Latin American Crisis of the 1980s The Lost Decade - PowerPoint PPT Presentation

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Latin American Crisis of the 1980s The Lost Decade

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History of L.A. Debt Crisis. Post WWII. Under Bretton Woods Agreement (1944) ... taxes, while public spending and social transfers play a very limited ... – PowerPoint PPT presentation

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Title: Latin American Crisis of the 1980s The Lost Decade


1
Latin American Crisis of the 1980sThe Lost
Decade
  • Econ. 462
  • Nov. 24, 2009
  • Edward Kulow
  • John Magallanes
  • Yojasi Lomas

2
Conditions Prior to the Crisis
3
History of L.A. Debt Crisis
  • Post WWII
  • Under Bretton Woods Agreement (1944)
  • - International Monetary Fund (IMF)
  • Economic Policy
  • - Import Substitution Industrialization Model

4
Continued . . . .
  • Economic Growth
  • Eurodollar Market
  • Early 1970s - Latin American exports increase
  • Western Banks Fund Expansion
  • Private Financing by Commercial Banks vs. IMF
  • - 33 of all financing by 1973
  • -50 of all financing by 1976
  • - 70 of all financing by 1980

5
Continued . . . .
  • Oil Prices increase after 1973 (see graph)
  • - Petro Dollar
  • US Dollar strengthened in late 1970s due to high
    interest rates (see graph)

6
(No Transcript)
7
Continued . . . .
  • Oil Prices increase after 1973 (see graph)
  • - Petro Dollar
  • US Dollar strengthened in late 1970s due to high
    interest rates (see graph)

8
Inflation and Interest Rates since 1970
- Inflation -U.S. Interest Rates
9
Contributing Factors
  • Between 1973-1983 external debt rose from 48
    billion to about 350 billion (see graph)
  • (about 58 of Gross Regional Product)
  • Latin American Crisis August 1982
  • - Mexican Finance Minister Jesus Silva-Herzog

10
L.A.C. Balance of Foreign Debt
(In Millions)
11
Conditions During the Crisis
12
What happened?
  • Global Economy slows into Recession
  • Debt Service
  • - 12 Billion in 1975
  • - 66 Billion by 1983
  • Banks react to Mexicos announcement
  • - Lending Freezes
  • - All loans due immediately!

13
Continued . . .
  • Situation Worsens
  • - Domino Effect by Oct. 1983 (16 Nations)
  • - Big 4 (Mexico, Brazil, Venezuela, Argentina)
  • owe about 176 Billion (50 of debt)
  • - 37/176 Billion owed to 8 largest U.S. banks
  • (representing 147 of capital reserves)

14
Conditions After the Crisis
15
Steps to Alleviate Debt Crisis
  • Bridge Loans
  • - Permitted countries to pay interests only!
  • Debt-Equity Swap
  • - Transfer of loan to another bank or 3rd party
  • Restructuring
  • - Extension of terms or payment schedules
  • Securitization of Loans
  • - Brady Plan
  • IMF Restrictions

16
Brady Plan
  • Securitization of sovereign debt
  • - 1989 Nicholas Brady U.S. Sec. of Treasury
  • - Converted loans into bonds backed by U.S.
  • T-bonds (available to general public)

17
IMF Restrictions
  • Conditional Lending
  • Increase in Interest Rates to Increase F.D.I.
  • Devalue Currency to Increase NX
  • Decrease Government Spending (no subsidies)
  • Privatization to relief financial burden
  • Stabilizes Index Prices Wages to control
    inflation
  • Removal of Tariff Barriers
  • (from Import Substitution Industrialization
    Policy to Export Oriented Trade Policy)

18
L.A.C. Balance of Foreign Debt
(In Millions)
19
Conditions Today
20
Where Does L.A. Stand Now?
21
Continued . . .
22
Recent trends in Latin America's Fiscal
Performance (OECD)
  • Since the end of the debt crisis of the 1980s,
    Latin American Countries have
  • reduced deficits
  • lowered fiscal volatility
  • increased public expenditure and pioneered fiscal
    innovations.
  • However, important problems remain
  • revenue generation relies on volatile non-tax
    sources and regressive indirect taxes, while
    public spending and social transfers play a very
    limited distributive role

23
Any Questions?
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