Surviving A Debt Crisis: Five Lessons for Europe from Latin America
Latin American Debt Crisi
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Transcript of Latin American Debt Crisi
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FinanacialCrisis
Presented by:-TEAM 3
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Team 3
}Abhinav Shukla (01)
}
Pranav Prashant (32)} Ronak Doshi (39)
} Ruchi (40)
} Sneha Verma (47)
} Subhasree Sahoo (49)} Swaroop C Mohan (52)
} Swati Bhardwaj (53)
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Lost Decade
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Latin American Debt Crisis
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Introduction
}Occurred in 1970s and 1980s.
}Due to over accumulation of foreign debt
and default on debt services.
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Background (1970s)
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PETRO-DOLLAR RECYCLING
} In 1973 oil prices quadrupled
}OPEC deposited huge amounts in banks
} Bank 'recycled' deposits as loans to LatinAmerican governments.
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Crisis (early 1980s)} 1975 to1982: Debt increased @ 20.4 % pa.
} LOAN: $75 bn (1975) $315 bn (1983)
} DEBT SERVICES: $12 bn (1975) $66 bn (1982)
} Due to American monetary policy
} Interest rates rose and Dollar become stronger.
} Demand for their exports fell.
} August 1982 Mexico defaulted to service its debt
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Recovery strategies:Debt Restructure (1983 to 1989)
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MUDDLING THROUGH:
} IMF and World banks rescue loans
} Loans with conditionality
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THE BAKER PLAN
} 1985 by US Treasury Secretary James Baker
} Based on the assumption of illiquidity
} Targeted 15 countries for $29 billion of new money} $20 billion (commercial banks)
} $9 billion (IMF and World Bank)
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End of Crisis
} In 1991, capital inflows > outflows for thefirst time since the onset of the debt crisis.
}Mexico was the first country to retire itsBrady bonds in 2003.
} Ecuador was the only one country thatdefaulted on Brady Bonds.
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Cause of crisisExternal factors} The collapse of the Bretton Woods system was accompanied by thereemergence of international capital markets and an increase in the
activity of international commercial banks.
} In 1973 the OPEC quadrupled the prices of oil. Oil producers countriesdeposited their surpluses of asses in international commercial banks.
Oil-importing nations in Latin America increasingly needed capital, in part tofinance the external deficits associated with oil inflation. The so
called Petrodollar recycling program allowed lesser developed nations to
purchase oil even as its price skyrocketed, and it was actively promotedby the United States.} A drastic change in the source and composition of loans to LatinAmerican in the 1970s, from long-term official loans with low interestrates to short-term commercial loans with variable high interest rateswas a major factor which led to the debt crisis of the 1980s
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Oil-importing nations in Latin America increasinglyneeded capital, in part to finance the externaldeficits associated with oil inflation. The socalled Petrodollar recycling program allowedlesser developed nations to purchase oil even
as its price skyrocketed, and it was activelypromoted by the United States.
} A drastic change in the source andcomposition of loans to Latin American in the1970s, from long-term official loans with lowinterest rates to short-term commercial loanswith variable high interest rates
was a major factor which led to the debt crisisof the 1980s
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Internal factors
} A good part of Latin American debt went tofinance the growing trade imbalances.
} Many LATAM nations kept the real exchangerate strong as a measure against inflation,worsening the current account.
} The continuous real exchange appreciation
made international interest rates (low innominal terms) to be negative in realterms.This exacerbated indebtedness
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Markets reaction to the debt
crisisSecondary markets
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Lessons from the debt crisis} Recovery from crisis long and painful} Latin American debt crisis of the 1980s (as) a
crucial dividing mark in the areas recenteconomic history (Rodrik, 2003).
} Strong economic fundamentals matter; countriesmust put attention to price stability and budgetconstrains.
} The burden of adjustment to the debt crisis mayhave fallen disproportionately on women inparticular andon the poorest people in general.
} Rodriks (2003), sees the debt crisis as theexplosive end of a period of continued decline:the import substitution industrializationdevelopment model
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