Latin American Debt Crisis 1

Latin American Debt crisis

Submitted by:

Rohan Mehra

Rohit Deshmukh

Saket Rathi

Sandeep Kumar Singh

Sankarshan Joshi

Debashish Bagg

Money Banking and Finance Project

Latin American Debt Crisis 2

Agenda

• Introduction to LADC• Era’s of debt crisis• Inputs to overcome debt crisis• Conclusion

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Latin American Debt Crisis 3

Introduction

• Officially Latin American Crisis began on August 12, 1982– Mexico would be unable to meet its August 16 obligation to

service an $80 billion debt

• Sixteen Latin American nations, Mexico, Brazil, Venezuela, and Argentina owed various commercial banks over $176 billion.

• Divided under three phases:– 1973-78– 1979-83– Post 1983

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Latin American Debt Crisis 4

• Increasing Interest of American Banks in Latin American economies:– Respectable growth rate in Real Domestic Product– Search for new markets & profit opportunities due to loss in share

savings to share markets

• Sharp Rise in Crude Oil Prices, beginning in1973 led to increased lending– Effects: Inflationary Pressure around the world.– Balance of Payment problems for Latin American nations

• Resulted in escalation of borrowings from international Capital Markets.

1973-1978 1979-1982 Post 1982

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• Official Response:– Warning signs had been given for individual

institutions& banking system.– Congress held hearings in 1975: Expressed “Grave

Concern”– 1977 : Report from Senate Subcommittee predicted

about possible instability of US banking system.

• Concern fell on deaf ears, heavy lending continued• Banks did not see any “Risk” associated with the

trend

1973-1978 1979-1982 Post 1982

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Latin American Debt Crisis 6

• Moral Hazard for the funds flowing in.

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1973-1978 1979-1982 Post 1982

Oil Shock

Inflation

Interest Rate Hike

Cost of lending rose

LADC

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Latin American Debt Crisis 7

• Official Response:• In 1979 the Interagency Country Exposure Review

Committee (ICERC), – Office of the Comptroller of the Currency (OCC),– Federal Reserve Board,– Federal Deposit Insurance Corporation (FDIC)

• OCC’s verdict on the 10% rule.

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1973-1978 1979-1982 Post 1982

Latin American Debt Crisis 8

• Took 7 years for – debt restructuring, – setting aside loss reserves,– attempting to protect the solvency of the U.S. financial

system.

• Bilateral negotiations started• Regulatory forbearance was also granted.• Banks realized that a large portion of the loans would

not be repaid.• Recovery– IMF– World Bank

1973-1978 1979-1982 Post 1982

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Conclusion

• Signs of distress were prevalent but were overlooked.

• Decision makers leave the shareholders to face the consequences. – Principal-Agent Problem.

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Latin American Debt Crisis 10

Thank You

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