Latin American Debt Crisis

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Transcript Latin American Debt Crisis

Latin American Debt Crisis
The International Financing Climate
 The Bretton Woods system collapses in 1971
Floating Exchange Rate
Global financing shift from IMF, World Bank to commercial banks
 Oil Shock of 1973 & 1979
The rich get richer…
Petrodollar Recycling
 Supply-side
Shift in loan packages offered
Insufficient (or little regard) credit risk evaluation
Mentality that countries could not go bankrupt
 Demand-side
Non-productive investments
Growing interest payments, depreciating peso, capital flight
The Meltdown
 The 1970s – Runaway inflation and multiple failed attempts to stabilize
inflation and the exchange rate
 August, 1982 – Mexico’s minister of finance declared that Mexico
would be unable to meets its August 16th $80 billion debt
 Commercial banks refused new loans and demanded payment
 October, 1983 - 27 nations had rescheduled their debts, 16 were Latin
American nations
 Mexico, Brazil, Venezuela and Argentina owed approximately $176
billion (74% of the total LDC debt outstanding)
 Banks collapsing, credit crunch, increase in unemployment, decrease
in GDP
The Way Out
 The International Monetary Fund (IMF) and the
Group of 7 (G7) led the response effort which
occurred in four phases:
August, 1982: International Lender of Last Resort
September, 1985: Baker Plan – increased voluntary spending
to offset recessionary impact of first phase
September, 1987: Bake Plan II - coined “market-based menu
approach” was adopted to assist lenders in recovering their
March, 1989: Brady Plan - launched a fifth round of debt
rescheduling and increased resources to reduce debt in Latin