understanding the latin american debt crisis
TRANSCRIPT
1UNDERSTANDING
THE LATIN AMERICAN DEBT CRISIS
2AN INTERNATIONAL FINANCE (F405) PRESENTATION
PREPARED FOR
SYEDA MAHRUFA BASHARASSISTANT PROFESSOR
INSTITUTE OF BUSINESS ADMINISTRATION UNIVERSITY OF DHAKA
3THE TEAMGROUP 05, BBA 21st BATCH
SHATABDI BISWAS (RH-12)
TAUSIF AHMED(ZR-42)
MUHTASIM SAROWAT RAYED (ZR-61)
SAZID AHMAD(ZR-65)
SARWATH HAFIZ MUMU(RH-70)
SHARMILI ROWSHON KABIR(RH-30)
4OUTLINE
01BACKGROUND
02REASONS
BEHIND THE CRISIS
03SHORT-TERM
IMPACT
5OUTLINE
04CONTROL MEASURES
05LONG-TERM
IMPACT
06OUR
TAKEAWAYS
6
01BACKGROUND
7INTRODUCTION
BRAZIL
ARGENTINA
MEXICOTHE LOST DECADE
Late 70s/Early 80s
COUNTRIES AFFECTED
16 Latin American countries and 11 other LDCS
DEBT UNSUSTAINABILITY
Foreign debt exceeded countries’ earning power
8BACKGROUNDPETRODOLLAR RECYCLING
$0.00
$20.00
$40.00
$60.00
$80.00
$100.00
$120.00
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981
CRUDE OIL PRICES, 1970-1981
Nominal Price Inflation Adjusted Price
Yom Kippur War- OPEC cuts production
Iranian Revolution
TWO LARGE OIL PRICE HIKES IN 1970S
Created current account surplus in oil exporting countries and current account deficits in many Latin American countries
9BACKGROUNDPETRODOLLAR RECYCLING
US MONEY CENTER BANKS
OPEC COUNTRIES
DEVELOPED COUNTRIES
DEVELOPING COUNTRIES
Surplus Funds
Sovereign Debt
US Money-Center Banks became intermediaries between the two parties
Financed sovereign debt in Latin American Countries
Provided the oil exporting
countries a safe, liquid place to
store their surplus funds
10BACKGROUNDPETRODOLLAR RECYCLING
$75 BILLION
$12 BILLION
$315 BILLION
$66 BILLION
1975 1982-83
Latin American External Debt
Debt Service Payments
27.02%CAGR
40.63%CAGR
11BACKGROUNDCRISIS OVERVIEW
A Good Illustration of Interdependence between Balance Of Payments And Macroeconomic Indicators
Change in Current Account positions lead to rise in sovereign
debt
Shifting global fortunes lead to
changes in interest rates and
inflation
These changes negatively impacted the debt sustainability of Latin American countries
1202
CRISIS
REASONS BEHIND THE
13ECONOMIC REASONS FOR
LATIN AMERICAN SOVEREIGN DEBT
TO ENHANCE ECONOMIC STABILITY AND REDUCE POVERTY
average real GDP growth 6% during 1970s and 4-5% in early 1980s
FAVORABLE LOAN TERMS
Collateral free with near zero interest rates
Loan roll over when principal was due
WHITE ELEPHANT PROJECTS
Appeased interest groups but did little for the economy
TO KEEP UP WITH HIGHER OIL PAYMENTS
After the two price hikes
14FINANCIAL REASONS
WHY US BANKS INVESTED IN LATIN AMERICAN DEBT
INFLUX OF NEW FUNDS FROM OIL
EXPORTERS
INTERNATIONAL EXPANSION OF
BANKING SERVICES
GROWTH OF EURODOLLAR MARKET GAVE GREATER ACCESS TO FUNDS
15FINANCIAL REASONS
OVEREXPOSURE TO LATIN AMERICAN DEBT
1977 1978 1979 1980 1981 1982 1983 1984 1985
$32 BILLION
$36 BILLION
$40 BILLION
$44 BILLION
$54 BILLION
$55 BILLION
$56 BILLION
$59 BILLION $58
BILLION
In the 70s, over 50% of money center banks’ paper profits came from Latin American sovereign debt
Loan capital coefficient of 180%
16ECONOMIC REASONS
WHY THE DEBT SITUATION WORSENED
US INTEREST RATE HIKE TO CURB INFLATION
In July 1980, federal funds rate increased from 10% to near 20%
This trigged global recession
DEBT SERVICING PAYMENTS GREW SIGNIFICANTLY
Loans were tied to LIBOR, which rose with US interest rates
LESSER DEMAND FOR LATIN AMERICAN EXPORTS
Slower world economy lead to worse ‘terms of trade’ for Latin American countries
17FINANCIAL REASONS
WHY THE DEBT SITUATION WORSENED
WORSENING CURRENT ACCOUNT DEFICIT DUE
TO FALL IN EXPORT
This depleted foreign exchange reserves
BANKS WERE NOW LESS KEEN ON LATIN
AMERICAN DEBT
Domestic investments were now safer and more
profitable
T-bill yields were close to 16%
MASSIVE CAPITAL FLIGHT
Private individuals and entities funneled money out of Latin American countries
FEWER EXTENSIONS WITH SHORTER PAYMENT PERIODS
Eventually, when Mexico asked for another extension, the banks refused.
18THE TRIGGER POINT
HOW THE CRISIS CAME TO BE
In August 1982, Mexico defaulted on its sovereign debt, which at that point totaled
$80 BILLION
19
OTHER LATIN COUNTRIES ALSO DECLARED LOAN
DEFAULT
THREAT OF US BANKS’ BANKRUPTCY
Overexposure to Latin American debt threatened
global financial collapse
THE TRIGGER POINT
THE IMMEDIATE FALLOUT
20
03SHORT-TERM IMPACT
21SHORT TERM IMPACT
DECREASE IN INCOME AND
STANDARD OF LIVING
Real wage dropped by 20-40% in the
ten years following the crisis
LACK OF INVESTMENT ON INFRASTRUCTURE
Funds were now diverted to paying off debt service payments and supporting
export-led industries
FINANCIERS BECAME MORE CAUTIOUS ABOUT LENDING TO LDCS
HIKE IN INTEREST RATES FOR LDC SOVEREIGN DEBT
Interest rates for poor countries were 4 times higher than rich countries
More focus on credit ratings and international exchange rate movements
22
04CONTROL MEASURES
23
1982-84
1985-89
1989-
1996
IMF AUSTERITY
Rescheduling and New Lending
BAKER PLAN
New lending ; pro-growth
BRADY PLAN
Debt Reduction
HIPC
Debt Reduction
CONTROL MEASURES4 STAGES OF ADJUSTMENT
Brady and Baker Plans were most effective
24CONTROL MEASURESBAKER PLAN
.
Loans were provided to cover interest payments. Some of the strings attached included:
PRIVATISATION OF STATE ENTERPRISES
END OF GOVERNMENT SUBSIDIES
OPENING ECONOMY TO FDI
These loans were provided to 15 debtors and comprised 20% of all World Bank Debt
25CONTROL MEASURESBRADY PLAN
COLLATERIZATION OF SOVEREIGN DEBT
Brady bonds shifted debt burden from the
government to the taxpayers
DEBT FORGIVENESS
80s’ boom refinanced the US banks, who were now better equipped to absorb loss from sovereign debt
26CONTROL MEASURESOTHER MEASURES
DEBT-EQUITY SWAPS
Chile and Mexico used asset to offset debt. The
lender acquired a tangible asset a discounted price
DEBT-FOR-NATURE SWAPS
Government exchanged development rights of
environmentally valuable lands for debt forgiveness
JUBILEE 2000
An international coalition movement that aimed to relieve LDC debt by 2000
27
05LONG-TERM IMPACT
28LONG TERM IMPACT
1982DEBT CRISIS
SHIFT FROM IMPORT SUBSTITUION
INDUSTRIALISATION TO EXPORT LED
INDUSTRIALIZATION
The latter was heavily encouraged by IMF
and often a condition of the debt rescue
loans
1982-1985
29LONG TERM IMPACT
NAFTA was established in 1994, encouraging MNCs to set up production in countries like Mexico
PUSH FOR TRADE LIBERALIZATION1986-
1994
1990s
HOLLOWING OUT EFFECT
US manufacturing sector suffered as firms located
overseas
Mexican workers eventually lost out to cheaper Asian
labor
30LONG TERM IMPACT
2000sGreater focus on free trade lead to rise of emerging markets like BRICS countries
THE COMMODITY BOOM
China in particular contributed to the rising demand for commodities
31
06OUR TAKEAWAYS
32OUR TAKEWAYS
INTERDEPENDENCE BETWEEN BOP AND MACROECONOMIC
FACTORS
Feedback loop between current account positions,
sovereign debt, interest rates and inflation
THE CRISIS EXACERBATED DUE TO OVEREXPOSURE
Overexposure to specific loan markets should be avoided
Due diligence must be done to determine debt sustainability
Heavy indebtedness (especially from short term debt) signals that the country may be unable to pay it back
33OUR TAKEWAYSA BLUEPRINT FOR DEALING
WITH FINANCIAL CRISES
Many of the methods employed, such as slashing short term interest rates, austerity and
debt collateralization, were later used to deal with the 07/08 credit crisis
CONTRIBUTION TO TRADE LIBERALIZATION
Debt rescue and rescheduling efforts by IMF and World Bank allowed more influence on national
trade and development policies
Facilitated globalization but at the expense of many stakeholders
34
THANKYOU!