest since growth of .54% in 1992. Brazil was affected by the

crisis in Asia along with Russia, further depicting the interlocking of economies all
over the world. This is an issue that is even more important now than it was back in
1982, because of the advancements in technology that has created an ever shrinking
marketplace and creating a tighter global economy. JP Morgan predicts Brazils
economy will shrink by 5.5% in 1999. That would represent Brazils worst recession
in 30 years.
On March 12, 1999 it was reported in the Wall Street Journal that Demonstrations in
Ecuador Fade, But Nations Economic ills Persist. In February 1999 Ecuadors
Central Bank devalued the nations currency for the third time in less than a year
before ultimately abandoning the exchange-rate band system. In the beginning of
March, Ecuadorians began to yank millions of dollars out of banks, pushing their
currency down 26% in value compared with the U.S. dollar.
These are but a few incidents, that have materialized over the past few years, and
show beyond a shadow of a doubt, that the financial crisis in Latin America, is alive
and well. Unless something is done in earnest to deal with the problem, the whole
world economy could one day be devastated.

Part D

Conclusion
No matter what type of reform is initiated, the fact remains you need sound economic
policies that are sustained by all of the market participants. Just because the crisis is
manageable today does not mean that it will not deteriorate into a full-blown crisis
tomorrow. There have been many suggestions for reform, or different types of reform.
Some of these suggestions are: first, forgive countries debts; second, some
recommend that governments and commercial banks cancel some of the debts; third,
restructure the IMF demands on countries in debt; fourth, reduce trade restrictions on
the products of poor nations; fifth, loans and grants to poor nations should be in
smaller amounts and specifically applied; and sixth, create new ratios for the heavily
indebted poor countries. Use debt to GDP and debt to budget expenditures instead of
debt to exports and debt service to exports.
I believe that future economic crises in developing countries should be handled on a
case-by-case, market oriented basis, not by a predetermined arrangement supervised

by international financial institutions. Reading in the Wall Street Journal a few weeks
ago I noticed an interesting article that was in the Letters to the Editor section of the
paper. An excerpt from the article is as follows: the IMF is a negative force. This isnt
a recent phenomenon, however. In the nearly three decades since the Bretton Woods
system started, the IMF has developed into a negative force. Countries that have come
under its sway see it as an agent of U.S. bankers and financiers. Since the early 1970s,
the Fund has impoverished much of the developing world through its mindless
formula of increasing taxes to balance budgets and depreciating currencies to promote
going out of business export sales. Despite promises to reform, the IMF continues to
inflict its damaging policies on countries already suffering from financial and
economic collapse. The article goes on to say; who can deny that the IMF helped wipe
out the savings of ordinary citizens and families in Mexico when it supported the
devaluation of the peso for years ago? The hope that NAFTA would bring about a new
era of prosperity that would raise the standard of living in such poor states was
quickly dashed. Although I do not want to seem that I agree with this opinion, there
does seem to be some elements of truth that one cannot idly sit back, and say or
assume that everything the IMF does is automatically correct.
The major reason I give for recommending the case-by-case approach for future crises
is the vast changes that have occurred in recent years in international markets that
have strengthened and greatly diversified international financial flows. Some of these
examples were discussed toward the end of the last section. As a result, crises that do
arise are likely to be isolated and sporadic, rather than pervasive as in the late 1930s
and 1980s. Todays countries have more moderate debt, sounder economic policies
and receive more of their capital in the more stable form of direct investment. Past
approaches such as rescheduling long-term bank claims, so common in the debt crisis
and 1980s, have lost much of their relevance, because of the great changes in capital
markets. In 1988 rescheduling of bank claims would have eased Latin Americas cash
flow by 25 percent of imports, but today it would ease the flow by roughly three
percent. Equity flows, both as direct investment and the more volatile portfolio
investment, now account for more than half of total net flows to emerging markets,
with multinational corporations, mutual funds, insurance companies and pension
funds all increasingly involved. Capital mobility has seemed to have grown
dramatically.
It is important to try to avoid future crisis in advance rather than acting in a
reactionary manner, as has been done in the past. Industrial countries should continue
to reduce fiscal deficits, implement prudent monetary policy, and face up to structural
challenges so that interest-rate shocks do not recur and sustained growth is realized.
Emerging market economies should reinforce their commitment to fiscal balance,
exchange-rate realism, and ongoing structural reforms, which have played the major
role in the normalization of emerging capital markets in the 1990s. The IMF for its

part should continue to improve its surveillance efforts by strengthening its dialogue
with private market participants.
Latin American countries need to do a number of things in the future, to strengthen
their financial position. They should allow higher priority to the safety and soundness
of their banking systems. A weak banking system can seriously restrain as it did in
Mexico. They should follow sound management policies. Trying to save on borrowing
costs by relying on short term, foreign currency debt is a penny wise, pound-foolish
strategy in todays world of volatile international capital flows. Those countries
should also maintain a healthy cushion of international reserves. Countries that let
their international reserves become small relative to the stock of liquid short run
liabilities of the government or banking system are playing with fire. These are but a
few of many sound fiscal policys that Latin American countries need to do in order to
take control of their mounting financial problems.
With increases in information technology, another crises could have even more dire
results, than what was realized back in the 1980s. Back then, it was mainly contained
to our side of the world, but any future problems will have a snowball effect all over
the globe, as has been seen with the Asian contagion. Debt forgiveness sounds like a
righteous thing to do, but from a financial standpoint, that is not the way to handle this
problem. That would only invite more fiscal mismanagement, and the lending
community would not be so free next time to give their money away to corrupt and
immoral LDCs leaders.
The financial crisis is not over, although things seem to have been settling down. The
debt problem must be handled, before substantive steps can be taken to bolster the
international financial system. Even the slightest downturn in commodity prices or
upticks in interest rates have recently touched off financial turmoil. We are not out of
the woods yet.
References
Aaronson, Susan., The Marketing And Message Of The Baker Plan, The Bankers
Magazine, July-August 1986.
Andrews, Suzanna., Debt Forgiveness Gains Ground, Banking, 1988
Cline, William R., International Debt: Progress and Strategy, June 1988

Husain, Ishrat., Recent Experience with Debt Strategy, Finance&Develeopment,

September 1989.
Islam, Shafiqul., Going beyond the Brady Plan, 1989
Johnson, Christopher., Fleshing Out The Baker Plan For Third World Debt, 1985
Main, Jeremy., A Latin Debt Plan That Might Work., Fortune Magazine, April 24,
1989
McLaughlin, Martin., Financial markets plunge as Brazil devalues currency. 1/14/99
Still Paying Ten Years After The Debt Crisis,
http://nacla.org/english/lat_rec/debintro.htm.
Latin America Annual Report 1998,
http://www.worldbank.org/html/extpb/annrep98/latin.htm
1996 Latin America Prospective,
http://www.worldbank.org/html/extpb/annrep96/wbar08d.htm
Private Capital Flows http://www.iie.com/PRESS/cappress.htm

Latin American debt crisis

From Wikipedia, the free encyclopedia

The Latin American debt crisis was a financial crisis that originated 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 not able to repay it.
Contents
[hide]

1 Origins
2 Beginning of the debt crisis
3 Effects
4 Effects of Latin American Debt Crisis and the IMF
5 Current levels of external debt
6 See also
7 References
8 Further reading
9 External links

[edit]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. Initially,
developing countries typically garnered loans through public routes like the World Bank. After 1973, private
banks had an influx of funds from oil-rich countries and believed that sovereign debt was a safe investment. [1]
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 (interest payments and the repayment of principal) grew even faster, reaching $66 billion in 1982, up
from $12 billion in 1975.[2]
Massive amounts of debt issued by dictatorships only worsened the situation

[edit]Beginning

[3]

of the debt crisis

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. The sharp increase in oil prices caused many countries to search out more loans to
cover the high prices, and even oil producing countries wanted to use the opportunity to develop further. These
oil producers believed that the high prices would remain and would allow them to pay off their additional debt. [1]
As interest rates increased in the United States of America and in Europe in 1979, debt payments also
increased, making it harder for borrowing countries to pay back their debts. [4] Deterioration in the exchange rate
with the US dollar meant that Latin American governments ended up owing tremendous quantities of their
national currencies, as well as losing purchasing power.[5] The contraction of world trade in 1981 caused the
prices of primary resources (Latin America's largest export) to fall. [5]
While the dangerous accumulation of foreign debt occurred over a number 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 1982 when Mexico's Finance Minister, Jesus Silva-Herzog declared that Mexico would no
longer be able to service its debt.[6] Mexico declared that it couldn't meet its payment due-dates, and
announced unilaterally, a moratorium of 90 days; it also requested a renegotiation of payment periods and new
loans in order to fulfill its prior obligations.[5]
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.
The banks had to somehow restructure the debts to avoid financial panic; this usually involved new loans with
very strict conditions, as well as the requirement that the debtor countries accept the intervention of
the International Monetary Fund (IMF).[5] There were several stages of strategies to slow and end the crisis.
The IMF moved to restructure the payments and reduce consumption in debtor countries. Later it and the
World Bank encouraged opened markets. [7][8] Finally, the US and the IMF pushed for debt relief, recognizing
that countries would not be able to pay back in full the large sums they owed. [9]
However, some unorthodox economists like Stephen Kanitz attribute the debt crisis not to the high level of
indebtedness nor to the disorganization of the continent's economy. They say that the cause of the crisis was
leverage limits such as U.S. government banking regulations which forbid its banks from lending over ten times
the amount of their capital, a regulation that, when the inflation eroded their lending limits, forced them to cut
the access of underdeveloped countries to international savings. [10]

[edit]Effects
The debt crisis of 1982 was the most serious of Latin America's history. Incomes dropped; economic growth
stagnated; because of the need to reduce importations, unemployment rose to high levels; and inflation
reduced the buying power of the middle classes.[5] In fact, in the ten years after 1980, real wages in urban

areas actually dropped between 20 and 40 percent. [7] Additionally, investment that might have been used to
address social issues and poverty was instead being used to pay the debt. [1]
In response to the crisis most nations abandoned their import substitution industrialization (ISI) models of
economy and adopted anexport-oriented industrialization strategy, usually the neoliberal strategy encouraged
by the IMF, though there are exceptions such asChile 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. Between
1982 and 1985, Latin America paid back 108 billion dollars. [5]

[edit]Effects

of Latin American Debt Crisis and the IMF

Since Latin American countries, such as Mexico and Brazil, were not able to pay back their foreign debts, it
showed that Latin America is not able to keep up with the pace in which their debts grew. Before the crisis,
Brazil and Mexico tried to borrow money to enhance economic stability and reduce the poverty rate. But after
continuously borrowing money, they fell in the whirlpool of debt, and the innovations and improvements from
the past few years became meaningless.[11]
During the 1970s the world fell into an international recession which strained and put stress onto the
economies of countries all over the world. Many major nations and countries attempted to slow down and stop
inflation in their countries by raising the interest rates of the money that they loaned, causing Latin America's
already enormous debt to increase further. In between the years of 1970 to 1980, Latin America's debt levels
increased by more than one-thousand percent.[12]
The crisis caused the per capita income to drop and also ironically increased poverty as the gap between the
wealthy and poor increased dramatically. Due to the plummeting employment rate, children and young adults
were forced to join the drug trade, and some even began prostitution. [13] The low employment rate also caused
many problems like homicides and crime and made the affected countries undesirable places to live. Frantically
trying to solve these problems, debtor countries felt pressured to constantly pay back the money that they
owed, which made it hard to rebuild an economy already in ruins.
Latin America, unable to pay their debts, turned to the IMF (International Monetary Fund) who provided money
for loans and unpaid debts. In return, the IMF forced Latin America to make reforms that would favor freemarket capitalism. The IMF also helped Latin America utilize austerity plans and programs that will lower total
spending in an effort to recover from the debt crisis. The efforts of the IMF brought Latin America's economy to
become a capitalist free-trade type of economy which is a type of economy preferred by wealthy and fully
developed countries.[14]

Latin America's growth rate fell dramatically due to the government's austerity plans which prevented them from
further spending. The living standards also fell alongside the growth rate which caused much anger and hatred
from the people towards the IMF. This caused the IMF to become a symbol that people came to dislike as more
and more people began to reject the IMF's policies which imposed the power of international agencies over
Latin America.[15]
The citizens of Latin America did not like the fact that their government was being controlled by "outsiders".
Leaders and officials were ridiculed and some even discharged due to involvement and defending of the IMF. In
the late 1980s Brazilian officials planned a debt negotiation meeting where they decided to "never again sign
agreements with the IMF".[16] The efforts of the IMF helped Latin America regain some balance after the debt
crisis but was not able to resolve all of its issues.

[edit]Current

levels of external debt

This article's factual accuracy may be compromised due to out-of-date information.Please
help improve the article by updating it. There may be additional information on the talk page. (August
2012)

Since the 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. The following is a list ofexternal debt for Latin America based on a March 2006
report by The World Factbook.[17]

Rank

Country - Entity

External Debt
(million US$)

Date of information

22

Brazil

211,400

30 June 2005 est.

24

Mexico

274,800

30 June 2011 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.

[edit]See

also

Chilean crisis of 1982

La Dcada Perdida

Developing countries' debt

Odious debt

Sovereign default

[edit]References

Since the Mexican debt crisis, 30 years of

neoliberalism
By Jerome Roos On August 22, 2012

Mexicos collapse of 1982, and the extreme response

of the US and IMF, marked the birth of an elite
consensus that continues to haunt Europe today.
As Nick Dearden, Director of the Jubilee Campaign for debt
cancellation justwrote for the New Statesman, this week
marks the anniversary of an event of great resonance. For
this week it is exactly 30 years ago that Mexico temporarily

suspended its debt payments to foreign creditors, thereby

marking the beginning of what would eventually escalate into
the first international debt crisis of the neoliberal era. Things
would never be the same again.
What ensued was not only a tragic collapse of living standards
throughout the developing world and a lost decade for
Mexicans and millions of poor people in the Global South
most notably in Latin America, Eastern Europe and Africa
but also a historic shift in power relations between debtors
and creditors in the emerging global political economy.
Indeed, 1982 marked the global ascendance of Wall Street. As
the famous geographer David Harvey put it:
What the Mexico case demonstrated was one key difference
between liberalism and neo-liberalism: under the former
lenders take the losses that arise from bad investment
decisions while under the latter the borrowers are forced by
state and international powers to take on board the cost of
debt repayment no matter what the consequences for the
livelihood and well-being of the local population.
In the lead-up to the 1980s debt crisis, Wall Street banks had
lent lavishly to developing country governments. The oil crisis
of the 1970s had led to huge capital surpluses in oil-producing
countries, which subsequently reinvested those surpluses
through US banks. As a wall of liquidity flooded international
capital markets, interest rates fell precipitously. Countries like
Mexico went on a borrowing spree. And the banks were only
all too happy about the arrangement. After all, as Citicorp
CEO Walter Wriston put it, countries dont go bust.
All the while, the US government stood by passively as
American banks lent billions of dollars, mostly to Latin
American governments. When the US was finally faced with
an economic crisis of its own, induced partly by the oil crisis of

the 1970s but more importantly by the long-term decline in

the rate of profit of its own industrial sector, the Chairman of
the Fed, Paul Volcker, decided to dramatically raise interest
rates to put an end to stagflation and break the economic
consensus (the so-called Keynesian compound of embedded
liberalism) that had reigned supreme since WWII.
This, in turn, immediately pushed developing countries into
fiscal trouble. Because most of the loans these countries had
taken on were denominated in dollars, the hike in US interest
rates which became known as the Volcker Shock
immediately raised interest payments for these governments.
Mexico was only the first country that found itself incapable of
servicing its debt. In the years to come, many dozens more
would follow in its wake.
But the US government, desperate to avoid losses for Wall
Street, rapidly mobilized the IMF and World Bank to disburse
large bailouts for developing country governments around the
world. Starting with the $4 billion bailout of Mexico, the IMF
and World Bank rapidly saw their international leverage
increase. Unsurprisingly, they were immediately accused of
fending for the large banks not for the poor countries they
purported to bail out.
After all, one of the first things the troika of the US
Treasury, Fed and IMF made sure to do, was to impose
dramatic conditions on its loans to developing countries. Not
only were Mexico, Brazil, Argentina, Poland, Egypt and
dozens of other countries forced to immediately impose
draconian austerity measures; they were also expected to don
what Thomas Friedman would later call the Golden
Straitjacket of neoliberal free-market ideology.
The year 1982 thus marked the emergence of what became
known as the Washington Consensus. This term, coined by

US economist John Williamson, referred to a list of policy

prescriptions developed by US officials in collaboration with
technocrats at the IMF and World Bank, and quickly gained
notoriety throughout the developing world. As Harvard
economist Dani Rodrikwrote, stabilization, liberalization and
privatization became the mantra of a generation of
technocrats who cut their teeth in the developing world, and
of the political leaders they counselled.
The result of this new neoliberal elite consensus that free
capital flows, a deregulated financial sector and powerful
private banks were good for the economy were catastrophic
for Mexico. As Dearden writes, the economy collapsed and
stagnated, many industries shut down, with the loss of at least
800,000 workers altogether. By 1989, the Mexican economy
was still 11% smaller than in 1981. Meanwhile, the debt
doubled from 30% of GDP in 1982 to 60% by 1987. As World
Bank Chief Economist Joseph Stiglitz would later put itduring
the Asian Crisis of 1997-98, the medicine actually killed the
patient.
In one of her seminal books, Mad Money, the British political
economist Susan Strange was no less sanguine about who was
to blame for the Mexican crisis and who eventually paid for it.
On balance, she wrote, the banks had been helped out with
public money, while the governments had had to give in to
the market. Indeed, the United States had arranged a rescue
package, [but] it was the Mexican economy and the Mexican
people that suffered most.
The same story, Dearden continues, was repeated across
Latin America. In 1990 Latin American economies were on
average 8% smaller than they had been in 1980, and the
number of people living in poverty increased from 144 million
to 211 million. Former Colombian Finance Minister Jose
Antonio Ocampo calls the bail-out responses an excellent way

to deal with the US banking crisis, and an awful way to deal

with the Latin American debt crisis.
All in all, it took the international community (read: the US
government) an astonishing seven years to realize that some
form of debt restructuring was necessary. Finally, in 1989, a
blueprint plan was set up to reduce Mexicos debt one that
would later be repeated across the developing world. Largely
initiated by Wall Street bankers themselves, but named in true
Orwellian fashion after the US Treasury Secretary at the time,
the so-called Brady Bonds were supposed to help alleviate the
intolerable debt load of developing countries.
In reality, they were just a way for Wall Street banks to bring
order to their books while reaping windfall profits from a
situation that should, for both practical and moral reasons,
have seen them go bankrupt. As economic historian Harold
James pointed out in an IMF-commissioned study, the Brady
Bonds deal only reduced Mexicos debt by a negligible 2.7% of
GDP. While this restored confidence to financial markets, it
barely helped Mexico.
In 1990, the New York Times wrote that the jury is now in on
the 1989 debt restructuring agreement between Mexico and
the international financial community. Unfortunately, the
deal is a bad one for Mexico. Similarly, economist Michael
Dooley wrote that the banks were the clear winners of the
game, because the expected bailout was forthcoming while
the debtor countries embarked on reform programs in the
narrow interest of the banks.
As Lee Buchheit, a world-renowned lawyer known as the
philosopher-king of sovereign debt, explained it, while the
terms of the packages should be beneficial to the debtor
country, the US government will not support a package that
would compel US banks to recognize losses which could
undermine the financial integrity of the banking system. In

other words, too big to fail was already a problem back in

the 1980s, and the Mexicans know all about it.
Ironically, what happened in Latin America, Africa and
Eastern Europe during the 1980s would later be repeated in
near-identical fashion in South-East Asia. Even though it
wasnt Asian governments that had indebted themselves, but
Asian firms, the US Treasury and IMF responded in similarly
aggressive fashion, prompting free-market economist Jagdish
Bhagwati to refer to a Wall Street-Treasury
complex dominating the US foreign policy agenda (political
economist Robert Wade, my Professor at the LSE, would
later add the IMF to that list).
Now the observing reader will already have noticed where this
story is inevitably headed As Larry Elliot, economics editor
of the Guardian, justsummarized it, for Mexico, read
Greece. After all, there are not only similarities in the deep
cause of both crises (systematically over-leveraged banks of
the core recycling capital surpluses through peripheral
countries), but, as Elliot points out, the policy response to the
crisis has also been identical:
In 1982, Latin American governments were lent money by the
International Monetary Fund so that they could pay back the
banks that were threatened with going bust as a result of their
stupidity. As in Greece today, the money was given with one
hand and taken away again with the other.
In the end, it seems that Hegel was right to point out that
history repeats itself. But it took Marx to point out that it does
so first as tragedy, and then as farce. What is happening in
Europe today is an almost identical reflection of what
happened in Mexico in the 1980s only the banks are even
more powerful; Greece, as a member of the eurozone, is even

more systematically stuck in its Golden Straitjacket; and the

eventual collapse will be even more dramatic.
In Mexico, the 1980s tragically became known as la decada
perdida the lost decade. Millions of lives were ruined as the
Mexican economy was decimated. If Mexico and Latin
America have one lesson to teach to Greece and Europe, it
would therefore be this: if you dont break the bank, the bank
will break you. Either the people of Europe topple their own
states and the Troika, or the states and the Troika will topple
the people. What will it be?