latin america’s debt crisis
TRANSCRIPT
-
8/8/2019 Latin Americas Debt crisis
1/19
By
Swapna Marka
Exe-PGDM
-
8/8/2019 Latin Americas Debt crisis
2/19
` Why the region accumulated an unmanageable external debt?
` What factors precipitated the crisis?
` How sovereignties and international creditors responded to the crisis?
` What was the most important outcome of the crisis resolution and
afterwards?` Is Latin America vulnerable to new debt crises?
-
8/8/2019 Latin Americas Debt crisis
3/19
` A. External factors
` The collapse of the Bretton Woods system was accompanied by the` reemergence of international capital markets and an increase in the` activity of international commercial banks.` In 1973 the OPEC quadrupled the prices of oil. Oil producers countries` deposited their surpluses of asses in international commercial banks.` Oil-importing nations in Latin America increasingly needed capital, in` part to finance the external deficits associated with oil inflation. The so` called Petrodollar recycling program allowed lesser developed nations to` purchase oil even as its price skyrocketed, and it was actively promoted` by the United States.` A drastic change in the source and composition of loans to Latin
` American in the 1970s, from long-term official loans with low interest` rates to short-term commercial loans with variable high interest rates` was a major factor which led to the debt crisis of the 1980s
-
8/8/2019 Latin Americas Debt crisis
4/19
` B Internal factors
` A good part of Latin American debt went to finance the growing
` trade imbalances.
` Many LATAM nations kept the real exchange rate strong as a
`
measure against inflation, worsening th
e current account.` The continuous real exchange appreciation made international
` interest rates (low in nominal terms) to be negative in real terms.
` This exacerbated indebtedness.
-
8/8/2019 Latin Americas Debt crisis
5/19
-
8/8/2019 Latin Americas Debt crisis
6/19
-
8/8/2019 Latin Americas Debt crisis
7/19
-
8/8/2019 Latin Americas Debt crisis
8/19
-
8/8/2019 Latin Americas Debt crisis
9/19
` The IMF Approach` The absorption approach: A way of understanding the` determinants of the balance of trade, noting that it is equal to income` minus absorption Y A = B.` If Y- A > 0 implies X-IM > 0 and NX>0 Trade surplus` A trade surplus, then, would help restore financial health by decreasing` the need to finance imports, leaving the balance to pay off the debt.` The IMF recommended contractionary policies aimed to decrease fiscal` spending and money emission.` Countries that signed agreements with IMF were signaling international` banks of their intentions to abide to the rules of the game. The notion of` conditionality emerged with its harsh consequences for the inhabitants`
of the debtor countries.
` Lending from the IMF and international banks were used for servicing` the debt. Resulting in a non-resolution of the problem.
-
8/8/2019 Latin Americas Debt crisis
10/19
-
8/8/2019 Latin Americas Debt crisis
11/19
` There are at least three parties to the transaction.
` Example` 1. Citibank recognizes $100m of bad debt in Mexico.` 2. Chrysler wants to invest in Mexico. It needs the equivalent of $75m in` pesos. Chrysler could take US$75m and convert it to pesos at the` prevailing exchange rate.` 3.The Mexican central bank wants to help Citibank recoup some of the` $100 m bad loan. That way Citibank will be willing to lend to other` Mexican clients in the future.` 4.The Mexican central bank approaches Citibank and Chrysler and` arranges the deal. Lets say it arranges for Citibank to sell the debt at` a 40% discount and agrees to purchase it from Chrysler at 75% of` face value.` 5.Chrysler then gives Citibank $60 (40% discount off of $100m ) and is` given the $100m bad debt. Just a paper asset.` 6. Chrysler immediately runs to the central bank and swaps the bad debt` for the equivalent of $75m in pesos.` 7. Chrysler then invests the $75m in pesos in Mexico
-
8/8/2019 Latin Americas Debt crisis
12/19
` Countries could not continue to service their debt through` contractionary policies, growth must be reassumed.` The Baker plan targeted fifteen less-developed countries for $29` billion of new money, $20 billion from commercial banks and $9` billion from the IMF and the World Bank.` Debt came to be understood as a development problem, and the` World Bank was charged with assisting in the management of the` adjustment process.` Too little too late. $29 billion will have no impact on obligations of` near one trillion dollars` The consensus was that the banks were prepared to take a realistic` position on developing country debt: it would never be repaid in full.`
Jump-starting growth
would not work until the debt burden was
` reduced two years later under the Brady plan.
-
8/8/2019 Latin Americas Debt crisis
13/19
` It was aimed to debt reduction throughout 3 options:
` decreasing the face value of debt
` extending the time period of obligations
` Infusion of new money
` Mexico restructured $48 billion of its liabilities. This debt
` relief reduced net transfers by $4 billion per year, nearly
` 2 percent of the gross domestic product (GDP), from
` 1989 through 1994
-
8/8/2019 Latin Americas Debt crisis
14/19
-
8/8/2019 Latin Americas Debt crisis
15/19
-
8/8/2019 Latin Americas Debt crisis
16/19
-
8/8/2019 Latin Americas Debt crisis
17/19
` Recovery from crisis long and painful
` Latin American debt crisis of the 1980s as a crucial dividing mark in theareas recent economic history (Rodrik, 2003).
` Strong economic fundamentals matter; countries must put attention toprice stability and budget constrains.
` The burden of adjustment to the debt crisis may have fallen
` disproportionately on women in particular andon the poorest people ingeneral.
` Rodriks (2003), sees the debt crisis as the explosive end of a period ofcontinued decline: the import substitution industrialization developmentmodel
-
8/8/2019 Latin Americas Debt crisis
18/19
-
8/8/2019 Latin Americas Debt crisis
19/19
`THANK YOU !