1. STEPHENY GRIFFITH-JONES
OSVALDO SUNKEL
SHAAD ALVI (3697)
NAZISH NAEEM (3687)
SEHRISH MEHMOOD(3661)

2. LATIN AMERICAN DEBT CRISES
(BACKGROUND)
 In the 1960s and 1970s many Latin American
countries, borrowed huge sums of money
from international creditors for
industrialization; especially infrastructure
programs.
 This heightened borrowing led Latin
America to quadruple its external debt from
$75 billion in 1975 to more than $315
billion in 1983.

3. DEBT AND DEVELOPMENT CRISES IN LATIN
AMERICA
STEPHENY GRIFFITH-JONES
OSVALDO SUNKEL
Internal/External causes of Crises
How the cost of debt burden should be
shared
Debt Crises Management

5.  The internal and external causes were largely
integrated or intimately linked to one
another.
 The Latin American Economy was
‘transnationalized’.
 Capital flight is believed to be an important
contributory factor for Latin America Debt
and Development Crises.

6.  The transnationalization of production and
consumptions patterns was accompanied in
the late 1970’s and early 1980’s by a sharp
increase in the transnationalization of private
wealth and assets.
 It was an interaction between unfavorable and
unstable circumstances in the international
market and the development strategies and
policies of Latin American Governments
which made this crises significant larger.

7.  Asian middle income countries that unlike
Latin American countries followed a policy of
targeted state intervention and selective
regulation of international trade and capital
flow absorbed the shocks of this crises more
successfully.
 Latin American countries were at
disadvantage because they were considered
less creditworthy just because of their
geographic location.

8.  Asian middle income countries that unlike
Latin American countries followed a policy of
targeted state intervention and selective
regulation of international trade and capital
flow absorbed the shocks of this crises more
successfully.
 Latin American countries were at
disadvantage because they were considered
less creditworthy just because of their
geographic location.

9.  The External factor contributing to the Latin
American Crises are linked to the severity to
the recession that occurred in the
industrialized countries between 1980 and
1982.
 In the late 1970’s, overall macroeconomic
policy in industrial countries was greatly
tighten, to achieve ‘disinflation’. There was
greater emphasis on monetary policy to
achieve this target.

10. A number of factors amplified the impact of the
resulting recession on developing countries.
I. The Value of Commodity exports fell sharply.
The most important cause of the collapse of
commodity prices in 1980-82 was the
recession in the industrial countries.

11. A number of factors amplified the impact of the
resulting recession on developing countries.
I. The Value of Commodity exports fell sharply.
The most important cause of the collapse of
commodity prices in 1980-82 was the
recession in the industrial countries.

12. A number of factors amplified the impact of the
resulting recession on developing countries.
I. The Value of Commodity exports fell sharply.
The most important cause of the collapse of
commodity prices in 1980-82 was the
recession in the industrial countries.
High interest rate greatly increased the cost of
holding commodity stocks, resulting in large
reduction of inventories, which further reduced
demand of many commodities.

13. A number of factors amplified the impact of the
resulting recession on developing countries.
II. The sharp escalation of interest rate increased
dramatically the cost of the accumulated debt.
A high proportion of the Debt had been
contracted at a variable rate
Latin America’s gross remittance for interest
payments rose at a spectacular rate, from
around US $ 6.9 billion in 1977 to over US $39
billion in 1982

14. A number of factors amplified the impact of the
resulting recession on developing countries.
In the early 1980’s the trend both in the
commodity prices and in interest rate were
simultaneously unfavorable for developing
countries, with a disastrous impact on their
current account deficit.

15. A number of factors amplified the impact of the
resulting recession on developing countries.
III. There was a large decline in bank lending to
the Latin American countries.
For Banks the credit risk in such lending was
very high.
The growing inability of many major debtor
countries to service their debt in 1982, and the
obvious need to reschedule those
debts, discouraged new loans to them, making
the debt crises even worse

16. A number of factors amplified the impact of the
resulting recession on developing countries.
IV. Rise in the Dollar exchange rate increased the
effective cost to most countries of the interest
and amortization payment on their external
debt.

17. Agents in the International Financial
Intermediation
 A potentially important mechanism for
enhancing international liquidity is the
provision of low conditionality lending by the
IMF.

18. Agents in the International Financial
Intermediation
 A potentially important mechanism for
enhancing international liquidity is the
provision of low conditionality lending by the
IMF.

19. Agents in the International Financial
Intermediation
 The IMF’s Compensatory Financing Facility (CFF)
was developed in 1963 with a stated objective
to maintain unaffected import capacity, in the
face of export fluctuations caused by external
events.

20. National Causes of Latin American Crises
 Large increase in the foreign debt that occurred
during the 1970’s.
 Deregulation of the financial and trade systems.
 The increase in imports during particular years
(1970’s), increased future dependence of the
economy on the higher level of imported inputs.

21. The Management of the Latin American Debt Crises
 Latin American Debt servicing difficulty caused
serious concerns amongst the international
Banks, as they feared that such difficulty could
threaten their profitability and even their
existence.
 Banks reacted by restricting credit to countries
already experiencing debt crises
 The contraction of credit made debt servicing
even more difficult for the borrowers.

22. The Management of the Latin American Debt Crises
I. The IMF played a key role in assembling rescue
packages, which included credit tranche,
rescheduling of maturing debt, and
arrangement of new finance from Banks.
II. The new finance from private Banks has to a
large extent been granted on an ‘involuntary’
basis.

23. The Management of the Latin American Debt Crises
III. Private Banks formed steering committees , for
the purpose of negotiating with the debtor
government.
These steering committees – cartel of Banks –
conducted negotiations on rescheduling of
loans, reached tentative agreement with the
government on the subject, and in collaboration
with the IMF and their central Banks, offered
package deals.

24. The Management of the Latin American Debt Crises
IV. Creditors negotiate as a block while debtors
negotiate individually.
V. The complexity of the task, and the difficulties
in reaching agreement, have in a number of
cases implied that agreement is delayed beyond
the targeted time, making the situation further
complicated, demanding special bridging loans.

25. The Management of the Latin American Debt Crises
VI. The complexity of negotiation demanded
‘short-leash’ year-by-year approach. This
approach implied the consolidation of debt
corresponding to only one year of payments.
Multi-year rescheduling first ratified in
1985, between Mexico and its creditors.
Later it was granted to other large debtors who
were seen by creditors to have ‘behaved well’ in
their previous adjustment efforts.

26. The Management of the Latin American Debt Crises
VII. Latin American countries were spending more
time on the rescheduling of the debt payments
than on making viable medium term
development strategies.

27. Evaluation of Debt rescheduling
 Latin American governments have not fully
perceived their new bargaining strength.

28. Evaluation of Debt rescheduling
 Latin American governments have not fully
perceived their new bargaining strength.

30. Latin American countries were at
disadvantage because they were considered
less creditworthy just because of their
geographic location.
In August 1982, Mexico defaulted on its
external bank debt. When Mexico defaulted, the
highly leveraged foreign banks pulled back
from emerging markets in general and Latin
America in particular.
THE ROLE OF LATIN AMERICAN BANKS IN THE
REGION’S CURRENCY CRISES
Carroll Howard GRIFFIN*
http://www.rebs.ro/articles/pdfs/9.pdf

31. The most important cause of the collapse of
commodity prices in 1980-82 was the
recession in the industrial countries
In 1980’s great decline in inflation was
accompanied by very high interest rates.
Interest Rates, Inflation, and Federal Reserve Policy Since 1980
Peter N. Ireland
Journal of Money, Credit and Banking
Vol. 32, No. 3, Part 1 (Aug., 2000), pp. 417-434
Published by: Ohio State University Press
Stable URL: http://www.jstor.org/stable/2601173

32. A potentially important mechanism for
enhancing international liquidity is the
provision of low conditionality lending by the
IMF.
Conditionality—that is, program-related
conditions—is intended to ensure that Fund
resources are provided to members to
assist them in resolving their balance of
payments problems.
INTERNATIONAL MONETARY FUND
Guidelines on Conditionality
Prepared by the Legal and Policy Development and Review Departments
(In consultation with other departments)
Approved by Timothy F. Geithner and François Gianviti
http://www.imf.org/External/np/pdr/cond/2002/eng/guid/092302.pdf

33. Latin American governments have not fully
perceived their new bargaining strength, as
because they were the one who had to repay
debt. The cash flows were negative to
them, making them stronger at the
bargaining table.
Cost that may result from an international
sovereign default: reputational
costs, international trade exclusion
costs, costs to the domestic economy
through the financial system, and political
costs to the authorities.
IMF Working Paper
Research Department
The Costs of Sovereign Default
Prepared by Eduardo Borensztein and Ugo Panizza