Latin American debt crisis (early eighties)

The Latin American debt crisis pinnacle moment was Augustus 1982, when Mexico declared that it would not be able to repay its debts. However the wheel had been set into motion much earlier. In the sixties and seventies many Latin American economies were booming. Countries like Argentina, Brazil and Mexico were investing heavily in large infrastructural projects. Because their economies seemed to be doing well, many banks were happy to lend large amounts of money to finance those projects. The total debt of Latin American countries quadrupled in the ten years leading up to the Mexican default. In the seventies the economic environment started to change and a recession of the world economy became apparent. This caused some problems for the Latin American countries, but this was still limited. The oil crisis caused a very large increase in the oil prices. This facilitated the economic recession. However, this also caused an enormous flow of wealth towards the oil producing countries. These countries in turn invested their new found wealth with international banks. These banks then lend it to the Latin American countries, because they had been good creditors in the past and they still had a demand for debt. Thus the possible problem with servicing debt (due to an economic slowdown) was postponed by financing the debt servicing costs with the new available debt.

This circle continued until it became clear that the Latin American countries could not finance their debt burden from their generated income. Mexico was the first to make an official statement of this fact. Banks reacted by abruptly stopping the sales of debt to those countries. Repayments were demanded for all debts due and no refinancing was made available. This caused the problem to quickly become visible. Because the debt repayments were financed from new debt, the repayments stopped as the availability of new debt evaporated. As a result many banks were forced to take large write downs on their debt portfolio.

The impact on banks was large. However the impact on the Latin American countries was even larger. The eighties for those countries are referred to as the “lost decade”. The crisis also caused several regimes and dictators to lose their power.

Author: Muller, J.J.