Time Bomb Explodes

Poland found itself unable to pay the interest or principal on its massive loans in 1981. In 1982, the Mexican government declared it could no longer make payments on its debts. Argentina, Brazil and others soon followed. Thirty countries had fallen into arrears by the end of 1984. Billions of dollars were at stake.

The global monetary system was under threat. How could the world solve the debt problem?

Developing Countries: Just Don’t Pay?

• The lending banks and investors would lose their money. For some, bankruptcy might follow.
• Once it defaulted, a country would be unable to obtain future loans or investment, slowing economic growth and encouraging political instability.
• Industrial countries that traded heavily with the debtor countries would lose those markets.
  

An individual or company that defaults on a loan goes bankrupt. But what happens if a country defaults? No one knew the answer.

Industrial Countries: Just Ignore It?

• Why should the world bail out banks and investors who had made poor loan decisions?
• If it should, who was to pay for the bailouts?

Both developing countries and banks found themselves in a difficult position. But could industrial countries afford to disregard the plight of the debtor countries?