POLYNOMICS ASSIGNMENT

GROUP 20

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 Latin American debt crisis

• Also known as “La Década

Perdida”(The Lost Decade)
originated in 1980s when the
Latin American countries
couldn’t repay their foreign
When debt as it exceeded their
earning capacity.
• The crisis began in August,
1982 when Mexico declared
that it will no longer be able
to repay its debt.

• Many Latin American countries

Where were affected especially
Mexico, Brazil and Argentina.

Source : https://en.m.wikipedia.org/wiki/Latin_American_debt_crisis#:~:text=The%20Latin%20American%20debt%20crisis,Latin%20American%20countries%20reached%20a
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 • In 1960s and 1970s, Latin American countries economy were soaring.
• As the oil prices were skyrocketing, many countries took loans from
foreign creditors for development believing that the prices will persist and
they will able to repay the loans which did not happen.
• Increasing interest rates, declining exchange rate and loosing purchasing
Debt power led to accumulation of huge amount of foreign debt over the years.
• The debt crisis began when the international capital market became aware
Crisis in August, 1982 that Mexico will no longer be able to repay the debts.
• In the wake of Mexico’s declaration, most commercial banks reduced
significantly or halted new lending to Latin America.
• Finally IMF had to intervene to help the debtor countries. Along with US it
pushed for debt relief, recognizing that countries would not be able to pay
back in full the large sums they owed.

Source : https://en.m.wikipedia.org/wiki/Latin_American_debt_crisis#:~:text=The%20Latin%20American%20debt%20crisis,Latin%20American%20countries%20reached%20a
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 Political
300%
Military
Increase in oil
Conflicts led
prices in the
to increase in
mid 70s
the oil price

Cause
Another cause
of
Debt Due to the recession in the
industrial world,
Meaning that the banks had
to borrow money from the
developing countries

Due to an increase in
the price of oil, the Led to a stock Market
developed countries in crash and a decreased
Latin America had to in the growth of
increase the cost of all developing countries
and imported products

Source : https://en.m.wikipedia.org/wiki/Latin_American_debt_crisis#:~:text=The%20Latin%20American%20debt%20crisis,Latin%20American%20countries%20reached%20a
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 Effects of the Debt Crisis on the Economy

• Inflation shot up nearly 100%.

• Peso collapsed to 1/5th of its former value.

• GDP per capita of the country shrank in line for 3 years.

• Poverty rate rose from 40.5% to to 48.4% of the population.

• Total debt to Least developed countries was almost 290% of the capital.

• Unemployment shot up to 12% with another 30% able to find only part time job.

• 7 of the 10 largest US Banks were threatened with bankruptcy.

• Nine largest American financial centers held 176% of their capital in debt in Latin America.

• The debt of the largest Latin American countries exceeded US $300 Billion, over $800 billion at todays’ valuation.

Source : https://www.youtube.com/watch?v=qDzg48QIImM
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 Effect on Developing Countries

• Declining Export Earnings

• Higher Interest Rates

• Declining local currency values

• Mexico alone had a debt of $80 Billion Dollar

In Mali, For Example:

• Total Foreign External Debt came up to $2.8 Billion Dollar

• Life Expectancy became 41 years

• Literacy rate fell to 46%

• 64% of the population were under the poverty line

• GDP per capita was $900.

Source : https://www.youtube.com/watch?v=qDzg48QIImM
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 GOVERNMENT APPROACH AND CRISIS
MEASURES EFFECT

■ BRIDGE LOANS ■ The restructuring and

rescheduling of debt in this form
Extension of bridge loans were given, which permitted continued throughout the 1980s.
countries to continue paying the interest on their loans,
even though they were not able to pay the principal. ■ However, the situation of people
■ DEBT-EQUITY SWAPS living in the borrower nations only
deteriorated. In order to continue
Transfer of a loan held by one bank to another bank or meeting their schedules for
to a third party in exchange for an equity investment in
the debtor country. paying interest, sovereign debtors
were forced to take out more
■ RESTRUCTURING loans, putting them even further
➢ Creditors rearranged payment schedules to give into debt.
debtors more time before the payments became
due. ■ Unemployment sky rocketed and
GDP declined.
➢ Extension of additional loans by the IMF
Source : https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?referer=&httpsredir=1&article=1305&context=jil
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 BRADY BONDS

■ In 1989, Nicholas Brady announced a scheme designed to "encourage banks

voluntarily to reduce the debt burden of LDC borrowers."
■ The Brady Plan ("Brady"), demanded the securitization of the loans owed by
sovereign debtors. The loans were converted into bonds backed by U.S. Treasury
Bonds and offered to the general public. The money generated by the sale of the
bonds was then used to pay off the country's debt.
■ Brady Bonds had a longer maturity date before payments were due, which allowed
sovereigns more time to generate revenue and rebuild their economies.
■ Since the Brady Plan was introduced sixteen years ago, many Latin American
sovereigns have converted their bank loans to Brady bonds. These nations include
Mexico, Costa Rica, Venezuela, Argentina, Brazil, and Peru.

Source : https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?referer=&httpsredir=1&article=1305&context=jil
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Repercussions of the government policies

➢ When the Managing director of the International Monetary Fund announced that
Mexico could no longer serve its debt, other countries quickly followed suit.
➢ Ultimately, 16 Latin American countries rescheduled their debts, as did even LDCs
in other parts of the world.
➢ In response, many banks stopped new foreign lending and tried to collect and
restructure existing loan portfolios.
➢ The sudden cessation of bank financing plunged many Latin American countries
into deep recession and exposed the shortcomings of previous economic policies.
➢ As transcript of July 1982 meeting of the Federal Open Market Committee [FOMC]
show, committee members felt a need to take action.
➢ Fed officials urged US banks to participate in Mexico’s loan restructuring program.

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Repercussions of the government policies

• As the crisis spread beyond Mexico, the United States took the lead in setting up an ‘international
lender of last resort’.
• While this program averted an immediate crisis, it allowed the problems to worse.
• Instead of eliminating subsidies to state-owned enterprises, many LDCs have cut spending on some
crucial aspects like
i. Infrastructure and wages
ii. Healthcare and education
• The government’s decision led to
i. High unemployment
ii. A sharp decline in per capita income
iii. Stagnation
iv. Negative growth
• By 1989, it became clear to the US government that the debtor countries could not repay their loans.

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 How the Debt Crisis Should Have Been Approached
Bank Loan Structure Recognition of loan losses Reduction of Spending's should Quicker Understanding of the
have been avoided. Problem

• US banking regulators
• A quicker understanding of
should have allowed
the root cause of the
lenders and the bank to
problem before it had
recognized the losses in
reached the surface would
loan early.
have been helpful.
• With this their would have
• More debt wouldn’t have
been no banks to dissolve
accumulated.
• The bank could have
• Negotiation time would
created more loan loss
have cut down significantly
Reserve
• At the start of the load subsidy
should have been given to the • Instead of reduction of
lower developed countries. spending, an elimination
• Interest should have been of subsidies to state
covered for low income owned enterprises should
families. have been done.
• Loan should be of the limited • Less unemployment would
amount. have been achievable
• Load should not have been • Less reduced in per capita
given if the person des not would have also been
have LSD or any collateral to
achievable.
avail for the load

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 How the Debt Crisis Should Have Been Approached
Approval of Signing of Exit Consents Setting Limit on Recovery in Lawsuits

• Sovereign debtors must be

allowed to sign exit consents
• A limit on recovery in lawsuits
• Which will allow them to
also leads to the availability
restructure their debts and
and recirculation of more
pay back the creditors when
money in borrower nations
their nation's finances will
because payouts would be
allow them to do so without
smaller.
their country going into
default

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 Lesson Learned from Latin American Debt Crisis of the 1980s

• The 1980s debt crisis counted with a

more elaborate international
institutional financial architect.
• Which did not turned out to be
advantageous at all.
• As it forced Latin America to service its
external debt beyond its capacity and
forced it into unduly contractionary
macroeconomic policies
• The main Lesson from this is the fact that
we do not require an institutional
architect, since the development of an
international debt workout mechanism is
much more required.
• And last but not least it is essential that
international financial institutions should
never be used in favour for the support of
interest in the creditor countries.

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THANK YOU
By Group 20

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 PEER RATING

Name Rating
Mayur Talware N/A
Mayank Modi N/A
Mayank garg N/A
Maurya Sreelatha Subby 7
Mark Lalduhawma 10
Manish Sharma N/A
S SUPRIYA 6
Malavika Muraleedas 9
Madhumita Rout 8
BODDU TARAKESWARA VENKATA N/A
MADHAN

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