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Reasons for the debt crisis of the eighties:
Many, if not all of Latin American countries were able to easily obtain loans from other nations. ... Lenders didn’t bother to check creditworthiness of their debtors and allowed LA countries to accumulate debt.
The debt crisis occurred when the US and other OECD countries tightened their money and raised interest rates. Since much of the debt of LA countries had floating exchange interest rates this increased their debt. Most of the loans were also denominated in dollars, and the appreciation of the US$ further increased debt. Additionally, higher interest rates in other countries along with concern about local stability forced Latin Americans to move their money abroad and resulted in capital flight. ... LA could not pay their existing debt and were unable to receive new loans, thus resulting in default. ... As debtors increase their exports to service their debt, they worsen their own terms of trade. Internal deficits resulted in domestic debt and inflationary money creation. ... The devaluation needed to generate a trade surplus raised the cot of debt service in terms of domestic currency and results in public finance problems since the external debt service is financed by inflationary money creation. And the trade surplus needed to finance debt service came out of reduced consumption and investment, which results in concern about sustaining growth.
Policies Adopted To Solve The Debt Crisis
*A muddling through strategy was formed by the US Federal Reserve, the US Treasury, and the IMF.
Approximate Word count = 1138
Approximate Pages = 4.6
(250 words per page double spaced)
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