DEBT AND DEVELOPMENT CRISES IN LATIN AMERICA

STEPHENY GRIFFITH-JONESOSVALDO SUNKEL

SHAAD ALVI (3697)

NAZISH NAEEM (3687)

SEHRISH MEHMOOD(3661)

LATIN AMERICAN DEBT CRISES(BACKGROUND)

In the 1960s and 1970s many Latin American countries, borrowed huge sums of money from international creditors for industrialization; especially infrastructure programs.

This heightened borrowing led Latin America to quadruple its external debt from $75 billion in 1975 to more than $315 billion in 1983.

Internal/External causes of Crises

How the cost of debt burden should be shared

Debt Crises Management

DEBT AND DEVELOPMENT CRISES IN LATIN AMERICA

STEPHENY GRIFFITH-JONESOSVALDO SUNKEL

SUMMARY

The internal and external causes were largely integrated or intimately linked to one another.

The Latin American Economy was ‘transnationalized’.

Capital flight is believed to be an important contributory factor for Latin America Debt and Development Crises.

The transnationalization of production and consumptions patterns was accompanied in the late 1970’s and early 1980’s by a sharp increase in the transnationalization of private wealth and assets.

It was an interaction between unfavorable and unstable circumstances in the international market and the development strategies and policies of Latin American Governments which made this crises significant larger.

Asian middle income countries that unlike Latin American countries followed a policy of targeted state intervention and selective regulation of international trade and capital flow absorbed the shocks of this crises more successfully.

Latin American countries were at disadvantage because they were considered less creditworthy just because of their geographic location.

Asian middle income countries that unlike Latin American countries followed a policy of targeted state intervention and selective regulation of international trade and capital flow absorbed the shocks of this crises more successfully.

Latin American countries were at disadvantage because they were considered less creditworthy just because of their geographic location.

The External factor contributing to the Latin American Crises are linked to the severity to the recession that occurred in the industrialized countries between 1980 and 1982.

In the late 1970’s, overall macroeconomic policy in industrial countries was greatly tighten, to achieve ‘disinflation’. There was greater emphasis on monetary policy to achieve this target.

I. The Value of Commodity exports fell sharply.

A number of factors amplified the impact of the resulting recession on developing countries.

The most important cause of the collapse of commodity prices in 1980-82 was the recession in the industrial countries.

I. The Value of Commodity exports fell sharply.

A number of factors amplified the impact of the resulting recession on developing countries.

The most important cause of the collapse of commodity prices in 1980-82 was the recession in the industrial countries.

I. The Value of Commodity exports fell sharply.

A number of factors amplified the impact of the resulting recession on developing countries.

The most important cause of the collapse of commodity prices in 1980-82 was the recession in the industrial countries.

High interest rate greatly increased the cost of holding commodity stocks, resulting in large reduction of inventories, which further reduced demand of many commodities.

II. The sharp escalation of interest rate increased dramatically the cost of the accumulated debt.

A number of factors amplified the impact of the resulting recession on developing countries.

Latin America’s gross remittance for interest payments rose at a spectacular rate, from around US $ 6.9 billion in 1977 to over US $39 billion in 1982

A high proportion of the Debt had been contracted at a variable rate

A number of factors amplified the impact of the resulting recession on developing countries.

In the early 1980’s the trend both in the commodity prices and in interest rate were simultaneously unfavorable for developing countries, with a disastrous impact on their current account deficit.

III. There was a large decline in bank lending to the Latin American countries.

A number of factors amplified the impact of the resulting recession on developing countries.

The growing inability of many major debtor countries to service their debt in 1982, and the obvious need to reschedule those debts, discouraged new loans to them, making the debt crises even worse

For Banks the credit risk in such lending was very high.

IV. Rise in the Dollar exchange rate increased the effective cost to most countries of the interest and amortization payment on their external debt.

A number of factors amplified the impact of the resulting recession on developing countries.

A potentially important mechanism for enhancing international liquidity is the provision of low conditionality lending by the IMF.

Agents in the International Financial Intermediation

A potentially important mechanism for enhancing international liquidity is the provision of low conditionality lending by the IMF.

Agents in the International Financial Intermediation

The IMF’s Compensatory Financing Facility (CFF) was developed in 1963 with a stated objective to maintain unaffected import capacity, in the face of export fluctuations caused by external events.

Agents in the International Financial Intermediation

Large increase in the foreign debt that occurred during the 1970’s.

National Causes of Latin American Crises

Deregulation of the financial and trade systems.

The increase in imports during particular years (1970’s), increased future dependence of the economy on the higher level of imported inputs.

Latin American Debt servicing difficulty caused serious concerns amongst the international Banks, as they feared that such difficulty could threaten their profitability and even their existence.

The Management of the Latin American Debt Crises

Banks reacted by restricting credit to countries already experiencing debt crises

The contraction of credit made debt servicing even more difficult for the borrowers.

I. The IMF played a key role in assembling rescue packages, which included credit tranche, rescheduling of maturing debt, and arrangement of new finance from Banks.

The Management of the Latin American Debt Crises

II. The new finance from private Banks has to a large extent been granted on an ‘involuntary’ basis.

III. Private Banks formed steering committees , for the purpose of negotiating with the debtor government.

The Management of the Latin American Debt Crises

These steering committees – cartel of Banks – conducted negotiations on rescheduling of loans, reached tentative agreement with the government on the subject, and in collaboration with the IMF and their central Banks, offered package deals.

IV. Creditors negotiate as a block while debtors negotiate individually.

The Management of the Latin American Debt Crises

V. The complexity of the task, and the difficulties in reaching agreement, have in a number of cases implied that agreement is delayed beyond the targeted time, making the situation further complicated, demanding special bridging loans.

VI. The complexity of negotiation demanded ‘short-leash’ year-by-year approach. This approach implied the consolidation of debt corresponding to only one year of payments.

The Management of the Latin American Debt Crises

Multi-year rescheduling first ratified in 1985, between Mexico and its creditors.

Later it was granted to other large debtors who were seen by creditors to have ‘behaved well’ in their previous adjustment efforts.

VII. Latin American countries were spending more time on the rescheduling of the debt payments than on making viable medium term development strategies.

The Management of the Latin American Debt Crises

Latin American governments have not fully perceived their new bargaining strength.

Evaluation of Debt rescheduling

Latin American governments have not fully perceived their new bargaining strength.

Evaluation of Debt rescheduling

Alternatives&

Evaluation

Latin American countries were at disadvantage because they were considered less creditworthy just because of their geographic location.

In August 1982, Mexico defaulted on its external bank debt. When Mexico defaulted, the highly leveraged foreign banks pulled back from emerging markets in general and Latin America in particular. 

THE ROLE OF LATIN AMERICAN BANKS IN THEREGION’S CURRENCY CRISES

Carroll Howard GRIFFIN*http://www.rebs.ro/articles/pdfs/9.pdf

The most important cause of the collapse of commodity prices in 1980-82 was the recession in the industrial countries

In 1980’s great decline in inflation was accompanied by very high interest rates. 

Interest Rates, Inflation, and Federal Reserve Policy Since 1980Peter N. Ireland

Journal of Money, Credit and BankingVol. 32, No. 3, Part 1 (Aug., 2000), pp. 417-434 

Published by: Ohio State University PressStable URL: http://www.jstor.org/stable/2601173

A potentially important mechanism for enhancing international liquidity is the provision of low conditionality lending by the IMF.Conditionality—that is, program-related conditions—is intended to ensure that Fund resources are provided to members to assist them in resolving their balance of payments problems.

INTERNATIONAL MONETARY FUNDGuidelines on Conditionality

Prepared by the Legal and Policy Development and Review Departments(In consultation with other departments)

Approved by Timothy F. Geithner and François Gianvitihttp://www.imf.org/External/np/pdr/cond/2002/eng/guid/092302.pdf

Latin American governments have not fully perceived their new bargaining strength, as because they were the one who had to repay debt. The cash flows were negative to them, making them stronger at the bargaining table.

Cost that may result from an international sovereign default: reputational costs, international trade exclusion costs, costs to the domestic economy through the financial system, and political costs to the authorities.

IMF Working PaperResearch Department

The Costs of Sovereign DefaultPrepared by Eduardo Borensztein and Ugo Panizza