THE THIRD WORLD DEBT CRISIS IN THE 1980s AND 1990s/89respectively, the biggest financial power and the country with the
biggest international currency market. Interest rates were sharply
increased. The primary objective of the 'second October revolution',
as some commentators called it, was to stamp out inflation in the US.
The result was an increase in interest rates on short-term loans to
unprecedented levels.
This policy was promoted worldwide from 1980 onwards by the
Reagan administration and Thatcher government. Neo-liberal
policies were progressively imposed the world over, leading to a
fundamental overhaul in the way national economies were financed
internally and externally. This change in financial policy had a major
impact on the most vulnerable countries (in the form of the Third
World debt crisis), and on employment, salaries, social spending and
the public debt in the developed capitalist countries.
THE FINANCIAL SUFFOCATION OF THE THIRD WORLD
The Effects of the Increase in Interest Rates
For Third World countries, this new policy meant a tripling of
payments on the same levels of debt. This is because the interest rates
they paid followed the upward march of the Prime and LIBOR rates
(see glossary). Loans contracted during the 19 70s contained a clause
whereby interest rates would be pegged to changes in the Prime and
LIBOR rates.
This evolution of interest rates can be seen very clearly in
Table 7.1.
In this table, the real interest rate is calculated by subtracting the
US inflation rate from the nominal interest rate. For our purposes, the
Prime Rate provides a good idea of the rates practised on interna
tional financial markets. Like the London LIBOR rate, it is used as a
reference for setting the rates on loans to the Third World.
The figures clearly show how low interest rates were in the 19 70s
(in both nominal and real terms). In 1974-75, real interest rates
were negative. The upward trend began in 1979-80 with a rise in
nominal rates. One of the objectives was a radical reduction of
inflation, beginning with the US. This drop in inflation began in
1981, leading to a strong surge in real interest rates which ultimately
asphyxiated financially the South's debtor countries.