Latin America and the Debt Crisis
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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