1982 Mexican Financial Crisis

© 1982, 2001 Donald J. Mabry

The purposes of this presentation are limited just as its contents are tentative. One goal is to outline the chronology of the Mexican financial crisis By doing so, it may help one,understand better what has happened in Mexico in 1982. The other purpose is to suggest some of the consequences of the crisis for the United States. Mexicans will pay the greatest price for the fiscal mismanagent by and greed of a few but U.S. citizens will also pay.One fundamental problem for the Mexican economy is that it is a satellite of the United States economy. Mexico is the third largest trading partner of the United States, which buys over 65% of Mexico's exports and accounts for a similar percentage of Mexico's imports. Tourism from the United States and border transaction produce billions of dollars for Mexico even after subtracting the large amounts spent by Mexican tourists in the United States Remittances by Mexicans working tn the U.S. contribute more billions to the Mexican economy. More subtle, perhaps, but of critical importance to the financial crisis is that Mexico borrows extensively from US citizens.The US economy has been sick and the germs have spread southward with a marked virulence. Mexico has caught pneumonia from the US head cold. The US recession eventually caught up with Mexico, which had previously countered international trends in 1977-1981 by increasing its gross domestic product by an average of 7% a year. As interest rates rose, money supplies contracted, inventories grew, and unemployment increased in the United States. The US purchased less and charged more for its exports. The cost to Mexico of imports and capital increased sharply while the value of its exports fell. For more than a year, the prices of petroleum, silver, coffee, cotton, copper and other important Mexican exports declined. In 1981, for example, Mexico projected some $20 billion in oil revenues but received about $12 billion. This year brought similar short-falls as petroleum prices continued to decline. The value of tourism to Mexico fell some $900 million. The staggering budget deficit programmed by the Reagan administration and Congress and the decision of the Federal Reserve System to charge more for money drove interest rates up (the prime rate went up to 17%) and increased Mexico's debt burden by some $2.5 billion.The Mexican government, for its part, had chosen an economic development strategy which increased its exposure to the ills of the United States economy. It borrowed extensively from foreign, principally US sources to finance investments in infrastructure and industry, social services, and debt service. The projected national budget of 1982 called for 34% of its revenues to come from borrowing. Mexico gambled that its income from tourism and exports, particularly petroleum, would enable it to service its debt and that banks, cognizant of Mexico's position as a major oil power, would continue to rollover the debt if difficulties developed. The very size of the debt which was approximately $70 billion in January, 1982.and some $80 billion in October, seemed to demand cooperation from international bankers. After all, the United States and others had anguished for months about possible default on the Polish national debt of $25 billion, puny compared to Mexico's.Mexico lost this gamble, The United States government raised the cost of dollars to slow down the rate of inflation and, in the process, inflated the Mexican economy, which depended so much on borrowing. Interest costs to both. the public and private sectors of Mexico skyrocketed.. In 1978, these charges had been $2.606 billion; in 1981, they were $8.2 billion. They continued to climb in 1982. The Mexican economy, already heated up by

President José López Portillo's policies, overheated. By January, 1982, Mexican economists were projecting a 60% inflation rate for 1982. Trying to obtain enough dollars to service the foreign debt became critical.Private citizens in Mexico had not been as optimistic as their government and had been taking steps to insure the integrity of their wealth. They began switching from pesos to dollars. In January, 1982, they had $9 billion deposited in bank accounts in Mexico; by August, they had converted another $3 billion from pesos to dollars and stashed them in such accounts. Ninety percent , of the bank accounts in Mexico were in dollars even though peso accounts paid 23% higher interest. Less optimistic Mexicans sent money out of the country or never brought it in. By July, 1982, some $14 billion had gone into foreign bank accounts and another $25 billion invested in US real estate. Some $6 billion was invested in Texas alone and Texas banks held $16 billion in accounts. It is perhaps no coincidence that the recent downturn in the Texas economy paralleled Mexico's financial troubles in August.Mexicans were betting that the peso would be devalued and, in February, the government did so. On February 17th, the Banco de México allowed the peso to float; the devaluation that followed eventually amounted to 43%. Besides stimulating exports, the government hoped that devaluation would slow capital flight. The government also cut its own spending and put a price freeze on fifty additional items to mitigate the effects of the subsequent inflation. In March., to pacify workers, the government granted its employees pay raises ranging from 10-30%, retroactive to February 18th. Private employers normally follow suit.The difficulties in which Mexico was finding itself can be illustrated by the experience of the Grupo Industrial Alfa, the largest private business in Mexico. This Monterrey conglomerate owned a variety of enterprises including steel mills, breweries, food processing plants, and tourist facilities, The company bit off more than it could chew and lost $124 million in 1981 and forecast losses of $304 million in 1982, considerable amounts for a $1.9 billion company. Alfa had also borrowed extensively and was having trouble servicing its debt. On April 21st, the company announced that it was suspending payment on the $2.3 billion debt principal owed to domestic and foreign banks. On April 30th, its representatives met in Houston with representatives of 135 US banks to discuss solutions to the debt problem. The February peso devaluation had increased the company's dollar debt by $140 million, more than it could bear.US banks were also vulnerable. Citibank and Continental Illinois had each loaned $100 million to Alfa. On August 5th, the company proposed a six-month suspension on 70% of the interest payments on its debt. So, by April, Mexico's largest private enterprise was close to bankruptcy; its shakiness certainly must have encouraged capital flight.The Mexican government continued to cut back its expenditures but attempted no drastic measures, perhaps because elections were to be held in July. By the end of April, the national budget had been cut 8%; in May, the expensive nuclear energy program was suspended. In August, continued capital flight and shortfalls in dollar reserves forced the government to act. On August 5th, the peso was again devalued, bringing the total decline in the value of the peso in 1982 to 67%. In addition, the government created a two-tier exchange system. To pay international debts and pay for necessary imports, the exchange rate would be 49 pesos to the dollar. For non-essential imports, the rate would be 69.5 to the dollar. On August 12th, the government ordered all bank accounts to be paid out in pesos, thus "freezing" the accounts and eventually recapturing the $12 billion deposited. Trading in foreign currency was suspended, To offset criticism, income taxes were lowered but the government also raised the prices of the basic consumer commodities it had been subsidizing, thus passing some of its financial burden to the consumer. On August 20th, the

government got a 90-day extension on repayment of short- and medium term-loans from 115 international banks. Dollar flight was temporarily halted and the government had bought time to negotiate foreign banksPresident López Portillo took drastic steps to reorganize the Mexican financial system with one decisive blow. On September 1st, he nationalized all private, Mexican banks and converted the Banco de México into a decentralized government agency. Strict currency controls were adopted. The president accused Mexican financial speculators, aided and abetted by these banks, of having looted the country and brought the nation close to financial collapse by withdrawing some $50 billion from the economy (the Mexican GNP in 1981 was $120 billion). Henceforth, the government would control domestic credit, and, of course, the flow of dollars. Some 80% of the economy was now in government hands, a situation which would force the international bankers to cooperate with Mexico. On September 6th, Mexico suspended payment on all debt principal until the end of 1983.Washington, for its part, has little choice but to help Mexico. It started helping in August by making a $1 billion advance payment for petroleum and by arranging a near one bi ion dollar loan from the Commodity Credit Corporation. Mexico's importance to the US as a trade partner means that the US needs a healthy Mexico. Congress was considering ways to stop the flow of illegal aliens, most of whom are Mexican, but any hope of expelling those currently in the US were dashed because Mexico needed the $4-7 billion they remit each year. Equally, if not more, important for US policy is the fact that the nine largest banks, in the United States had the equivalent of 40% of their capital and reserves loaned to Mexico. If Mexico defaulted, these banks would collapse and other countries might default as well.The United States has little choice but to cooperate with Mexico and perhaps there is justice in that. It was US tight money policies that squeezed Mexico and the bad judgment of US bankers in continuing to loan money to Mexico that contributed to the crisis.New president Miguel de la Madrid took office on December 1st and had to clean up the mess left by his predecessor's irrationality. Most of what López Portillo had done in August was reversed. Mexico could not continue those policies if it wanted foreign investment.11101

To understand the nature of the financial crisis of Mexico in the 1980's it is necessary to consider what was happening in the petroleum industry in the 1970's and the effect those events had on the world's economies in the 1980's. The story of the emergence of the industries for finding, refining and marketing petroleum is told elsewhere. By the 1960's the countries of the Middle East decided that they wanted a bigger share of the value of the petroleum that multinational oil companies had found in their countries. Those countries and others formed in 1960 the Organization of Petroleum Exporting Countries (OPEC) to try to create a cartel. Not all petroleum exporting countries joined OPEC. In particular, the Soviet Union and Mexico did not join. OPEC was largely ineffective in gaining any larger payment from the petroleum being

produced in their countries until about 1973. In 1973 the Shah of Iran led a movement to increase the price of petroleum by several hundred percent. In order to increase the price of petroleum OPEC would have to reduce the amount which was being put on the market. It was not easy to arrange a cutback in production because most of the countries in OPEC wanted to sell more if the price was going to be higher rather than less. The petroleum-exporting countries which were not in OPEC would expand their production in response to any higher price. This is why it took from 1960 to 1973 for OPEC to have an impact on the price of petroleum. The cutback in production and price rise in 1973 only was possible because Saudi Arabia agreed to take the lion's share of the cutbacks.

With the rise in petroleum prices in the mid1970's came a flood of dollars to the petroleum-exporting countries, OPEC countries and non-OPEC countries. In some of those countries there was more funds available than could be utilized within the country so the excess was channeled into American and Western European banks where they were known as petrodollars. The banks in turn were flooded with petrodollars and were scrambling to find places to put the money to work to earn interest.

Countries such as Mexico which were petroleum exprters found it very easy to gain loans. the Government of Mexico found that it not only had vastly more revenue from its petroleum exports but it also could borrow vast amounts from international banks. Mexico has a great need for capital investments, both public and private. With the aboundance of funds that were available there seemed to be no need to turn down any investment project.

Many projects were funded of doubtful validity; i.e., some projects were not well conceived or properly executed. Some, even if they were honestly administered, would not generate more benefits than their costs. Some projects were executed to allow bad economic policies to continue. For example, Mexico City had a problem with water shortage and water development projects were created to bring water to Mexico City from farther and farther away. The real problem is that residential water use in Mexico City was not metered. Residents paid a flat fee and the fee did not go as they used more and more water. There was nothing to discourage middle and upper income families from creating landscaping that required vast amounts of water. To make matters worse the more water the city used the more waste water there was to dispose of. Mexico City lies at the bottom of a basin so the waste water had to be pumped uphill to dispose of it. This required electrical power.

The policy of providing water to Mexico City residents at zero marginal cost is a bad policy. Solution is to install water meters to impose the real cost of water on the users. The solution definitely was not one of paying for more and more expensive water to market to the residents at zero marginal cost. Yet that was what Mexico was doing in the late 1970's.

The rise in petroleum prices became even larger in 1979 when the Iranian Revolution took Iran's petroleum production off the market for a few years. That price rise accelerated Mexico's borrowing. Mexico's debt mounted and the interest payments on it grew. This did not seem to be a problem.

Suddenly Paul Volcker, the Chairman of the Board of Governors of the Federal Reserve Bank of the United States, implement a new, tight monetary policy. The rise in petroleum prices drove up the rate of inflation. Moderate measures of anti-inflation policy were not working and so Paul Volcker decided to institute strict monetarist monetary policy no matter what happened to interest rates. Restrictions on the growth rate of the money supply brought the prime interest rate, the interest rate banks charge their best commercial customers, from a level of about twelve percent to a level of about 24 percent. Borrowers who had adjustable or floating interest rate loans found suddenly that their interest payment had doubled.

One of the borrowers who had escalating interest payments was Mexico. At the same time that Mexico's interest costs went up its income from petroleum sales started to go down.

The quantity of petroleum supplied to the market went up due to, in part, Iranian production coming back on the market. Non-OPEC countries were expanding their production. The price of petroleum began to fall.

There were two other effects of Volcker's tight monetary policy that affected Mexico. The high interest rates in the U.S. discouraged investment and produced a recession. It is said that when the U.S. economy catches a cold the economies of its Third World trading partners come down with pneumonia. The recession in the U.S. produced a downturn in the economy of Mexico. Furthermore, the high real interest rates in the U.S. encouraged those with investible funds to convert them into dollars for investment in the U.S. financial markets. The end result is that the value of the dollar increased with respect to foreign currencies such as the Mexican peso. If the loan payments for Mexico were denominated in dollars then the decreased value of the peso with respect to the dollar meant that it took more pesos make the same dollar payment. With increased dollar payments to

cover the higher interest rates it meant a lot more pesos were required. In 1982 Mexico was in deep financial crisis.

To be continued.

HOME PAGE of   Thayer Watkins

The cost to Mexico of imports and capital increased sharply while the value of its exports fell. For more than a year, the prices of petroleum, silver, coffee, cotton, copper and other important Mexican exports declined. In 1981, for example, Mexico projected some $20 billion in oil revenues but received about $12 billion. This year brought similar short-falls as petroleum prices continued to decline. The value of tourism to Mexico fell some $900 million. The staggering budget deficit programmed by the Reagan administration and Congress and the decision of the Federal Reserve System to charge more for money drove interest rates up (the prime rate went up to 17%) and increased Mexico's debt burden by some $2.5 billion.The Mexican government, for its part, had chosen an economic development strategy which increased its exposure to the ills of the United States economy. It borrowed extensively from foreign, principally US sources to finance investments in infrastructure and industry, social services, and debt service. The projected national budget of 1982 called for 34% of its revenues to come from borrowing. Mexico gambled that its income from tourism and exports, particularly petroleum, would enable it to service its debt and that banks, cognizant of Mexico's position as a major oil power, would continue to rollover the debt if difficulties developed. The very size of the debt which was approximately $70 billion in January, 1982.and some $80 billion in October, seemed to demand cooperation from international bankers. After all, the United States and others had anguished for months about possible default on the Polish national debt of $25 billion, puny compared to Mexico's.

1994 economic crisis in MexicoFrom Wikipedia, the free encyclopedia

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V

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The 1994 economic crisis in Mexico, widely known as the Mexican peso crisis or the Tequila crisis, was

caused by the sudden devaluation of the Mexican peso in December 1994.

The impact of the Mexican economic crisis on the Southern Cone and Brazil was labeled the "Tequila effect"

(Spanish: efecto tequila).

Contents

  [hide]

1 Precursors

o 1.1 Crisis

2 Financial assistance package

3 See also

4 References

5 External links

[edit]Precursors

The crisis is also known in Spanish as el error de diciembre—The December Mistake—a term coined by

outgoing president Carlos Salinas de Gortari in reference to his successor Ernesto Zedillo's sudden reversal of

the former administration's policy of tight currency controls. While most analysts agree that devaluation was

necessary for economic reasons,[who?] Salinas supporters argue that the process was mishandled at the political

level.

The root causes of the crisis are usually attributed to Salinas de Gortari's policy decisions while in office, which

ultimately strained the nation's finances. As in prior election cycles, a pre-election disposition to stimulate the

economy, temporarily and unsustainably, led to post-election economic instability. There were concerns about

the level and quality of credit extended by banks during the preceding low-interest rate period, as well as the

standards for extending credit.

The country's risk premium was affected by an armed rebellion in Chiapas, causing investors to be wary of

investing their money in an unstable region. The Mexican government's finances and cash availability were

further hampered by two decades of increasing spending, a period of hyperinflation from 1985 to 1993, debt

loads, and low oil prices. Its ability to absorb shocks was hampered by its commitments to finance past

spending.

Economists Hufbauer and Schott (2005) from the Institute for International Economics have commented on the

macroeconomic policy mistakes that precipitated the crisis:

1994 was the last year of the sexenio, or six-year administration of Carlos Salinas de Gortari who,

following the Partido Revolucionario Institucional (PRI) tradition on an election year, launched a high

spending splurge and a high deficit.

To finance the deficit (7% of GDP current account deficit), Salinas issued the Tesobonos, a type of debt

instrument denominated in pesos but indexed to dollars.

Mexico experienced lax banking or corrupt practices; moreover, some members of the Salinas family

collected enormous illicit payoffs.

The EZLN, an insurgent rebellion, officially declared war on the government on January 1; even though the

armed conflict ended two weeks later, the grievances and petitions remained a cause of concern,

especially amongst some investors.[1]

Macroeconomics 5th Edition by N. Gregory Mankiw explains the country-risk issues precipitating the crisis:

The EZLN's violent uprising in Chiapas in 1994 along with the assassination of presidential candidate Luis

Donaldo Colosio made the nation's political future look less certain to investors, who then started placing a

larger risk premium on Mexican assets.

Mexico had a fixed exchange rate system that accepted pesos during the reaction of investors to a higher

perceived country risk premium and paid out dollars. However, Mexico lacked sufficient foreign reserves to

maintain the fixed exchange rate and was running out of dollars at the end of 1994. The peso then had to

be allowed to devalue despite the government's previous assurances to the contrary, thereby scaring

investors away and further raising its risk profile.

When the government tried to roll over some of its debt that was coming due, investors were unwilling to

buy the debt and default became one of few options.

A crisis of confidence damaged the banking system, which in turn fed a vicious cycle further affecting

investor confidence.[2]

[edit]Crisis

All of the above concerns, along with increasing current account deficit fostered by consumer binding and

government spending, caused alarm among those who bought the tesobonos. The investors sold

the tesobonos rapidly, depleting the already low central bank reserves. Given the fact that it was an election

year, whose outcome might have changed as a result of a pre-election day economic downturn, Banco de

México decided to buy Mexican Treasury Securities to maintain the monetary base, thus keeping the interest

rates from rising.

This caused an even bigger decline in the dollar reserves. However, nothing was done during the last five

months of Salinas' administration. Some critics affirm this maintained Salinas' popularity, as he was seeking

international support to become director general of the World Trade Organization. Zedillo took office on

December 1, 1994.

A few days after a private meeting with major Mexican entrepreneurs, in which his administration asked them

for their opinion of a planned devaluation; Zedillo announced his government would let the fixed rate band

increase to 15 percent (up to four pesos per US dollar), by stopping the previous administration's measures to

keep it at the previous fixed level. The government, being unable even to hold this line, decided to let it float.

The peso crashed under a floating regime from four pesos to the dollar to 7.2 to the dollar in the space of a

week. The United States intervened rapidly, first by buying pesos in the open market, and then by granting

assistance in the form of $50 billion in loan guarantees. The dollar stabilized at the rate of six pesos per dollar.

By 1996, the economy was growing (peaked at 7% growth in 1999). In 1997, Mexico repaid, ahead of

schedule, all US Treasury loans.

[edit]Financial assistance package

A week of intense currency crisis stabilized some time after US president Bill Clinton, in concert with

international organizations, granted a loan to the Mexican government.[3]

Loans and guarantees to Mexico totaled almost $50 billion, with the following contributions:

The United States arranged currency swaps and loan guarantees with a $20 billion total value.

The International Monetary Fund promised an 18 month Stand-by Credit Agreement of around US$17.7

billion.

The Bank for International Settlements offered a $10 billion line of credit.

The Bank of Canada offered short term swaps of around US$1 billion.

The Mexican "bailout" attracted criticism in the US Congress and the press for the central role of the former Co-

Chairman of Goldman Sachs, U.S. Treasury Secretary Robert Rubin. Rubin used a Treasury

Department account under his personal control to distribute $20 billion to bail out Mexican bonds, of which

Goldman was a key distributor.[4] In late 1995, Patrick Buchanan wrote "[n]ewly installed President Ernesto

Zedillo said he needed the cash to pay off bonds held by Citibank and Goldman Sachs, lest the New World

Order come crashing down around the ears of its panicked acolytes."[5]

According to Hannibal Travis, the "former manager of $5 billion in Mexican investments at Goldman Sachs

became U.S. Secretary of the Treasury and lobbied for legislation that forced U.S. taxpayers to contribute in

excess of $20 billion to bail out investors in Mexican securities, in a form of 'corporate socialism'".[6]

The United States' assistance was provided via the treasury's Exchange Stabilization Fund. This was slightly

controversial, as President Bill Clinton tried and failed to pass the Mexican Stabilization Act through Congress.

However, use of the ESF allowed the provision of funds without the approval of the legislative branch. By the

end of the crisis, the U.S. actually had made a $500 million profit on the loans.[7]

[edit]See also

1998 Russian financial crisis

Economy of Mexico

Late 2000s recession

Mexico

North American Free Trade Agreement

Sudden stop (economics)

[edit]References

1. ̂  Hufbauer, G. C., J. Schott, NAFTA Revisited: Achievements and Challenges, Institute for International

Economics, Washington, D.C., October 2005

2. ̂  Mankiw:Macroeconomics

3. ̂  http://www.usdoj.gov/olc/esf2.htm

4. ̂  Bradsher, Keith (March 2, 1994). "House Votes to Request Clinton Data on Mexico". The New York

Times. Retrieved June 4, 2010.

5. ̂  Buchanan, Patrick (August 25, 1995). "Mexico: Who Was Right?". The New York Times. Retrieved June

4, 2010.

6. ̂  Travis, Hannibal (2007). "Of Blogs, eBooks, and Broadband: Access to Digital Media as a First

Amendment Right". Hofstra Law Review 35: 148. Retrieved June 4, 2010.

7. ̂  Alan Greenspan (September 17, 2007). The Age of Turbulence. The Penguin Press. p. 159. ISBN 1-

59420-131-5.

[edit]External links

Abstract

The debt crisis exploded into public view in August of 1982 when Mexico announced to the world that it was unable to pay what it owed to its international creditors. The

rapid rise in large-scale loans to the Third World, especially to the largest and most rapidly growing countries such as Mexico, Brazil and Argentina, had occurred in the 1970s under conditions of rapid inflation and increasingly floating interest rates. In principle, as long as these loans could be repaid there was no crisis, just business as usual. The sudden onset of recession in 1980 and then again in 1981 in response to Paul Volcker and the Fed.’s tightening of the money supply and rapid rise in interest rates dramatically changed the situation of the debtor countries. The engineered rise in interest rates aimed at inflation, raised the cost of the loans and the recession, by reducing world output and trade reduced the debtor countries ability to earn the foreign exchange necessary to repay the loans. These were the direct and obvious causes of the crisis announced by Mexico in 1982 and subsequent defaults and reschedulings by a great many other countries. But behind this bottom-line crisis lie a continuing series of social crisis in both the debtor in creditor countries. The international debt crisis has continued to worsen since it erupted in the early 1980s. Currently, developing countries as a whole in Latin America owe over $600 billion. In a world where 20 percent of the people hold 83 percent of the world wealth while the poorest 20 percent received only 1.4 percent of the total income, over one billion poor people in the world’s impoverished countries suffer because of the debt. The debt crisis is far from over. You will see the causes “mainly a liquidity crunch” as well as some of the measures that were taken to try to resolve this crisis. You will also see the players in this tragedy; the debtor countries, the creditor countries, the creditor banks along with other third party banks. In conclusion I will offer possible remedies to the debt crisis, a crisis that has been ongoing for two decades.

Part A

1. Introduction

The debt crisis began in the mid-1970s when many of the Organizations of Petroleum Exporting Countries (OPEC) amassed wealth, and banks were eager to lend billions of dollars. Other developing countries around a world borrowed large sums of money at low, but floating, interest rates. As a result of the irresponsibility of both creditor and debtor governments, the countries did not use the money for productive investment; rather, they spent these new dollars on immediate consumption. Consequently, these countries had no money to repay their loans. Aristocrats controlled the government while the poor had no voice in these loan matters, nor did they benefit from them.

These adjustable interest loans skyrocketed in the early 1980s when the United States attempted to reduce inflation by enforcing stringent monetary policies while, at the same time, it also increased its military spending. The Reagan Administration did all of this while also cutting United States income tax rates. Around the Globe, raw material prices fell sharply, meaning poor countries had even less money to repay their debts. For example, both Brazil and Mexico nearly defaulted on their loans; and, according to international law, there was no option for these poor countries to declare bankruptcy. Commercial banks rescued their own situations and prevented default. However, many developing countries were left in great debt, and as a result, could no longer get loans. With nowhere else to turn, these nations have relied heavily on the World Bank or the International Monetary Fund.

The IMF required structural adjustment programs in these countries. Debtor countries had to agree to impose very strict economic programs on their countries in order to reschedule their debts and/or borrow more money. Put simply, countries had to cut spending to decrease their debt and stabilize their currency. The governments limited their costs by slashing social spending; education, health, social services, etc.., devaluing the national currency via lowering export earnings and increasing import costs, creating strict limits on food subsidies, cutting workers jobs and wages, taking over small subsistence farms for large-scale export crop farming and promoting the privatization of public industries. Most countries have suffered a recession and often depression; and the poorest of the poor are most affected. It is not hard to find evidence showing that the poor, women, children and other groups suffered disproportionately as a result of structural adjustment programs during the 1980s. As Latin America’s economies stagnated, per capita income plummeted, poverty increased, and the already wide gap between the rich and the poor widened further. The debt crisis seriously eroded whatever gains had been made in reducing poverty through improved social welfare measures over the preceding three decades. Poverty is 50 percent in growing; malnutrition is 40 percent in growing; children are increasingly recruited into the drug trade and prostitution; long-term unemployment and its adverse social effects are increasing; the weakening of local communities and networks of mutual support are being destroyed; and the growth of crime and an epidemic of homicides, are but a few of the many dilemmas that this debt crisis has caused.

I believe the debt crisis stemmed from a liquidity squeeze. Consider the role of the official sector in the crisis prevention and management. I maintain that many explanations of the Mexican crisis give insufficient emphasis to financial vulnerabilities, particularly mounting maturity and currency mismatches in public debt and in the banking system that together rendered the Mexican government illiquid and produced not only a currency crisis but a debt crisis. In my view, both

host countries and international surveillance exercises need to pay closer attention to such indicators of financial vulnerability. I am also in favor of the IMF publishing its appraisals of country policy, deepening its contacts with private capital markets, and conveying a frank view on appropriate exchange-rate policy to its members.

In August 1982 Mexico announced to the international financial community that it did not have enough external liquidity to fulfill its financial obligations and requested a 90 day rollover of the payments of the principal to prepare toward definite restructuring financial package. Just a few weeks later, the problem spread all throughout Latin America and to other debtor countries. The impact from Mexico’s statement was far-reaching. This created an atmosphere that caused many people to issue dire forecasts, which thankfully were never realized. Most observers believe the petrodollar recycling of the 1970s gave rise to this debt crisis. During that period, the price of oil rose dramatically. As was stated before, oil-exporting countries in the Middle East deposited billions of dollars in profits they received from the price hike in United States and European banks. Commercial banks were eager to make profitable loans to governments and state-owned entities in developing countries, using the dollars flowing from the Middle Eastern countries. Developing countries, particularly in Latin America, were also eager to borrow relatively cheap money from the banks.

Decreased exports and high interest rates in the early 1980s caused debtor countries to default on their foreign loans. The frenzied lending and borrowing came to a halt with the global recession in the early 1980s. The significant drop in debtor country exports, combined with a strong dollar and high global interest rates, depleted foreign exchange reserves that debtor countries relied upon for international financial transactions. Debtor countries consequently began to feel the strain of having to make timely payments on their foreign debt, which became much more expensive to pay off because the loans carried floating interest rates that increased along with global rates. These problems were compounded by massive capital flight of outward transfers of money by private individuals and entities in developing countries.

The prospect of massive defaults posed grave problems for creditor countries, such as the United States. Government regulators discovered that commercial bank creditors, particularly the big U.S. money center banks, had dangerously low levels of capital that could be used to absorb losses resulting from massive loan defaults. Policymakers were also worried that there was no authority or forum that could oversee and orderly resolution of the crisis, such as a global bankruptcy system. 

A case-by-case debt restructuring negotiations saved the international financial system from collapse. Yet the principal players in the crisis, mainly governments, banks, the IMF and the World Bank, averted a collapse of the international financial system by resorting to slow and cumbersome approaches. The approach entailed engaging in a

series of workouts with hundreds of commercial bank creditors throughout the world via Bank Advisory Committees, which were composed of banks with the greatest exposures to debtor countries. Under this approach, commercial banks agreed: (I) to provide new loans to debtor countries, and (ii) to stretch out external debt payments. In return, debtor countries agreed to abide by IMF and World Bank stabilization and structural adjustment programs intended to correct domestic economic problems that gave rise to the crisis. IMF stabilization programs typically included drastic reductions in government spending in order to reduce fiscal deficits, a tight monetary policy to curb inflation, and steep currency devaluation’s in order to increase exports. World Bank structural adjustment programs focused on longer-term and deeper structural reforms in debtor countries.

Debt fatigue appeared in the mid-1980s. After a few years of repeated restructuring deals, debt fatigue began to appear. New loans to debtor countries plummeted as commercial bank creditors contemplated the possibility that debtor countries were facing insolvency rather than a temporary drop in their ability to pay back the foreign debt.

In October 1985, U.S. Treasury Secretary James Baker proposed a strategy, dubbed the Baker plan, which attempted to alleviate the debt fatigue. The plan was designed to renew growth in 15 highly indebted countries through 29 billion dollars in new lending by commercial banks and multilateral institutions in return for structural economic reforms such as privatization of state-owned entities and deregulation of the economy. The strategy failed, however, because the projected financing did not materialize and, to the extent it did, the new lending merely added to debtor countries already crushing debt burden. During this period, Latin American debtor countries were making massive net outward transfers of resources. I will touch upon the Baker plan in greater detail later in my report.

In light of what appeared to be a non-correctable problem, government officials, academics, and private entities began to propose plans that would provide debtor countries with debt relief rather than debt restructuring. In the meantime, various debtor countries suspended debt payments and fell out of compliance with, or otherwise refused to adopt, IMF adjustment programs. This eventually prompted the big creditor banks to admit publicly that many of the loans to debtor countries would not be paid.

The Brady initiative in 1989 focused on debt reduction tragedies. The Brady initiative, announced in March 1989 by U.S. Treasury Secretary Nicholas F. Brady, marked a change in U.S. policy towards the debt crisis. Given the persistently high levels of foreign debt, the initiative shifted the focus of the strategy from increased lending to

voluntary, market based debt reduction and debt service reduction in exchange for continued economic reform by debtor countries.

Debtor countries obtained significant debt relief under the Brady initiative through: (I) direct cash buy backs; (ii) exchange of existing debt for discount bonds, which are bonds issued by the debtor countries with a reduced face value but carrying a market rate of interest; (iii) exchange of existing debt for par bonds, which carry the same face value as the old loans but carry a below market interest rate; and (iv), interest rate reduction bonds, which initially carry a below market interest rate that rises eventually to the market rate. Commercial bank creditors that did not wish to participate in a debt or debt service reduction option could choose to give debtor countries new loans or receive bonds created from interest payments owed by debtor countries. Debtor countries sweetened the deals by providing enhancements, such as principal and interest collateral. I will touch upon the Brady initiative in more detail later in a report.

The Brady deal combined with economic reforms and increased flows of capital to debtor countries led some people in the early 1990s to declare that the debt crisis was over. Commercial bank creditors agreed to Brady deals with a good handful of countries, including Argentina, Costa Rica, Mexico, Venezuela, Uruguay and Brazil. In the meantime, Latin American countries implemented substantial economic reforms. In 1991, the region registered capital inflows that exceeded outflows for the first time since the onset of the debt crisis. This led some observers to proclaim that the debt crisis was over for major Latin American debtor countries. As we will see, my report will show that the debt crisis was far from over.

With the resolve and atmosphere that fears of financial collapse can generate, creditor governments and multilateral institutions offered loan guarantees, debt equity swaps and debt rescheduling to countries willing to rapidly privatize, deregulate and open their economies to world trade and investment. After these and other measures were done, the creditors were somewhat off the hook, the crisis was downgraded to a problem and quickly disappeared from view. Once the debt became serviceable again, it was no longer a crisis for the world. It turned out to only be a crisis for the debtors who could not pay and develop at the same time.

When the debt disappeared from the political agenda of creditor countries, it disappeared from the debtor’s agenda as well, illustrating the degree to which the creditors came to define and thus dominate the terms of discussion. Putting the debt on the agenda, would have meant calling the very relationship between the U.S. and Latin America into question. The reluctance to do so may very well reflect the disappearance of an effective radical opposition within Latin America. Back in 1997, in a sign that this reluctance may have been just a temporary break, a group of Latin

American parliamentarians gathered some two thousand people together in Caracas, Venezuela with the aim of reinserting the debt in the debate about Latin American development. At the gathering it was quoted that the character of most of our economies, is today determined by debts incurred through the errors and economic misjudgments of our governments, as well as through creditor countries abuse of the conditions of negotiation. The political problem, is that the debt, limits the ability of the indebted governments to make their own decisions.

The combined foreign debt owed by Latin American nations now stands at somewhat over 600 billion, up from 425 billion at the height of the crisis in 1987. It is not only the absolute size that hurts but also the size relative to the ability to pay. The region pays just under 30 percent of its export earnings to service those debts, and owes about 45 percent of its combined gross domestic product to foreign creditors. It is this drain on resources that feeds the growing social dislocation of so much of the continent and eats away at the ability of Latin American countries to make their own decisions at home.

When doing my research for this paper I came across an interesting quote from Congresswoman Ifigenia Martinez of Mexico. She summed up the problem in an interesting way. She said, “to say that a debt is unpayable, is to say that one cannot pay and continue to generate the income necessary to make further payments. This is now the case in Latin America, she asserts to no one’s disagreement, where in 1982, the chief goal of economic policy ceased to be long-term growth, and instead became payment of the debt. What, then, is the real value of the debt? It is that value, she says, that permits a country to grow and continue paying. The debt, proposes the Mexican Deputy, should be adjusted precisely to that real value. If not, the U.S. will continue to be collecting tribute from the South rather than earning a return on its investment”.

For developed country creditor institutions, namely the ones who counted on timely debt service payments for at least a part of their duration, a massive Latin American default, or even a significant interruption of payments, would have constituted a major hardship, and perhaps even called the possibility for the end of the international financial system. For the debtors, servicing the debt has become an insurmountable obstacle to growth and development. Since the eruption of the debt crisis, there is no question that we have avoided a major international financial crisis and that we have gained time and breathing space. But the problem is far from being over. Debt service payments are still too high, and this is hindering the prospects of growth, and with growth and significant forgiveness of debt that has been recently talked about, the possibilities do exist for this crisis to once and for all come to a halt.

Part B

What was done to try to correct the problem?

1. The Baker Plan “Growth, the Key to Breaking the Debt Crisis”.

The Baker Plan proposals begun in 1985 by then Secretary Treasurer Baker, in response to the mounting debt crisis that had started back in 1982. At Seoul in October 1985, U.S. Treasury Secretary James Baker reshaped the strategy for dealing with Third World debt. The Baker plan emphasized that the debt crisis could only be resolved through sustained growth by the debtor countries. To achieve the desired growth, the plan recommended programs of economic reform and structural adjustment for the debtor countries, including greater reliance on the private sector, curtailment of state subsidies and price controls, steps to stimulate both foreign and domestic investment, and export promotion and trade liberalization. Secretary Baker emphasized that the cornerstone of sustained growth must be greater domestic savings, and the investment of the savings at home. He stressed the importance of foreign investment as non-debt-creating. He also pointed out that equity investment has a high degree of permanence and is not debt-creating. Moreover he pointed out, it can have a compounding effect on growth, bring innovation and technology, and help to keep capital at home. The plan also called for private banks and multinational institutions to step up sharply their lending to the indebted countries. The banks were urged to provide new commercial credits of $20 billion over a three year period while World Bank and the Inter-American Development Bank would contribute an additional $9 billion in loans. The Baker plan called for an annual increase of around 2.5% in commercial lending. What did not change in Mr. Baker’s proposals was the reliance on continuing accumulating debt to finance growth. However, bankers were uneasy with this request, mainly from their exposure to existing loans and from angry shareholders. At the time of this request, many banks were under severe pressure to cut loose their existing loans, even at a lose, rather than increase their exposure. Without strong assurances on the new loans, it would be very difficult if not impossible to justify increased international spending.

The global banking community carefully examined the proposal through meetings and briefings by all the players in this tragedy from a financing standpoint. Mainly; the Treasury, the IMF, the World Bank and other creditor governments. Many of the banks formed large cohesive groups in order to collectively protect or try to protect

their interests. These groups were the Institute of International Finance (IIF); the G-14 group of major international commercial banks, and later, national banking groups.

The IIF is a non-profit bank-financed organization comprising more than 185 banks. Its function is mainly informative by providing country analysis on some 40 borrowing countries to its members and serves as a forum for discussing international lending issues. Because the IIF members hold more than 85% of all overseas lending, they were the first group to oversee the Baker plan. The other forum, the G-14, which consisted of the largest international banks, also looked over the plan, and not to many peoples surprise, they both came out with more questions than answers. They endorsed the concepts of the plan, but noted that each bank would have to formulate their own response. It’s not surprising why the crisis continued to linger.

The part to play by the IMF was still in doubt. Mr. Baker gave it a central role, but some countries have drawn up their IMF access limits, and will soon have to start repaying. The role of the IMF will be somewhat more subdued if those countries that are not borrowing more decide not to listen to the IMF demands. It will be harder to impose strict IMF conditions where countries are not drawing additional credits, but only rolling over and repaying existing lines of credit.

The Baker plan gives new importance to the World Bank and other Multilateral Development Banks (MDBs), mainly the Inter-American Development Bank, both by increasing their disbursements and, as a condition of this, by giving them a bigger share of policy formation. The World Bank will be expected to increase from 11% to about 20% of total credits its non-project lending, in the form of structural or sectoral adjustment loans, aimed at improving either the whole economy, or key sectors such as foreign trade. In the past these loans have been linked with IMF programs. But countries such as Brazil were anxious not to be tied to two sets of conditions, and may regard the World Bank as more sympathetic to their pleas for gradualism and flexibility than the IMF.

The World Bank and the other MDBs will have to increase their outstanding credits far more rapidly than the commercial banks, even though each group of institutions is expected to contribute $20 billion over the next three years.

Its also important to stress the role of non-U.S. banks in international lending. They hold two thirds of the outstanding paper, and their commitment to the Baker plan was essential for its success. Also, in the U.S., the pledge was not communicated by the American Bankers Association, the largest association of U.S. banks. It was quit obvious from the outset, that even though the plan was aimed right, “Latin American Growth”, it turned out to be a smoking gun, only adding more fuel to the fire and piling more debt on top of the already unmanageable levels of existing debt.

The basic idea, that Mr. Baker finally recognized the severity of the problem was great, but the fact of the matter was, the plan fell short of any substantive successes in alleviating the debt problem. The problems with the plan lie with the details. The amount of new lending proposed was insufficient. The recommended policy reforms were insensitive to the political and economic situation of each country. The debilitating effects of high interest rates and low commodity prices were not addressed. The plan was geared towards the 15 largest debtors and neglected the needs of smaller countries. And finally, the problems caused by the huge U.S. budget deficit were ignored. 

In order for Mr. Baker’s plan to work, all participants needed to be actively involved. One of the problems with this assumption lies in the fact that creditor banks were not as interested in the problem as they were back in the early 1980’s. In the five years since the Mexican crisis in 1982, the capacity and resilience of the global banking system has been bolstered substantially. Something positive has been achieved, but on the side of the creditors and at great costs to the debtors. Developing country debt accounted for less than 7% of the total assets by 1986 in U.S. banks while in 1981 it accounted for over 10%. The equity capital of the U.S. banking system has increased from about $80 billion in 1981 to nearly $150 billion in 1986 while LDC’s assets have increased from $131 billion to $154 billion. Because of this, banks are in a much better position because of their writedowns and increased equity buildups in their portfolios, and as such, their willingness to participate in the Baker plan was not as intense as it would have been, if it were proposed back in 1983 for instance.

In the years that followed the Baker plan, there has not been one significant contribution that it has been shown that the plan has indeed alleviated debt or restored growth. The Baker plan was certainly motivated more by a growing threat to creditors than by a worsening of economic problems of the debtor countries. It does not seem, however, that the plan was a complete falsehood. It was not designed merely to quiet the restrictiveness of the borrowing countries and induce them to continue along a path they no longer found acceptable, even though it seems, that it has effectively done just that. The reasons that the Baker plan failed can be found within all the participants; the reluctant banks, the passive debtors, and the confused and nervous creditor governments. The plan does not offer any regulatory or tax incentives to banks to continue their lending. Nor does it promise borrowing countries new lending without the adherence to traditional economic adjustment policies. Unilateral approaches like the Baker plan is difficult to implement, no matter how well thought out. Only a strategy that is formulated, endorsed, and managed by both the debtor and creditor countries will have any hope of succeeding.

The Baker plan has had mixed results at best. A number of the worst indebted countries had made progress in adjusting their external sector during 1986-88 and the threat to the international banking system has subsided, for the time being. But external financing in support of adjustment programs remained scarce. Net resource flows to developing countries, particularly from commercial banks, continued to fall. More importantly, they were insufficient in meeting the investment needs of these countries and in helping them meet their debt obligations. Because of all these facts, indebted countries had to cut back on investment. Their growth did not resume and living standards either stagnated or fell. The heavy debt burden continued to obstruct the mobilization of domestic resources, discourage repatriation of flight capital and direct foreign investment, and undermined the credibility of adjustment programs. I give the overall grade of the Baker plan, C, at least it started the discussion about the mounting debt problem.

2. The Brady Plan. “The Key to The Crisis is Debt Reduction”

On March 10, 1989 the United States approach to managing the Third World debt took a dramatic turn. Treasury Secretary Nicholas F. Brady acknowledged that serious problems and impediments to a successful resolution of the debt crisis still remains. He declared that, the path toward greater creditworthiness and a return to the markets for many debtor countries needs to involve debt reduction.

The framework that Brady outlined in his speech is only a first step toward designing and implementing a more effective approach to dealing with the problem. The major elements of the Brady initiative are as follows. First, in order to qualify for debt reduction, debtor nations under the IMF and World Bank economic programs must undertake sound growth oriented policy measures to encourage foreign investment flows, strengthening domestic savings, and promote the return of flight of capital. Second, to accelerate the pace of voluntary market based debt reduction and pass the benefits directly to the qualifying debtor nations, commercial banks should negotiate a joint waiver of the sharing and the negative pledge clauses included in existing loan agreements for a three-year period. Third, the IMF and World Bank would provide financial support for two types of debt reduction transactions, which could be the form of converting the bank loans into new bonds with reduced principal or reduced interest rates, and debt buy backs with cash. Fourth, in order to provide more timely and more flexible financial support to the reforming debtors, the international financial institutions should not hold hostage initial disbursements to firm commitments of other creditors to fill the estimated financing gaps. Fifth, debtor nations should maintain reliable debt to equity swap programs and permit domestic investors to engage in such transactions to encourage the repatriation of flight of capital. Sixth, the return of the use of public funds to enhance the quality of their L.

D.C. exposure and for being able to engage in debt to equity swap programs, commercial banks should provide new money in the form of trade credits, project loans, as well as voluntary and concerted lending. And finally, creditor governments should continue to restructure their own claims through the Paris Club, provide additional financial support to debtors pursuing debt reduction, and maintain open and growing markets with sound policies. They should also ease existing regulatory, accounting, and tax impediments to debt reduction.

There seems to be many flaws with the Brady plan. Countries that need debt reduction need it because they have too much debt to start with. A country can reduce its current resource transfer with new money from banks, but only at the expense of worsening its future capacity of paying off the debts. It’s like throwing fuel on the fire. The seeds of today’s debt problem were planted back in the 1970s when commercial banks were actively encouraged to finance the balance of payments deficits of Third World countries. Any new idea of debt reduction should encourage banks to reduce their claims so that the countries do not need new bank money to service old bank debts.

The Brady plan does not seem to share this same view on bank activities. Mr. Brady’s view seems not to be too much old bank debt, but too little new bank money. Looking at the plan, at this angle, one can see that the plan has not alleviated the debt problem, but only made it worse. Countries needed debt reduction even more because the commercial banks cut back on their loans and thus made it even harder for banks to pay their loans. By trying to force the banks and the debtor countries to remain in the debt trap that they got into during the irresponsible overborrowing and overlending of the 1970s, the new approach may increase the possibility of the counterproductive process of subjecting development finance to the distortions and imbalances of a historical accident that could have been avoided.

Another weakness of the plan lies in the fact that the proposal involves only a part of the total debt of the troubled nations, the part that is owed to commercial banks. But one must remember that the banks have, in large part, lowered their exposures to the debt balance outstanding by writedowns and equity inflows to their balance sheet. Also the spotlight of the proposals has been on debt reduction rather than interest rate reduction. If Mr. Brady wanted to help the cause, he should have proposed interest rate reductions rather than debt reductions for obvious reasons. Debt reduction that a country may get from a principal reduction can easily be offset by increases in international interest rates. For example, the 20 percent average debt reduction that the Treasury estimates the 39 debtor countries may receive under the plan, if provided in the form of principle reduction, is equilivant to a 2 percentage point reduction in their cost of borrowing. A much more substantive approach to the crisis that was mentioned involves, providing relief to countries to convert their variable rate loans into fixed-

rate loans or bonds with market discount rates. It is very important that the interest rate be not only reduced below the market rate, but that the rates remain fixed during the life of the loan.

The Treasury suggests three major instruments for debt reduction: exchanges of loans for bonds with reduced principal or reduced interest, buybacks of loans with cash, and debt/equity swaps. The IMF and the World Bank are expected to support the first two types of reductions, to make them attractive for the banks. The third item, debt/equity swaps, do not need any sweeteners, because the constraint is not with the banks but with the debtor governments. In this type of swap, a foreign investor buys the debt at a discount, converts it to local currency, and invests it back into local business or property. These swaps reduce external debt of a country in a way that may not be desirable on the grounds of stabilization, efficiency, and equity. These swaps increase inflationary pressures, and they do not increase new capital inflows. While debt/equity swaps could be of limited use if carefully controlled, they do not represent stabilizing, efficient, and equitable debt reduction, and as such, should be dropped by the Brady plan. Cash buybacks make sense only if the following three conditions are met. First, the secondary market price must be very low. Second, the buyback applies to all longer-term bank debt where both the buyback price and full participation by all banks are negotiated rather than left to a market auction. And third, the resources to purchase debt are donated by third parties such as the creditor governments and the multilateral development banks.

The main goal of a new debt strategy should be to revive growth in the debtor countries by cutting their debt service burden substantially, and not to encourage large-scale bank lending to the developing countries for financing their balance of payment deficits. It is unrestrained lending and borrowing by the banks and the developing countries in the wake of the oil shock that led to the debt crisis in the first place. It would be a shame if that lesson is not heeded in meeting the future external financing needs of the developing countries as efforts are made to resolve the current crisis. In terms of total debt stock this plan has not helped debtor countries. As commercial debts have fallen, multilateral debts have risen. Resources continue to flow out of these countries to pay interest on Brady Bonds. Debt service was lowered to levels, which were already being paid, so no actual benefit accrued to the debtor country. The Brady plan was much more close the problem than was the Baker plan. Because of this, my overall grade for this initiative, B.

3. The Highly Indebted Poor Country Initiative (HIPC) “Debt Forgiveness is The Key”

After the Baker plan and its call for growth failed, and then the Brady plan and its call for debt reduction failed, HIPC came along and proposed the ever popular proposal

for debt forgiveness. In October 1996, there was a major shift by the IMF and the World Bank when they produced a debt relief initiative, which contemplated for the first time the cancellation of debts, owed to them. The agreement also recommended a strategy to enable countries to exit from unsustainable debt burdens. Briton’s Chancellor proposed that the Initiative should be financed through the sale of IMF gold. The Initiative proposed 80% debt relief by the key creditor countries (Japan, U.S., Germany, France and Briton). The World Bank announced the establishment of a Trust Fund to finance the Initiative.

The World Bank has committed resources to the Trust Fund, while the IMF has not. Instead it will offer cheaper loans to pay off expensive loans. There has been no agreement to sell IMF gold. And the Paris Club of key creditor countries has been reluctant to give the necessary minimum 80% debt relief. In practice, HIPC has been very limited in effect.

While many believe that the dreaded forgiveness word, should never have been spoken, others believe that the actions over the past 17 years show that is precisely where we are headed. Look at what the banks have been consciously or unconsciously doing. They have been reserving billions of dollars in the face of potential mounting unpaid debts. They have been selling loans using debt/equity swaps in the tune of several billions of dollars. They have been outright selling and writing off bad performing portfolios of debt. This seems to be showing that, debt forgiveness is not only conceivable, it is also unavoidable.

Some feel that debt forgiveness is not necessary and could even be counterproductive. They bring up that defaults in Latin America in the 1930s locked countries out of the capital markets for 30 years, and they say that doing the same now, could possibly do the same thing. I for one do not believe that scenario. The facts are completely different than they are now. In the 1930s the whole world economy was in a deep depression, and it was very difficult for any financial institution to step in, and help them out. Also the financial system was not at all the same with regards to the world economies. The economies back in the 30s were tied to the gold standard, while today we come under the Bretton-Woods system of economic stability.

So far creditor governments have fiercely resisted making outright donations to LDCs or guaranteeing portions of their debt. But a growing number of debt consultants and bankers believe that this will have to change if the next stage of the debt crisis is to be manageable. Budget deficits are one major reason for the resistance, especially in the United States. But as Latin America continues to groan under the debt burden, more people are questioning whether the industrialized governments shouldn’t do more to ease the debt load. Bankers and debt experts point to West Germany and Japan as two surplus running countries that should be doing more, especially when the U.S. helped

them rebuild their own economies after World War II ravaged their country. This is the closest idea thus far to attempt to end the debt crisis. At least the crisis is being looked at realistically, and because of that I give it the highest mark so far, B+.

Part C

Mexico Rocks the Financial World Again in 1994 With the Mexican Peso Crisis. Showing the World that The Financial Crisis Is Far From Over.

Mixed results characterized economic performance in the countries of Latin America in 1995. While the total regional economy grew by only .8%, sharp distinctions persisted among the countries of the region. The December 1994 peso crisis in Mexico led to a substantial 6.9% decline in GDP in 1995. In Argentina and Uruguay, the main countries affected by carryover from the Mexican crisis, their economies contracted by 4.4% and 2.5% respectfully.

The crisis in 1994 underlined the significant fragility and vulnerability in many of the region’s financial and banking systems, not only in Mexico but also in Argentina and a number of other countries. In both Mexico and Argentina, the weak position of the banking system contributed to the poor GDP performance. Investors, both international and domestic, feared that a collapse of important banks could result in major economic dislocations, massive and costly bailout programs, and a resurgence of inflation. Argentina’s weakness in their banking system tested the convertibility program and, the exchange rate regime. In Brazil, the weakness of their banking system, and especially the state owned banks, has added significant uncertainty to the public deficit picture. Central bank moves to provide liquidity to private banks in distress and treasury obligations to recapitalize public banks will add significant amounts of public debt over the next few years.

There are many problems that lie ahead for Latin America. The Latin American region is capable of achieving a growth rate of 6% by the turn of the century, under reasonable assumptions about the evolution of the external environment and of appropriate domestic policies. Increased domestic savings rates will be crucial for more robust growth to occur. One of the important lessons of the Mexican crisis is that domestic savings matter greatly. They are important because they help finance the accumulation of capital and, because of that, facilitate growth, and also because of high domestic savings are associated with lower current-account deficits. Latin

America, however, has traditionally had very low saving rates. In 1980 the region saved on average only 19% of its GDP, by 1994 this ratio was basically unaltered. This contrasts sharply with fast growing regions of the world that save 35% or more of GDP.

On January 14, 1999, Financial markets plunged because Brazil devalued its currency. Still we see the financial difficulties facing this region. Brazil devalued the real by 7.5%. The action was followed by the resignation of the president of Brazil’s Central Bank, Gustavo Franco, a leading advocate of the harsh austerity policies which Brazil has pursued over the past four years. The devaluation was triggered by a political crisis within Brazil, arising from domestic opposition to the austerity measures demanded by the IMF as the price of the $42 billion loan package agreed on back in November 1998, to provide a financial cushion for the Brazilian markets and its currency. 1998 was Brazils worst economic performance in six years, pushing into a recession and the worst could be yet to come. Latin America’s biggest economy shrank by 1.89% in the fourth quarter 1998, from the same quarter a year earlier. For all of 1998, the economy grew just .15% after a 3.68% expansion in 1997. That showing was the weakest since growth of .54% in 1992. Brazil was affected by the crisis in Asia along with Russia, further depicting the interlocking of economies all over the world. This is an issue that is even more important now than it was back in 1982, because of the advancements in technology that has created an ever shrinking marketplace and creating a tighter global economy. JP Morgan predicts Brazil’s economy will shrink by 5.5% in 1999. That would represent Brazil’s worst recession in 30 years.

On March 12, 1999 it was reported in the Wall Street Journal that “Demonstrations in Ecuador Fade, But Nation’s Economic ills Persist”. In February 1999 Ecuador’s Central Bank devalued the nations currency for the third time in less than a year before ultimately abandoning the exchange-rate band system. In the beginning of March, Ecuadorians began to yank millions of dollars out of banks, pushing their currency down 26% in value compared with the U.S. dollar.

These are but a few incidents, that have materialized over the past few years, and show beyond a shadow of a doubt, that the financial crisis in Latin America, is alive and well. Unless something is done in earnest to deal with the problem, the whole world economy could one day be devastated.

Part D

Conclusion

No matter what type of reform is initiated, the fact remains you need sound economic policies that are sustained by all of the market participants. Just because the crisis is manageable today does not mean that it will not deteriorate into a full-blown crisis tomorrow. There have been many suggestions for reform, or different types of reform. Some of these suggestions are: first, forgive countries debts; second, some recommend that governments and commercial banks cancel some of the debts; third, restructure the IMF demands on countries in debt; fourth, reduce trade restrictions on the products of poor nations; fifth, loans and grants to poor nations should be in smaller amounts and specifically applied; and sixth, create new ratios for the heavily indebted poor countries. Use debt to GDP and debt to budget expenditures instead of debt to exports and debt service to exports.

I believe that future economic crises in developing countries should be handled on a case-by-case, market oriented basis, not by a predetermined arrangement supervised by international financial institutions. Reading in the Wall Street Journal a few weeks ago I noticed an interesting article that was in the Letters to the Editor section of the paper. An excerpt from the article is as follows: the IMF is a negative force. This isn’t a recent phenomenon, however. In the nearly three decades since the Bretton Woods system started, the IMF has developed into a negative force. Countries that have come under its sway see it as an agent of U.S. bankers and financiers. Since the early 1970s, the Fund has impoverished much of the developing world through its mindless formula of increasing taxes to balance budgets and depreciating currencies to promote going out of business export sales. Despite promises to reform, the IMF continues to inflict its damaging policies on countries already suffering from financial and economic collapse. The article goes on to say; who can deny that the IMF helped wipe out the savings of ordinary citizens and families in Mexico when it supported the devaluation of the peso for years ago? The hope that NAFTA would bring about a new era of prosperity that would raise the standard of living in such poor states was quickly dashed. Although I do not want to seem that I agree with this opinion, there does seem to be some elements of truth that one cannot idly sit back, and say or assume that everything the IMF does is automatically correct.

The major reason I give for recommending the case-by-case approach for future crises is the vast changes that have occurred in recent years in international markets that have strengthened and greatly diversified international financial flows. Some of these examples were discussed toward the end of the last section. As a result, crises that do arise are likely to be isolated and sporadic, rather than pervasive as in the late 1930s

and 1980s. Today’s countries have more moderate debt, sounder economic policies and receive more of their capital in the more stable form of direct investment. Past approaches such as rescheduling long-term bank claims, so common in the debt crisis and 1980s, have lost much of their relevance, because of the great changes in capital markets. In 1988 rescheduling of bank claims would have eased Latin America’s cash flow by 25 percent of imports, but today it would ease the flow by roughly three percent. Equity flows, both as direct investment and the more volatile portfolio investment, now account for more than half of total net flows to emerging markets, with multinational corporations, mutual funds, insurance companies and pension funds all increasingly involved. Capital mobility has seemed to have grown dramatically.

It is important to try to avoid future crisis in advance rather than acting in a reactionary manner, as has been done in the past. Industrial countries should continue to reduce fiscal deficits, implement prudent monetary policy, and face up to structural challenges so that interest-rate shocks do not recur and sustained growth is realized. Emerging market economies should reinforce their commitment to fiscal balance, exchange-rate realism, and ongoing structural reforms, which have played the major role in the normalization of emerging capital markets in the 1990s. The IMF for its part should continue to improve its surveillance efforts by strengthening its dialogue with private market participants.

Latin American countries need to do a number of things in the future, to strengthen their financial position. They should allow higher priority to the safety and soundness of their banking systems. A weak banking system can seriously restrain as it did in Mexico. They should follow sound management policies. Trying to save on borrowing costs by relying on short term, foreign currency debt is a penny wise, pound-foolish strategy in today’s world of volatile international capital flows. Those countries should also maintain a healthy cushion of international reserves. Countries that let their international reserves become small relative to the stock of liquid short run liabilities of the government or banking system are playing with fire. These are but a few of many sound fiscal policy’s that Latin American countries need to do in order to take control of their mounting financial problems.

With increases in information technology, another crises could have even more dire results, than what was realized back in the 1980s. Back then, it was mainly contained to our side of the world, but any future problems will have a snowball effect all over the globe, as has been seen with the Asian contagion. Debt forgiveness sounds like a righteous thing to do, but from a financial standpoint, that is not the way to handle this problem. That would only invite more fiscal mismanagement, and the lending

community would not be so free next time to give their money away to corrupt and immoral LDCs leaders.

The financial crisis is not over, although things seem to have been settling down. The debt problem must be handled, before substantive steps can be taken to bolster the international financial system. Even the slightest downturn in commodity prices or upticks in interest rates have recently touched off financial turmoil. We are not out of the woods yet.

References

Aaronson, Susan., The Marketing And Message Of The Baker Plan, The Bankers Magazine, July-August 1986.

Andrews, Suzanna., Debt Forgiveness Gains Ground, Banking, 1988

Cline, William R., International Debt: Progress and Strategy, June 1988

Husain, Ishrat., Recent Experience with Debt Strategy, Finance&Develeopment, September 1989.

Islam, Shafiqul., Going beyond the Brady Plan, 1989

Johnson, Christopher., Fleshing Out The Baker Plan For Third World Debt, 1985

Main, Jeremy., A Latin Debt Plan That Might Work., Fortune Magazine, April 24, 1989

McLaughlin, Martin., Financial markets plunge as Brazil devalues currency. 1/14/99

Still Paying Ten Years After The Debt Crisis, http://nacla.org/english/lat_rec/debintro.htm. 

Latin America Annual Report 1998, http://www.worldbank.org/html/extpb/annrep98/latin.htm 

1996 Latin America Prospective, http://www.worldbank.org/html/extpb/annrep96/wbar08d.htm

Private Capital Flows http://www.iie.com/PRESS/cappress.htm

Latin American debt crisisFrom Wikipedia, the free encyclopedia

The Latin American debt crisis was a financial crisis that originated in the early 1980s (and for some

countries starting in the 1970s), often known as the "lost decade", when Latin American countries reached a

point where their foreign debt exceeded their earning power and they were not able to repay it.

Contents

  [hide]

1 Origins

2 Beginning of the debt crisis

3 Effects

4 Effects of Latin American Debt Crisis and the IMF

5 Current levels of external debt

6 See also

7 References

8 Further reading

9 External links

[edit]Origins

In the 1960s and 1970s many Latin American countries, notably Brazil, Argentina, and Mexico, borrowed huge

sums of money from international creditors for industrialization; especially infrastructure programs. These

countries had soaring economies at the time so the creditors were happy to continue to provide loans. Initially,

developing countries typically garnered loans through public routes like the World Bank. After 1973, private

banks had an influx of funds from oil-rich countries and believed that sovereign debt was a safe investment.[1]

Between 1975 and 1982, Latin American debt to commercial banks increased at a cumulative annual rate of

20.4 percent. This heightened borrowing led Latin America to quadruple its external debt from $75 billion in

1975 to more than $315 billion in 1983, or 50 percent of the region's gross domestic product (GDP). Debt

service (interest payments and the repayment of principal) grew even faster, reaching $66 billion in 1982, up

from $12 billion in 1975.[2]

Massive amounts of debt issued by dictatorships only worsened the situation [3]

[edit]Beginning of the debt crisis

When the world economy went into recession in the 1970s and 80s, and oil prices skyrocketed, it created a

breaking point for most countries in the region. Developing countries also found themselves in a desperate

liquidity crunch. Petroleum exporting countries – flush with cash after the oil price increases of 1973-74 –

invested their money with international banks, which 'recycled' a major portion of the capital as loans to Latin

American governments. The sharp increase in oil prices caused many countries to search out more loans to

cover the high prices, and even oil producing countries wanted to use the opportunity to develop further. These

oil producers believed that the high prices would remain and would allow them to pay off their additional debt.[1]

As interest rates increased in the United States of America and in Europe in 1979, debt payments also

increased, making it harder for borrowing countries to pay back their debts.[4] Deterioration in the exchange rate

with the US dollar meant that Latin American governments ended up owing tremendous quantities of their

national currencies, as well as losing purchasing power.[5] The contraction of world trade in 1981 caused the

prices of primary resources (Latin America's largest export) to fall.[5]

While the dangerous accumulation of foreign debt occurred over a number of years, the debt crisis began when

the international capital markets became aware that Latin America would not be able to pay back its loans. This

occurred in August 1982 when Mexico's Finance Minister, Jesus Silva-Herzog declared that Mexico would no

longer be able to service its debt.[6] Mexico declared that it couldn't meet its payment due-dates, and

announced unilaterally, a moratorium of 90 days; it also requested a renegotiation of payment periods and new

loans in order to fulfill its prior obligations.[5]

In the wake of Mexico's default, most commercial banks reduced significantly or halted new lending to Latin

America. As much of Latin America's loans were short-term, a crisis ensued when their refinancing was

refused. Billions of dollars of loans that previously would have been refinanced, were now due immediately.

The banks had to somehow restructure the debts to avoid financial panic; this usually involved new loans with

very strict conditions, as well as the requirement that the debtor countries accept the intervention of

the International Monetary Fund (IMF).[5] There were several stages of strategies to slow and end the crisis.

The IMF moved to restructure the payments and reduce consumption in debtor countries. Later it and the

World Bank encouraged opened markets.[7][8] Finally, the US and the IMF pushed for debt relief, recognizing

that countries would not be able to pay back in full the large sums they owed.[9]

However, some unorthodox economists like Stephen Kanitz attribute the debt crisis not to the high level of

indebtedness nor to the disorganization of the continent's economy. They say that the cause of the crisis was

leverage limits such as U.S. government banking regulations which forbid its banks from lending over ten times

the amount of their capital, a regulation that, when the inflation eroded their lending limits, forced them to cut

the access of underdeveloped countries to international savings.[10]

[edit]Effects

The debt crisis of 1982 was the most serious of Latin America's history. Incomes dropped; economic growth

stagnated; because of the need to reduce importations, unemployment rose to high levels; and inflation

reduced the buying power of the middle classes.[5] In fact, in the ten years after 1980, real wages in urban

areas actually dropped between 20 and 40 percent.[7] Additionally, investment that might have been used to

address social issues and poverty was instead being used to pay the debt.[1]

In response to the crisis most nations abandoned their import substitution industrialization (ISI) models of

economy and adopted anexport-oriented industrialization strategy, usually the neoliberal strategy encouraged

by the IMF, though there are exceptions such asChile and Costa Rica who adopted reformist strategies. A

massive process of capital outflow, particularly to the United States, served to depreciate the exchange rates,

thereby raising the real interest rate. Real GDP growth rate for the region was only 2.3 percent between 1980

and 1985, but in per capita terms Latin America experienced negative growth of almost 9 percent. Between

1982 and 1985, Latin America paid back 108 billion dollars.[5]

[edit]Effects of Latin American Debt Crisis and the IMF

Since Latin American countries, such as Mexico and Brazil, were not able to pay back their foreign debts, it

showed that Latin America is not able to keep up with the pace in which their debts grew. Before the crisis,

Brazil and Mexico tried to borrow money to enhance economic stability and reduce the poverty rate. But after

continuously borrowing money, they fell in the whirlpool of debt, and the innovations and improvements from

the past few years became meaningless.[11]

During the 1970s the world fell into an international recession which strained and put stress onto the

economies of countries all over the world. Many major nations and countries attempted to slow down and stop

inflation in their countries by raising the interest rates of the money that they loaned, causing Latin America's

already enormous debt to increase further. In between the years of 1970 to 1980, Latin America's debt levels

increased by more than one-thousand percent.[12]

The crisis caused the per capita income to drop and also ironically increased poverty as the gap between the

wealthy and poor increased dramatically. Due to the plummeting employment rate, children and young adults

were forced to join the drug trade, and some even began prostitution.[13] The low employment rate also caused

many problems like homicides and crime and made the affected countries undesirable places to live. Frantically

trying to solve these problems, debtor countries felt pressured to constantly pay back the money that they

owed, which made it hard to rebuild an economy already in ruins.

Latin America, unable to pay their debts, turned to the IMF (International Monetary Fund) who provided money

for loans and unpaid debts. In return, the IMF forced Latin America to make reforms that would favor free-

market capitalism. The IMF also helped Latin America utilize austerity plans and programs that will lower total

spending in an effort to recover from the debt crisis. The efforts of the IMF brought Latin America's economy to

become a capitalist free-trade type of economy which is a type of economy preferred by wealthy and fully

developed countries.[14]

Latin America's growth rate fell dramatically due to the government's austerity plans which prevented them

from further spending. The living standards also fell alongside the growth rate which caused much anger and

hatred from the people towards the IMF. This caused the IMF to become a symbol that people came to dislike

as more and more people began to reject the IMF's policies which imposed the power of international agencies

over Latin America.[15]

The citizens of Latin America did not like the fact that their government was being controlled by "outsiders".

Leaders and officials were ridiculed and some even discharged due to involvement and defending of the IMF.

In the late 1980s Brazilian officials planned a debt negotiation meeting where they decided to "never again sign

agreements with the IMF".[16] The efforts of the IMF helped Latin America regain some balance after the debt

crisis but was not able to resolve all of its issues.

[edit]Current levels of external debt

This article's factual accuracy may be compromised due to out-of-date information.Please help improve the article by updating it. There may be additional information on the talk page. (August 2012)

Since the 1980 several countries in the region have experienced a surge in economic development and have

initiated debt management programs in addition to debt relief and debt rescheduling programs agreed to by

their international creditors. The following is a list ofexternal debt for Latin America based on a March 2006

report by The World Factbook.[17]

Rank

Country - EntityExternal Debt(million US$)

Date of information

22 Brazil 211,400 30 June 2005 est.

24 Mexico 274,800 30 June 2011 est

29 Argentina 119,000 June 2005 est.

39 Chile 44,800 31 October 2005 est.

43 Venezuela 39,790 2005 est.

45 Colombia 37,060 30 June 2005 est.

50 Peru 30,180 30 June 2005 est.

65 Ecuador 17,010 31 December 2004 est.

73 Cuba 13,100 2005 est.

79 Uruguay 9,931 30 June 2005 est.

81 Panama 9,859 2005 est.

85 El Salvador 8,273 30 June 2005 est.

88 Dominican Republic 7,907 2005 est.

95 Bolivia 6,430 2005 est.

98 Guatemala 5,503 2005 est.

103 Honduras 4,675 2005 est.

108 Nicaragua 4,054 2005 est.

110 Costa Rica 3,633 30 June 2005 est.

112 Paraguay 3,535 2005 est.

[edit]See also

Chilean crisis of 1982

La Década Perdida

Developing countries' debt

Odious debt

Sovereign default

[edit]References

Since the Mexican debt crisis, 30 years of neoliberalismBy Jerome Roos On August 22, 2012

Mexico’s collapse of 1982, and the extreme response of the US and IMF, marked the birth of an elite consensus that continues to haunt Europe today.As Nick Dearden, Director of the Jubilee Campaign for debt cancellation justwrote for the New Statesman, this week marks the “anniversary of an event of great resonance”. For this week it is exactly 30 years ago that Mexico temporarily suspended its debt payments to foreign creditors, thereby marking the beginning of what would eventually escalate into the first international debt crisis of the neoliberal era. Things would never be the same again.What ensued was not only a tragic collapse of living standards throughout the developing world and a lost decade for Mexicans and millions of poor people in the Global South – most notably in Latin America, Eastern Europe and Africa — but also a historic shift in power relations between debtors and creditors in the emerging global political economy. Indeed, 1982 marked the global ascendance of Wall Street. As the famous geographer David Harvey put it:What the Mexico case demonstrated was one key difference between liberalism and neo-liberalism: under the former lenders take the losses that arise from bad investment decisions while under the latter the borrowers are forced by state and international powers to take on board the cost of debt repayment no matter what the consequences for the livelihood and well-being of the local population.

In the lead-up to the 1980s debt crisis, Wall Street banks had lent lavishly to developing country

governments. The oil crisis of the 1970s had led to huge capital surpluses in oil-producing countries, which subsequently reinvested those surpluses through US banks. As a wall of liquidity flooded international capital markets, interest rates fell precipitously. Countries like Mexico went on a borrowing spree. And the banks were only all too happy about the arrangement. After all, as Citicorp CEO Walter Wriston put it, “countries don’t go bust.”All the while, the US government stood by passively as American banks lent billions of dollars, mostly to Latin American governments. When the US was finally faced with an economic crisis of its own, induced partly by the oil crisis of the 1970s but more importantly by the long-term decline in the rate of profit of its own industrial sector, the Chairman of the Fed, Paul Volcker, decided to dramatically raise interest rates to put an end to stagflation and break the economic consensus (the so-called Keynesian compound of embedded liberalism) that had reigned supreme since WWII.This, in turn, immediately pushed developing countries into fiscal trouble. Because most of the loans these countries had taken on were denominated in dollars, the hike in US interest rates — which became known as the Volcker Shock — immediately raised interest payments for these governments. Mexico was only the first country that found itself incapable of servicing its debt. In the years to come, many dozens more would follow in its wake.But the US government, desperate to avoid losses for Wall Street, rapidly mobilized the IMF and World

Bank to disburse large bailouts for developing country governments around the world. Starting with the $4 billion bailout of Mexico, the IMF and World Bank rapidly saw their international leverage increase. Unsurprisingly, they were immediately accused of fending for the large banks — not for the poor countries they purported to “bail out”.

After all, one of the first things the “troika” of the US Treasury, Fed and IMF made sure to do, was to impose dramatic conditions on its loans to developing countries. Not only were Mexico, Brazil, Argentina, Poland, Egypt and dozens of other countries forced to immediately impose draconian austerity measures; they were also expected to don what Thomas Friedman would later call the “Golden Straitjacket” of neoliberal free-market ideology.The year 1982 thus marked the emergence of what became known as the “Washington Consensus“. This term, coined by US economist John Williamson, referred to a list of policy prescriptions developed by US officials in collaboration with technocrats at the IMF and World Bank, and quickly gained notoriety throughout the developing world. As Harvard economist Dani Rodrikwrote, “stabilization, liberalization and privatization became the mantra of a generation of technocrats who cut their teeth in the developing world, and of the political leaders they counselled.”The result of this new neoliberal elite consensus — that free capital flows, a deregulated financial sector and powerful private banks were good for the

economy — were catastrophic for Mexico. As Dearden writes, “the economy collapsed and stagnated, many industries shut down, with the loss of at least 800,000 workers altogether. By 1989, the Mexican economy was still 11% smaller than in 1981. Meanwhile, the debt doubled from 30% of GDP in 1982 to 60% by 1987.” As World Bank Chief Economist Joseph Stiglitz would later put itduring the Asian Crisis of 1997-’98, the “medicine” actually killed the patient.In one of her seminal books, Mad Money, the British political economist Susan Strange was no less sanguine about who was to blame for the Mexican crisis and who eventually paid for it. “On balance,” she wrote, “the banks had been helped out with public money,” while “the governments had had to give in to the market.” Indeed, “the United States had arranged a rescue package, [but] it was the Mexican economy and the Mexican people that suffered most.”“The same story,” Dearden continues, “was repeated across Latin America. In 1990 Latin American economies were on average 8% smaller than they had been in 1980, and the number of people living in poverty increased from 144 million to 211 million. Former Colombian Finance Minister Jose Antonio Ocampo calls the bail-out responses ‘an excellent way to deal with the US banking crisis, and an awful way to deal with the Latin American debt crisis’.”All in all, it took the international community (read: the US government) an astonishing seven years to realize that some form of debt restructuring was

necessary. Finally, in 1989, a blueprint plan was set up to reduce Mexico’s debt — one that would later be repeated across the developing world. Largely initiated by Wall Street bankers themselves, but named in true Orwellian fashion after the US Treasury Secretary at the time, the so-called Brady Bonds were supposed to help alleviate the intolerable debt load of developing countries.In reality, they were just a way for Wall Street banks to bring order to their books while reaping windfall profits from a situation that should, for both practical and moral reasons, have seen them go bankrupt. As economic historian Harold James pointed out in an IMF-commissioned study, the Brady Bonds deal only reduced Mexico’s debt by a negligible 2.7% of GDP. While this restored confidence to financial markets, it barely helped Mexico.In 1990, the New York Times wrote that “the jury is now in on the 1989 debt restructuring agreement between Mexico and the international financial community. Unfortunately, the deal is a bad one for Mexico.” Similarly, economist Michael Dooley wrote that “the banks were the clear winners of the game, because the expected bailout was forthcoming … while the debtor countries embarked on reform programs in the narrow interest of the banks.”As Lee Buchheit, a world-renowned lawyer known as the “philosopher-king of sovereign debt”, explained it, “while the terms of the packages should be beneficial to the debtor country, the US government will not support a package that would

compel US banks to recognize losses which could undermine the financial integrity of the banking system.” In other words, “too big to fail” was already a problem back in the 1980s, and the Mexicans know all about it.Ironically, what happened in Latin America, Africa and Eastern Europe during the 1980s would later be repeated in near-identical fashion in South-East Asia. Even though it wasn’t Asian governments that had indebted themselves, but Asian firms, the US Treasury and IMF responded in similarly aggressive fashion, prompting free-market economist Jagdish Bhagwati to refer to a Wall Street-Treasury complex dominating the US foreign policy agenda (political economist Robert Wade, my Professor at the LSE, would later add the IMF to that list).Now the observing reader will already have noticed where this story is inevitably headed… As Larry Elliot, economics editor of the Guardian, justsummarized it, “for Mexico, read Greece.” After all, there are not only similarities in the deep cause of both crises (systematically over-leveraged banks of the core recycling capital surpluses through peripheral countries), but, as Elliot points out, “the policy response to the crisis has also been identical”:In 1982, Latin American governments were lent money by the International Monetary Fund so that they could pay back the banks that were threatened with going bust as a result of their stupidity. As in Greece today, the money was given with one hand and taken away again with the other.

In the end, it seems that Hegel was right to point out that history repeats itself. But it took Marx to point out that it does so first as tragedy, and then as farce. What is happening in Europe today is an almost identical reflection of what happened in Mexico in the 1980s — only the banks are even more powerful; Greece, as a member of the eurozone, is even more systematically stuck in its Golden Straitjacket; and the eventual collapse will be even more dramatic.In Mexico, the 1980s tragically became known as la decada perdida – the lost decade. Millions of lives were ruined as the Mexican economy was decimated. If Mexico and Latin America have one lesson to teach to Greece and Europe, it would therefore be this: if you don’t break the bank, the bank will break you. Either the people of Europe topple their own states and the Troika, or the states and the Troika will topple the people. What will it be?