Causes for 1980s Debt Crisis

Introduction:

This paper is mainly focusing on the historical background and causes of debt crisis in late 1970s and 1980s.

The debt crisis was know as financial crisis and defined as a point of a country's foreign debt accumulation exceed it's earning power and the country has no ability to repay the debt.

The readily identification of debt crisis was Mexico’s inability to serve its outstanding debt of $80 billion debt. And the situation continue to worsen, and one year later, by October 1983, 27 countries owing $239 billion had reschedule debts or in the process of doing so.

Total indebted areas were major in Developing countries or known as third world could be devided in three groups: Latin America, East Asian and Sub-Sahara Africa. East Asian countries include South Korea and Tailand didn't involved in debt crisis and pay back it's debt later. On the other hand, Latin American countries was the most significant group of debt crisis as 16/27 nations were from Latin America, and four largest- Mexico, Brazil, Venezuela and Argentina-owed varies commercial banks $176 billion dollars or approximately 74% of the total less developed countries debt outstanding. And the crisis is often known as “ lost decade”.

This essay would mainly focus on reasons for Latin America to involved in debt crisis.

Outline:

According to the traditional view, the main causes for debt crisis was divided into two main parts:

External factors include oil price shocks, floating interest rates, and capital flow

Internal factors include inefficient use of government policies include borrowing and trade policy.

However, there's anther point raised by Susan George that explored the interlocking network of national banks, Third World elites an...

... middle of paper ...

... changes in market interest rates. Borrowers bears the risk for increasing interest rates. However, with low interest rate in the 1970s, the problem was overlooked (Pollin, 1989 and George, 1988).

Works Cited

Federal Deposit Insurance Corporation (FDIC) (1997), History of the 80s, Chapter 5 the LCD Debt crisis,1. Available from: http://www.fdic.gov/bank/historical/history/191_210.pdf [Accessed: May 1, 2010].

George, S. (1988), A Fate Worse Than Debt, Penguin Books, London.

Pollin, R. (1989), A Fate Worse than Debt: The World Financial Crisis and the Poor. Available from: Monthly Review Foundation, Web site:

http://www.tni.org/inthemedia/fate-worse-debt-world-financial-crisis-and-poor [Accessed: June 6, 2010].

Cuddington, J.T. (1989), "The extent and causes of the debt srisis of the 1980s". In Diwan, I. Dealing with the debt crisis, World Bank Publications