EH101 Essays due Feb. 15 - EH 101 Essays: 3. Why did most...

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EH 101 Essays: 3. Why did most Latin American countries default on debt commitments when in financial difficulties in the 1930s, but renegotiate the debts in the 1980s? The Latin American debt crisis of the 1980s has drawn several parallels to its predecessor in the 1930s. The decade preceding each of these crises witnessed an acceleration of lending to the region, a drastic decline in primary commodity prices, followed by a collapse in the volume and values of exports, and finally, a cessation of foreign lending to Latin America. While the result of this sequence of events was overall economic catastrophe for the region in both periods, there is one striking difference between the two crises: the 1930s witnessed rampant defaults on sovereign loans while the 1980s stand out as an era in which countries continued to service their foreign debts. I contend that this distinction between the two period is a result of the different bargaining power of the creditors of each era, the influence of multilateral negotiating parties in the 1980s, as well as lessons learned by Latin American countries by defaulting in the 1930s. 1930s- creditors were individual bondholders with no bargaining power. Bondholders govts viewed their problems as a private matter -In the 1980s round of sovereign defaults, creditors were chiefly commercial banks from Europe, the U.S, and japan. By definition, banks are far more integrally tied into national and intl systems than are bondholders. Banking systems of Europe, the U.S and Japan backed by national lenders of last resort. -In the 1980s creditors were big bans, with real bargaining power. Industrialised countries wanted to protect their banks-and banking systems so they intervented. More pressure on them to do so than just people writing letters. As a result of particularly a drastic decline in foreign trade revenues, the capacity of most Latin American governments to pay service to foreing debts decreased. -Decline in price of raw materials, the dollar value on Peruvia exports dropped by 72% between 1929 and 1932. This was due, in large measure, to the closing of foreign markets as a result of defensive action by the U.S as well as by the U.K and France. the protectionism of the powerful industrial nations thus had a distinctly negative impact on the weak and dependent economies of such natios as Peru. 1) huge banking consortia rather than scattered individual investors. -Bargaining power -Also Baker plan -Many people to negotiate with rather than small number (IMF) -dont have to simply do bilateral negotiations with every investor. Lindert 234- The meaning of foreign debt for private creditors and their home govts has risen because of the unprecedented exposure of major banks, particularly the top nine American banks, in the 1970s and 1980s. No such concentration of foreign public debt into a few private
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institutions was evident in the international bond era. The top banks then served as issuers and brokers, more than holders, of foreign bonds, earning fees as well as interest. For all the
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This note was uploaded on 09/04/2010 for the course GOVT 100 taught by Professor Peterenns during the Spring '08 term at Cornell University (Engineering School).

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EH101 Essays due Feb. 15 - EH 101 Essays: 3. Why did most...

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