The Latin America Debt Crisis Essay

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Pages: 5

The Latin America debt crisis
What Happened
Both internal and external for Latin Americas roller coaster economic performance in what was known as the crisis. During the 50’s and 60’s there was favorable conditions in place to maintain steady employment creation, capital investment and overall economic expansion. But this period ended in 1973 amid the first world oil crisis rocked the world economy and caused an era of debt-led growth among the oil importing Latin America countries. Latin American countries were hit by a slow down in economic growth. The import bill in these nations sky-rocketed and exports saw a massive slump as demand for Latin American products fell abruptly as the world economy slowed down. When a second oil price
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The impact from Mexico’s statement was far-reaching.
Most observers believe the petrodollar recycling of the 1970s gave rise to this debt crisis. During that period, the price of oil rose dramatically. Oil-exporting countries in the Middle East deposited billions of dollars in profits they received from the price hike in United States and European banks. Commercial banks were eager to make profitable loans to governments and state-owned entities in developing countries, using the dollars flowing from the Middle Eastern countries. Developing countries, particularly in Latin America, were also eager to borrow relatively cheap money from the banks.
Decreased exports and high interest rates in the early 1980s caused debtor countries to default on their foreign loans. The frenzied lending and borrowing came to a halt with the global recession in the early 1980s. The significant drop in debtor country exports, combined with a strong dollar and high global interest rates, depleted foreign exchange reserves that debtor countries relied upon for international financial transactions. Debtor countries consequently began to feel the strain of having to make timely payments on their foreign debt, which became much more expensive to pay off because the loans carried floating interest rates that increased along with global rates. These problems were compounded by massive capital flight of outward transfers of money by private individuals and entities in developing