Panic, Prosperity, and Progress: Five Centuries of History and the Markets

CHAPTER 16

Latin American Debt Crisis

Latin American countries have a long history of economic booms and busts, accompanied by foreign lending which has helped fuel the growth of the developing economies of South America. There have been multiple instances of widespread defaults on these debts, but no crisis was more severe or widespread than that which occurred in the 1980s, threatening to bring down some of the world’s biggest banks.

■ A Healthy Development

Prior to the debt crisis of the 1980s, the last major economic shock suffered in Latin America was during the Great Depression. The worldwide departure from the gold standard in the early 1930s, as well as the ubiquitous economic cataclysm occurring around the globe, compelled most developing countries to simply default on their loans. By 1935, 97.7 percent of bonds issued by Latin American countries (with the exception of Argentina) were in default. Even by the end of World War II, a decade later, two-thirds of Latin American debt had gone unpaid.

Following such a financial debacle, the financial world had scant interest in providing funding to the nations of South America following the war. However, economies in Latin America starting improving on their own. The region had healthy growth in both agricultural exports as well as industrial manufacturing, and between 1950 and 1980, overall gross domestic product quintupled.

Manufacturing enjoyed a healthy 7 percent annual growth rate through the 1960s, and exports between ...