Boom & Bust

Episode · 1974–1989 · Mexico City & New York

The LDC Debt Crisis

Petrodollars recycled into a lost decade

$327bn developing-country debt outstanding by 1982
>100% of the nine largest US banks’ capital lent to Latin America
−9% Latin American income per head across the 1980s
OPEC surplusesdeposited in London banks Syndicated lendingfloating rate, in dollars Sovereign borrowersMexico, Brazil, Argentina Collateral valuesrise countries don’t go bankrupt — lend more
The loans floated with US interest rates while the borrowers’ export earnings did not. When Volcker raised rates to break American inflation, he repriced the entire developing world’s debt overnight.

The oil shocks of the 1970s left OPEC producers with more dollars than they could spend and the oil-importing world short of them. The banks solved both problems at once: take the deposits in London, lend them on to developing countries in syndicated loans. Walter Wriston of Citibank supplied the era’s reassuring formula — countries do not go bankrupt.

They do not, but they can stop paying. The loans were dollar-denominated and floating-rate, so the borrowers carried both the currency risk and the interest-rate risk. Through the late 1970s, with real rates near zero and commodity prices high, this looked costless.

Paul Volcker ended that. To break US inflation he pushed policy rates above 20% in 1981, and the developing world’s debt service repriced instantly while a global recession crushed the commodity exports meant to service it. On 12 August 1982 Mexico told Washington it could not meet the following week’s payment.

Because the nine largest US banks had lent more than their entire capital to Latin America, an honest write-down would have rendered them insolvent. So the crisis was managed instead: emergency IMF programmes, involuntary new lending to cover old interest, and seven years of rescheduling that kept the loans at face value on bank balance sheets until the banks had earned enough to absorb the loss. The Brady Plan finally wrote the debt down in 1989. Latin America called the intervening years the lost decade, and the arithmetic of who was actually rescued is the book’s standing question about international crisis lending.

What it cost

The rescheduling bought the banks time. What the 1980s looked like in Latin America shows up in ECLAC’s household surveys: the number of people living in poverty rose from 135.9 million in 1980 to 200.2 million in 1990, from 40.5% of the population to 48.3%, and the number in extreme poverty from 62.4 million to 93.4 million.

  • 136m → 200m Latin Americans living in poverty in 1980 and in 1990, on ECLAC’s estimates for 19 countries — 40.5% of the population, then 48.3%. Those in extreme poverty went from 62.4 million to 93.4 million ECLAC, A decade of social development in Latin America, 1990–1999, Table I.1
  • −50% the cut in spending per head on health in the 37 poorest countries over the preceding few years, with education down 25%; in almost half of the 103 developing countries with recent figures, the share of 6-to-11-year-olds enrolled in primary school was falling UNICEF, The State of the World’s Children 1989, A decade of achievement threatened, p.1
  • at least 500,000 young children UNICEF estimated had died in the preceding twelve months as a result of the slowing down or reversal of development. The estimate leaves out countries at war and rests on the sixteen — ten in Africa, six in Latin America — where under-five mortality fell more slowly in 1980–87 than in 1970–80 UNICEF, The State of the World’s Children 1989, p.1 and its footnote

On 16 February 1989 President Carlos Andrés Pérez announced structural adjustment measures to refinance Venezuela’s external debt through the IMF, to take effect on 27 February. That day people in Guarenas began protesting at the rise in urban transport fares, and the disturbances spread through metropolitan Caracas and to cities from Maracaibo to Mérida. The next day the government suspended constitutional guarantees and put the army on the streets. On the official figures 276 people died, most of them shot by state agents.

Inter-American Court of Human Rights, El Caracazo v. Venezuela, judgment of 11 November 1999, paragraph 2 — the facts Venezuela acknowledged in full — and the reparations judgment of 29 August 2002, paragraphs 66.1 to 66.4

What followed

Argentina’s turn came three months later. Price rises of up to 100% on staples set off the looting of supermarkets in Rosario and in the province of Buenos Aires, and President Raúl Alfonsín declared a 30-day state of siege on 29 May 1989, with one man dead and dozens wounded. The minimum wage was then about $20 a month. Alfonsín gave up the five months left of his term, and Carlos Menem took office on 8 July with inflation running at an annual 1,472%, telling Congress that Argentina was broke.

UPI, State of siege declared in Argentina, 29 May 1989, and Menem inaugurated as Argentine president, 8 July 1989

Phases on show: displacementboomdistresspanic