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The international debt crisis 1982 - 1989 - World Economic History Part 4



– V.Srinivas IAS  –

The international debt crisis began on August 20, 1982 when the Mexican Finance Minister informed the bankers assembled in New York that Mexico could not repay the loan that was due and engulfed 20 countries. The Mexican authorities had informed the IMF that without an immediate rescue, Mexico had no option but to default. This was the commencement of a decade long international debt crisis. In March 1981, Poland informed its bank creditors that it could not repay its debt obligations. A number of Europe’s largest commercial banks were heavily exposed with loans to Poland, and European governments had little choice but to rescue these banks. Poland pushed several other countries into the precipice – Romania, Hungary and Yugoslavia also requested for rescheduling the terms of repayment. The monetary contraction in the United States in the 1970-80 period resulted in a sustained appreciation of the US dollar. It made repayments in dollar terms impossibly difficult for most countries of Eastern Europe and Latin America. The commercial debt crisis erupted in 1982 and lasted till 1989.

In the 1970s, developing countries borrowed freely in the rapidly growing international credit markets at low interest rates. Banks had grown cash rich with large deposits from oil-exporting countries and there was increased lending to oil-importing countries. The loans were used on investment projects or to boost current consumption. Several developing countries had reached borrowings 12 percent of their national income, resulting in major debt-servicing difficulties. The monetary contraction in the United States in 1979-80 and the second oil shock resulted in sustained appreciation of the dollar. The May 1980 World Economic Outlook (WEO) said that the outlook for oil-importing developing countries was “frightening” and that current account deficits for those countries were not financeable under the existing development assistance. There was concern in the WEO bordering on urgency, gravity and insistence about the potential problems in most heavily indebted countries.

The overwhelming view was that debt accumulation was beneficial and even a key element in solution to problems of 1970s. No one saw the crisis coming, or who might be affected. Commercial banks believed that sovereign lending to developing countries was a highly profitable activity. Mexico and Poland were the first manifestations of the impending crisis. Soon after Mexico, several countries in Latin America – Argentina, Brazil, Chile, Ecuador, Peru and Uruguay encountered debt-servicing problems. This accelerated the eruption of crisis in other continents also. Clearly too many Governments were pursuing unsustainable economic policies in the contracting economic policy environment of the 1980s. Sub-Saharan African countries with official debts too faced economic catastrophe. The tremors were felt in Asia too with India, Pakistan and China drawing on Fund’s support for ambitious development and reform plans. Korea was able to service its debt without restructuring by an effective adjustment and reform program.

The International Debt Crisis lasted from 1981 to 1989. It covered nearly 20 countries around the world encompassing 30 different episodes. The 3 major East European countries affected were Poland, Romania and Hungary and the 3 major Latin American countries affected were Argentina, Brazil and Chile. Each one faced serious debt problems but each one had unique problems in origin and implications. Long-term growth in most heavily indebted countries required innovation and broader strategy. The Baker Plan was formulated to strengthen growth prospects of indebted countries and was followed by the Brady Plan.

Inability to service debt was only a symptom of deeper economic mismanagement in most developing countries. Feasible economic reform programs were put in place by a series of IMF programs under the Stand-By Agreements, Extended Fund Facility and Brady Plan. The strategy drawn up the IMF and the creditor countries envisaged financing a small portion of the debt through official programs. Traditional IMF relations with Commercial Banks were characterized by arms-length mutual dependency, with Banks financing strong economic policy programs recommended by the Fund. Post-Debt Crisis there was a major change in relations between the IMF and the Commercial Banks. Representing the change, officials of the IMF participated in meetings between the Commercial Banks and Country authorities. Large Stand-By Arrangements and Extended Financing Facilities were put in place to persuade Commercial Banks against rapid withdrawal.

The International Debt Crisis of 1982-89 was addressed through a 3 pronged strategy – it was viewed as a threat to both creditors and debtors, the crisis could only be solved by cooperation between debtors and creditors and resolving the problem required coordinated and centralized action. The Commercial Banks had a collective interest, the Creditor Countries had a collective interest and the coordination efforts were led by an International Agency – the International Monetary Fund. The systemic crisis gradually subsided by 1983, although debt-servicing difficulties remained. The period 1985-87 was a period of sustained growth and developing countries could reduce the burden of servicing debt. By 1989, there was a marked improvement in external economic environment facing many of the indebted countries which brought an end to the international debt crisis.


World Economic History

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About the author
V.Srinivas IAS
Senior Bureaucrats and Author

V.Srinivas is an IAS officer of 1989 batch, presently posted as Chairman Board of Revenue for Rajasthan

He had previously served in the Ministry of Finance and as Advisor to Executive Director (India) IMF, Washington DC. Also worked as Planning and Finance Secretary of Rajasthan.

Disclaimer : The views expressed by the author in this feature are entirely his  own and do not necessarily reflect the views of INVC NEWS.

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