ECON 361 Debt Crisis

ECON 361 Debt Crisis - TheDebtCrisisofthe1980s...

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The Debt Crisis of the 1980s  in Latin America The Lost Decade
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The International Debt Crisis of the  1980s Official beginning in mid-August 1982 when Mexico informed U.S. treasury that they couldn’t pay interest. Not unique to Latin America, but Latin America held most of the international debt Developing countries around the world were affected U.S. Farm sector was also severely affected by high levels of debt and rising interest rates. Farm Aid born.
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The international debt vs the public debt  in the U.S. (An aside)   Much of U.S. public debt we owe to our own citizens who have bought bonds. International debt for Latin America was owed to bondholders and institutions abroad -- importantly it had to be paid back in foreign currency, i.e. $US In order to pay the interest, $ are needed -- either from exports, or from foreign investment or loans. $ can't be borrowed internally.
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Balance of Payments Payments (Debits) Current Account Imports Travel abroad Interest on foreign debt Capital Account Investment & loans abroad by nationals Cash Reserves Acct Receipts (Credits) Current Account Exports Tourism in country Income from overseas investment Capital Account Investment and loans from abroad Cash Reserves Acct
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Latin America held most of the debt U.S. Banks afraid of default
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The Lost Decade in Latin America  Annual per capita economic growth in Latin America: 1970-80 -- 3.3% 1980-90 -- (-.4%) Argentina, Bolivia, El Salvador, & Nicaragua lost over 2% per year, 1990s – approximately 1.5% Even more difficult in Africa, but Asia suffered less
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Pointing The Creditor Perspective: debt crisis due to policy mistakes of the debtor govts loans wasted by inefficient SOE or squandered in capital flight Recommend free-market policies, trade liberalization to grow out of crisis Insist countries should honor their debt The Debtor Perspective: crisis due to rise in world interest rates, fall in commodity prices, and collapse of world trade in early 1980s U.S. budget deficit was to blame Free market policies will only serve foreign interests Successful adjustment requires debt relief
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Roots of the debt crisis:  Explosion of lending in 1974-79 OPEC profits funneled thru financial markets -- commercial banks loaned at variable rates to developing countries
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ECON 361 Debt Crisis - TheDebtCrisisofthe1980s...

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