82/YOUR MONEY OR YOUR LIFE!
THE BIRTH OF THE EURODOLLAR MARKET AND THE
ORIGINS OF THE DEBT CRISIS
In the 1960s, a growing number of banks operating outside the US,
especially in Europe, began to accept deposits and provide loans in
dollars. This helped absorb and recycle the huge quantity of dollars
circulating around the world as an instrument for international
payments (Adda, 1996, vol. l,p. 94 and after; Chesnais, 1996, p. 14;
de Brunhoff in Chesnais, 1996, p. 47; Norel and Saint-Alary, 1988,
p. 41 and after). Eurodollars were dollars held on account by banks
with operations centred outside the US. This newcomer to the
financial markets signalled the beginning of the deregulation of
capital flows, since the banks in question were not subject to the
control of any state body - neither that of the US Federal Reserve nor
that of Western European governments. They were also outside the
ambit of inter-state bodies, with the IMF opting for non-interference.
In so doing, the IMF was not respecting its own statutes; article VI
explicitly calls for controls on capital flows.
Handling costs for Eurodollar-denominated financial products
were lower than those in other currencies, since 'Eurobanks' were
not obliged to set up mandatory reserves. This meant they could offer
high returns to depositors and competitive rates to borrowers, while
posting high profits themselves. All at a risk, however.
Early signs of the impending winding down of the long wave of
rapid growth included high levels of bank liquidity. The banks
received increasing amounts of capital, since the drop in profit levels
meant there were fewer and fewer attractive investments in
production. The beginning of the 19 70s saw a major upswing in
Eurodollar loans. They jumped 212 per cent between 19 70 and
1971, 58 per cent between 1971 and 1972, and 207 per cent
between 1972 and 1973.
INCREASE IN WORLD BANK LOANS
During the first 22 years of its existence, the World Bank provided
loan financing for only 708 projects, to the tune of S10.7 billion.
From 1968 onwards, however, loan totals skyrocketed. Between
1968 and 19 73, the World Bank loaned S13.4 billion for 760
projects (George and Sabelli, 1994; McNamara, 1973).