Your Money or Your Life!

THE THIRD WORLD DEBT CRISIS IN THE 1980s AND 1990s/91

Even more damning is the study made by Sebastian Edwards,
World Bank economist and head of the bank's Latin American
economics division until 1996. Edwards calculates the real interest
rates used for Latin American loans by subtracting the inflation rate
for Latin American exports from the nominal LIBOR rate. This is an
astute calculation to make, since Latin America services its debts with
its export earnings.
Edwards writes,

in the case of Latin America, the real interest rate went from an

average of-3.4 per cent [a negative rate favourable to debtors]

between 1970 and 1980 to +19.9 per cent in 1981, +27.5 per

cent in 1982 and +17.4 per cent in 1983. (Edwards, 199 7)

The Shrinking of Export Markets and the Resulting Drop in
Earnings Created Trade Deficits for the Countries of the
South

In 19 8 0-81, the first generalised recession since the one in 19 74- 7 5
caused export markets to contract (Mandel, 1982, pp. 214). Coupled
with the sharp fall in the price of raw materials from August 1982
onwards, this financially throttled the countries of the Third World.
These countries were hit by a drop in export earnings and an increase
in interest payments. This in turn created a trade deficit, which had
to be financed with new loans.
At the same time, credit sources were drying up as banks became
aware of the risks they had taken.
The earnings of oil-producing countries plummeted; petrodollars
were no longer available for recycling into loans.
The spectacular increase in the US budget deficit under Reagan
was financed by masses of capital that flooded into the US, and away
from Third World countries.
The US overtook Third World countries as the main borrower on
global financial markets, while West Germany and Japan overtook
OPEC as the world's main moneylenders.
Not surprisingly, the decision by banks abruptly to stop all loans to
Third World countries led to the very suspension of debt-service
payments that these banks feared.
In August 1982, Mexican officials announced that they were no
longer able to meet their international financial obligations. They