Money
Matters: An IMF Exhibit -- The Importance of Global Cooperation
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Debt
and Transition (1981-1989)
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Part
1 of 7
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Countries
Don't Go Bankrupt
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| Reinventing
the System |
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"If
you owe your bank a hundred pounds, you have a problem. But if you
owe your bank a million pounds, it has." - John Maynard
Keynes
"If you owe your bank a billion pounds everybody has a problem."
- The Economist
During the 1970s, Western commercial banks had loaned billions of
recycled petrodollars to the developing countries, usually at variable,
or floating, interest rates. So when interest rates began to soar
in 1979, the floating rates on developing countries' loans also
shot up:
- Higher
interest payments are estimated to have cost the non-oil-producing
developing countries at least $22 billion during 1978-81. At the
same time, the price of commodities from developing countries
slumped because of the recession brought about by monetary policies.
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The
time bomb was set.
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credits |
What
Went Wrong?
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- Between
1979 and 1982, interest rates more than doubled worldwide, dramatically
raising the cost of loans.
- The
U.S. dollar exchange rate improved, making the dollars needed
to repay loans more expensive.
- Widespread
recession dried up the markets for the exports of developing countries.
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Real prices for the export
commodities that were essential to the developing economies fell
to their lowest levels since the Great Depression.
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"The
time bomb was the debt burden and grotesquely high interest
rates being carried by the Third World to the profit of the
Western banks."
Les Gibbard
"Countries don't go out of business....The infrastructure
doesn't go away, the productivity of the people doesn't go
away, the natural resources don’t go away. And so their
assets always exceed their liabilities, which is the technical
reason for bankruptcy. And that's very different from a company."
Walter Wriston
Citicorp Chairman
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Who
Was to Blame?
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Why
did Western banks loan so much money to the developing countries?
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Many
developing countries were good loan prospects in the 1970s:
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Many produced raw materials, foodstuffs, or manufactured goods
that were in demand.
- Growth
rates looked even better than for industrial countries.
- From
1960 to 1980, Latin America's economic growth rate was nearly
twice the U.S. rate.
- Even
Eastern European countries seemed a good risk, because of the
climate of détente and growing East-West trade.
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Why
did developing nations borrow such huge amounts?
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As
long as interest rates were low and inflation was high, the loans
fueled their economies at little cost:
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With high inflation, by the time the dollars had to be repaid,
their real value had decreased.
- Meanwhile,
the borrowers could invest the money in economic development.
It
worked. Between 1973 and 1980, the economies of oil-importing developing
countries grew an average of 4.6%, compared with 2.5% for the industrial
world.
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| Reinventing
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