The Latin American Debt Crisis

The second and chief objective is to assess the impact of the crisis on the foreign exchange and stock markets. The report answers why the crisis adversely affected the Latin American market indices while the US market indices continued to rise.

When doing that, interest rates rose higher than anyone has seen since the Civil War. Not only did interest rate rise, the lending rate rose also. It rose from 6.8 percent all the way to 21.5 percent in five years. Everyone in every part of the world was effected one way or another by this disaster, but farmers and rural bankers were especially hurt.

The heavy borrowing of the 1960s and 70s also however allowed countries to put in place unsustainable domestic policies. Many governments put in place populist policies that entailed using expansionary fiscal and monetary policies with little regard for inflationary risks, budget deficits, and foreign exchange constraints. Populism promoted growth and income distribution but did not address the risks of increasing debt. In addition to encouraging unsustainable policies, the low interest rates that Latin American countries became accustomed to actually discouraged saving which added additional fuel to the economic crisis.

Many investors believe that this means the United States will have problems repaying these loans in the future and will cause many economic problems in the future. The debt accumulated this much because of deficits in the national budget. These can be caused by new programs to help citizens or help the US economy. Tax cuts, military spending, and the economic stimulus package caused this national debt to skyrocket. On the USdebtclock.org website it shows our largest budget items are Medicare/Medicaid at $1 Trillion, Social Security at $886 Billion, defense/war at $583 Billion, income security at $303 Billion, net interest on debt at $224 Billion, and Federal pensions at $255 Billion.(usdebtclock1) These debts are large and spending on some of these programs must be cut.

Latin America is filled with countries that have such great richness in environmental, agricultural and cultural goods but unfortunately it is also the place where the majority of the countries have high levels of poverty and social inequalities. Latin America is the place where we find many natural wonders like the Amazon rainforest, the Andes, the Iguazu Falls and many other natural resources. However, the economic situation is one of the poorest in the world. According to the article, The Politics of Economic adjustment policy in Argentina, Brazil, and Mexico: Experiences in the 1980’s and challenges for the future, Latin American countries underwent the worst economic recession during the 1980’s. The distribution of incomes after the

Along with the stocks and bonds, there was also a high demand from foreigners wanting American goods. This occurred because the deflation from the United Sates made it so appealing to foreigners (Romer). On the other hand, because there was such a low income from Americans it reduced their demand for foreign products (Romer). Unfortunately other countries were trying to maintain an international gold standard in order to continue to meet the monetary contraction that was occurring in the United States (Romer). Sadly, this resulted in the deterioration of output and prices throughout countries all over the world. This downturn of other countries started looking like the one occurring in the United States (Romer). Banking panics along with financial crisis started occurring in other countries around the world, not just in the United Sates (Richardson, September 2007). By forcing countries to deflate, the gold standard reduced the value of bank’s collateral and made them more vulnerable to bank runs (Romer). Due to the overwhelming panics in banks and other financial market disruptions, countries globally experienced a tremendous depression in output and prices (Paul Evans).

In 1994, the world saw the decline of the Mexican Peso, leading to what is now considered as the Mexican Peso Crisis. The crisis was characterized by the drastic decline in the value of the Mexican Peso. The Mexican Peso Crisis is considered significant because of its impact on other parts of the region, including Brazil. The following is a discussion of the causes and impact of the Mexican Peso Crisis.

Before the 60’s Mexico has experience a growth in their economy that was called the “Mexican miracle” because of the growth from 3% to 4% in just few time. However, after this period of growth, what followed was decades of debt. “In the late 1960s, Latin America

During this time period the IMF took on a new role of lending to countries on the brink of default. By the mid 1980s, some observers noted that the loan qualifying austerity policies implemented by many borrowers were prolonging and deepening the debtor nations’ problems.

With the large capital surplus largely arising from foreign investments to support the huge trade deficits in the Mexican current account, all seemed to go well for the Mexican economy until several political crises erupted and several macroeconomics mistakes were left exposed in 1994 which affected foreign investor’s confidence.

The United States at this stage was the world financial centre and sole superpower in the world (arguably). Once again the US was the creator of the crisis.

companies and investments in financial instruments. Fourth, the currency turmoil affects U.S. imports and exports as well as capital flows and the value of the U.S. dollar; the U.S. deficit on trade was rising as these countries import less and export more. Fifth, the crisis is causing economic turmoil that is exposing weaknesses in many financial institutions in Asia; some have gone bankrupt. The economic problems of the troubled Asian economies are adversely affecting the United States, Japan, and others.

Moreover, the collapsed Bretton Woods system was accompanied by the reemergence of international capital markets and an increase in the activity of international commercial banks. With decreased demand for loan in high-income countries, interest rate decreased and banks sought new borrowers. Meanwhile,in less developing countries growth rates was fairly satisfactory. According to FDIC ( 1997,pp 192), before tho oil price shocks which will explained later, for more than a decade, the real domestic product growth rate of the developing countries averaged 6 percent and for remainder year slowed to 4-5 percent. Such growth generated investment from international banks in these markets.

To begin, Latin America is indeed one of the most poor regions in the world. Due to bad leaders, poverty, natural disasters and debt this region is facing a lot of problems due to unsustainability. The problem that seems most sensible to fix is debt. Debt by definition is something typically money that is owed or borrowed. In Latin American’s case the problem is that they borrowed to much money; that in the end was supposed to be payed off but wasn’t. This problem continued when Latin America borrowed money from other countries to repay the US, yet the money unfortunately just kept adding up.

There are many causes for the debt crisis to start. Before world war II Europe had very strict trade barriers between countries examples being currency exchange fees and trade tariffs. Then World War II happened and was so detrimental to Europe they couldn’t continue to have such strict trade barriers. The barriers were then slowly removed with the first barrier removal being steel and coal. This worked well enough that it caused twenty-seven countries to sign the Maastricht Treaty thus forming the European Union (UN). This made trading throughout all Europe easier which caused more trade to occur within Europe.