International Finance

Third edition

by Keith Pilbeam

Chapter 15 - International Debt Crises

Chapter Introduction
On 12 August 1982, the Mexican government announced that it could not meet its forthcoming debt repayments on its $80 billion of outstanding debt to international banks. This was the first sign of the international debt crisis. Soon after the Mexican announcement a number of other developing countries announced that they too were facing severe difficulty in meeting forthcoming repayments. Throughout the 1980s and 1990s and the early part of the new century the problems faced by the developing countries in servicing their debts has been one of the major international policy issues, and granting of debt relief has recently also become a major policy issue.

The debt crisis encompassed a wide set of countries from low-income developing nations to middle-income countries. In this chapter, we concentrate primarily upon four countries that were classified by the World Bank in its 1994 World Debt Tables as severely indebted middle-income countries (SIMICs), that is Argentina, Brazil, Mexico and Venezuela. In its 2004 Global Development Finance Report the World Bank classification of a SIMIC is that the country must be a middle-income country (an annual income of between $736 and $9,075 per capita) and have one of two key ratios above certain critical levels. These ratios are the present value of debt to gross national income (GNI) (80%) and the present value of debt to exports of goods and services (220%). Other than the SIMICs there is a group classified moderately indebted middleincome countries (MIMICs), a group classified as severely indebted low-income countries (SILICs), and a group of moderately indebted low-income countries (MILICs) and less-indebted middle-income countries (LIMICS). As we shall see, in 2002 only Argentina and Brazil of the four countries we examine remained classified as SIMICs with Mexico and Venezuela having shown a marked improvement resulting in them being listed as LIMICs.

Although they were both severely indebted, there are considerable contrasts between the SIMICs and the SILICs. The 15 SIMICs identified by the World Bank in 1994 were especially concentrated in Latin America, and in 1994 their combined external debt amounted to $587.4 billion the majority of which was owed to private sources made up primarily of commercial banks. By contrast, the majority of the 35 SILICs identified by the World Bank in 1994 were to be found in sub-Saharan Africa, and in 1994 their combined external debt amounted to $223.6 billion with the vast majority owed to governments and official agencies and the remainder to private sources.

The international debt crisis raised many questions. How did the crisis come about? Why did international banks lend so much money to these countries? Why did the indebted countries not go into outright default? How was the debt crisis managed? How successful has the management of the crisis been? What lessons can be learned from the crisis? In this chapter we examine possible answers to these questions. We pay special attention to the debt problems of the four major debtors located in Latin America – Mexico, Argentina, Brazil and Venezuela. The concentration of commercial bank loans in these four economies led to fears that if any of them defaulted, this would undermine the banks that lent to them, especially the US banks that had massive exposures, and threaten an international financial crisis. The resulting knockon effects would push the world into a major economic recession.