Argentina International Debt

Latin American Backround

The Latin American debt crisis started in the early 1980s when countries reached the point where their loans exceeded their income and they were not able to repay their external debt.

Average Latin American External Debt as a Percent of Gross National Product

In the 1960s several Latin American countries were dissatisfied with the traditional International Specialization model so they started to borrow enormous sums of money from foreign creditors to begin implementing the Import Substitution Industrialization (ISI) model. In the 60s and 70s these countries economies expanded really fast so the creditors were more than happy to lend them money. Between 1975 and 1982, Latin American debt increased at an annual rate of 20.4%. This type of borrowing led Latin America to owe as much as 50% of their GDP. Interest rates grew even faster.

In the 1970s and 80s the world economy went into recession, and oil prices skyrocketed. Developing countries were in a financial emergency. Oil exporting countries had a huge increase in cash inflows and they invested their money with international banks, which use most of their gains from their investments as loans to Latin American governments. The debt crisis began when the international capital markets realized that Latin America would not be able to pay back their loans. The lenders refused refinancing their debt and the debts were now expected to be paid immediately.

In response to the crisis Argentina abandon its Import Substitution Industrialization (ISI), which was sustained by direct government intervention, nationalization of domestic industry and high amount of funds. Instead, Argentina adopted an export-oriented industrialization strategy, encouraged by the International Monetary Fund (IMF). These export-oriented policies of free trade agreements and reducing tariffs had a allarmimng effect in Argentina. 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%.

The debt crisis contributed to the collapse of the dictatorship that was in power at that time.

Glossary

• Amortization: Scheduled reimbursement or repayment of the amount borrowed.

• Balance of Payments (BOP):A statement summarizing the economic transactions between the residents of a country and nonresidents during a specific period, usually a year. The BOP includes transactions in goods, services, income, transfers and financial assets and liabilities. Generally, the BOP is divided into two major components: the current account and the capital and financial account.

• Convertibility:The ability to freely use a currency for international transactions by the residents of any country.

• Debt: financial liabilities arising from past borrowing. Debt may be owed to external or domestic creditors and typically, debt financing is in the form of loans or bonds. The debtor may be either a public (government) or private sector entity.

• Default: term used when a party is unwilling or unable to pay their debt obligations. This can occur with all debt obligations including bonds, debentures, mortgages, loans, and notes. Default can also occur with sovereign bonds, that is, governments can default on their payments to creditors. In corporate finance, a default is typically a prelude to bankruptcy. With most loans the total amount owed becomes immediately payable on the first instance of a default of payment.

• International Monetary Fund: Established by international treaty in 1945 to promote monetary cooperation among its members. Its purposes include promoting the balanced growth of international trade, stability of exchange rates and the maintenance of orderly exchange arrangements among members. The IMF monitors global economic and financial developments and gives policy advice, lends to member countries with balance of payments problems, and provides technical assistance in its areas of expertise.

• Structural Adjustment: Changing the way in which an economy is organized in order to raise productive capacity. Reforms associated with structural adjustment can include liberalization of trade and investment policies and anti-competitive agricultural policies; removal of exchange and price controls; and reform of tax policies.

Sources

Federal Reserve Bank of Atlanta

Economy Policy Insitute

International Monetary Fund

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Dictatorship | Raúl Alfonsín | Carlos Menem | Fernando de la Rúa

Interim Presidents | Néstor Kirchner | Graphs | Final Analysis