Transcript Latin America and the Debt Crisis

Latin America and the Debt
Crisis
Michael Henderson
Paula Ramko
Lance Gomes
Ildiko Kiss
What was the debt crisis?
Individual countries could no longer make
payments on their debt
Interest payments are financed by:
1.Current Account surpluses
2.New debt issues
3.Other capital inflows (Foreign Direct
Investment)
Why does a debt crisis occur?
Deficits in the non-interest current
accounts (fiscal disorder)
World economic shocks hurt terms of trade
Non-debt capital inflows dry up
Loss of confidence of the world capital
markets
Why did the debt crisis occur?
 Economic growth under ISI was funded by
issuing debt (external savings)
 Private sector could not fund large capital
requirements
 Debt trap
–
–
Investments had VERY long time horizons
Unproductive investments
 Economic Populism: Buying off the masses
(Peron)
–
–
Emphasized growth and income redistribution
Tax collection was poor or nonexistent
Why did the debt crisis occur?
 Populism: inefficiency and corruption in state
firms – (Brazil and Mexico)
 Argentina used debt to defend fixed currency
 Negative real interest rates (1970’s)
 External shocks:
–
–
–
Oil prices plunged (lost income)
Real interest rates rose (borrowing more expensive)
Global recession
 Creditworthiness – banks would not roll over
loans
 Capital flight leading to devaluation
Results of the debt crisis
Pegged currencies were unstable
High interest rates
Recession
Hyperinflation
Debt Indicators
Year
1982
1983
1984
1985
1986
1987
1988
Total Debt/
Exports of
goods
269.1
309.1
291.4
312.9
376.6
377.6
332.6
Total Debt/
GNP
46.9
58.6
59.3
61.3
63.2
66.1
56.7
Interest/ GNP
5.3
5.6
5.5
5.5
4.6
4.6
4.1
Impact on local business
(inflation)
 Uncertainty
 Increased velocity of money (money spent as
soon as it came in)
 Speculation
 Reduced investments in business
 Barter
 Capital flight
 Fewer types of investment sources available
 Less liquid, robust currency exchange market
Impact on local business
 Businesses must determine industrial
development sought by govt.
 Monitor the RBI and agriculture strategies
 Determine if govt is structuralist or monetarist
 Use policy categories to understand national
strategy and the instruments govts use to
implement policies (p. 89)
 Identify how policies will affect operations
Doing business in midst of a
debt crisis
 Focus on intra-regional trade activities, among
Latin American countries
 Concentrate on developing less capital intensive
industries (service industry)
 Focus on producing necessities (food) instead of
luxury goods for the local market
 Increase export of high-quality, higher margin
products to generate foreign currency