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The Latin American Debt Crisis Essay

2038 words - 8 pages

The Latin American Debt crisis did not occur over night, the crisis was many years in the making and signs of its arrival were prominent in Latin American society. The reasons for its occurrence are also expansive; some fault can also be place in countries outside of Latin America. The growth rate in the real domestic product of many Latin American countries grew at a constantly high rate in the decade prior to the crisis in the 1980s, this growth led to an increase in foreign investment, corporate investment, and the world began supporting these developing nations (Ocampo). The foreign investments into Latin America created a new international financial system that gave the foreign banks access the funds to give massive loans to the developing nations of Latin America. However, the affluence was not continuous. A rise in natural resources occurred in the mid-1970s, which led to increase the prices of imported goods, and thus Latin American countries would have to find a way to pay back these deficits, which then led them to borrowing more money. By the end of the 1970s, Latin America was in debt to for over $150 billion, and the growth rates for each nations debt varied greatly with Mexico and Brazil taking on more than half of the debt themselves.
The loans accrued by the Latin American countries had floating interest rates, which made them closely tied to the commodities of the time. The London Interbank Offering Rate controlled the variable rate, and these prices were updated every six months (Ocampo). The LIBOR calculated the rates based off the average interest rate estimated by leading banks in London and what those particular banks would charge if they were borrowing from other banks. With the LIBOR rates and the floating rate contracts, the credits were very risky because they relied heavily on the creditors (Ocampo). The majority of the loans made to Latin America were by banks in the United States, the concentration of the loans were made by money center banks which dealt mainly with borrowing and lending money with governments, corporations, and other banks rather than civilians. These banks held a lot of the debt that Latin America accrued over the 1970s, and these banks began loaning money to these developing nations because they wanted new profit opportunities and these developing nations were showing promise along with losing businesses to competitors in the US (Ocampo). However, the risks in investing in developing nations were not a secret and many economists and people outside those making the risky investments showed the dangers in these maneuvers.
There were many signs that a crisis was in the horizon for Latin America, and it became more unlikely that these developing nations would be able to continue paying off their debts. The first economic shock caused by natural resources caused some ripple effects, however they were essentially harmless. The second shock caused by these resources, oil in particular, occurred in...

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