This essay is explaining the causes of the 1980s debt crisis which swept a lot of LDCs countries especially Latin America. the way with which it was dealt and how it changed the international institutions.

1. Dariq K.Nour
15-12-2017
Debt Crisis in the 1980s
During the 1980s, the world experienced one the worst debt crisis since the Great Depression in
1939. The crisis severely affected most of the Less Developing Countries (LDC) where they
couldn’t able to pay back their foreign debt to the creditors, an, thus resulted in a serious of debt
crisis across the globe. The 1980s started when in August, 1982 Jesus Silva the Finance Minister
of Mexico announced the Federal Reserve, US Treasury, and the international monetary fund
that Mexico couldn’t able to serve and repay its debt. This move encouraged other LDCs and
soon countries like Brazil, and Argentina flowed the similar path and informed IMF and other
international creditors that they no longer able to repay their debt, thus this created a wide spread
of international debt crisis.
Origin of the 1980s crisis
Although the actual crisis started in 1982 by the inability of Mexico to repay its debt, the origin
of the crisis goes back in the 1970s by the Oil shock in 1979-1981, the US Federal Reserve’s
decision to increase the interest rate to control the inflation,
Oil Shock: to fully understand the causes of the 1980s debt crisis, in fact, we need to understand
the situation in the previous decade. In the 1970s two major ‘Oil Shocks’ hit the world the first
wave in 1973-74 and the second wave in 1979-80. Members of the Organization of Petroleum
Exporting countries shortly known as OPEC decided to increase the oil prices dramatically for

2. political and military-related reasons. Oil prices quadrupled and as result, this OPEC member
countries generated a large revenue and huge cash account surplus from the increase in the oil
prices. This surplus cash was deposited by the European and US banks which in return promised
for large profits by giving and investing a large portion of this money the LDC countries mostly
in Latin countries as a form of investment. The Latin American borrowings from the US
skyrocketed from $29billion at the end of the 1970s and in just a couple of years, the level of
indebtedness reached in about $327billion. With lowering inflation of most of the developed
countries interest rates were raised, this with high oil prices and non-profitable projects
implemented by the developing countries increased the burden to the LDCs and this resulted
inability of debt repayment.
Volcker Shock: shortly after President Nixon ended the Gold Standard in 1973, the value of US
dollars fallen against other foreign currencies and thus, leading the imports to become expensive
and eventually creating a high inflation. To tackle this issue, Paul Volcker, the president of the
US Federal Reserve in 1979-87 raised the interest rate more than double and implemented
monetary tightening policies to lower the inflation. The consequences of these policies to the
LDCs was tremendous, as the interest rate of the US dollar increased, so does the debt owed
increased. In addition to this, due to the global recession, the export of the LDCs decreased and
like so a balance of deficit occurred and payment difficulties faced the indebted countries and the
debt crisis broke. To aggravate the situation, foreign banks stopped lending money and requested
the repayments of the debts which LDCs couldn’t meet so IMF and WB come to meditate and
launched financial rescue and bailout programs they also re-scheduled the debt payment
deadlines, but this comes at a very high price paid by the LDCs.

3. These external causes were magnified by internal policies carried out by the governments of the
developing countries. Wages of the workers was increased due to social pressure and to meet up
with this need government couldn’t have a choice other than printing money which resulted in
dramatic increase of the inflation rate. Also fixed exchange rate to stabilize the price led the loss
of the international market to the competitors.
Debt Crisis in Soviet bloc Eastern Europe
One of the first areas which were hit by the 1980s debt crisis was the Soviet bloc Eastern
European countries. Several countries in the region engaged a tremendously large scale of
industrialization projects only to find out that couldn’t compete with the more complex and
advanced Western economy, so they heavily browed from the western commercial Banks to
cover the costs of their projects. But unfortunately the projects as anticipated failed to generate
profits, the Soviet Union economy was not much better the increased oil prices and the war in
Afghanistan exhausted their economy and the Soviet Union couldn’t afford to help them so they
turned towards the western countries for help.
Poland: the first signal of the Debt crisis come from Poland when due to lack of foreign
exchange the Poland government couldn’t able to repay its debt which totaled $25billion and
only March 1981 they requested their debt to be re-scheduled. After a long discussion in Paris
club which took a year or so, the creditors agreed to postpone some $2.2 billion in principle
payment. In this year, Poland experienced a political upheaval and unrest in which martial law
was declared and Soviet Army took over the power. Also, Romania and Hungary which also had
a centrally planned economy also were hit by the Crisis.
Debt crisis in Latin America

4. One of the regions which heavily affected by 1980s Debt Crisis was Latin American countries;
the rapid inflation and increasingly floating interest rates caused many countries to not able to
repay their loans. Mexico triggered the Latin debt crisis when in August 1982 they announced
that they cannot pay their debt and needs a debt re-schedule. Soon Mexico was followed by a
wave of Latin countries which were also struggling the same problem and 1980-89 this decade
was called the lost decade.
Mexico: the scope of the Eastern European Debt Crisis was just exclusive in some large
European Banks but apart from that, neither it did threaten the International Financial System nor
it triggered a worldwide Debt Crisis. In contrary, when Mexico announced that it could neither
roll over nor repay principal on its bank loans this ring the alarm bell the crisis is spreading in a
worldwide and the financial system as a whole was in danger. For the first time major Banks in
Japan and USA was threatened and European Banks which were already struggling faced a large
new risk.
Working towards a resolution
After the Debt Crisis scope increased and no sign of LDCs ability to repay their debt was
realized WB and IMF stepped up to solve the crisis and they launched a set of new rules and
policies.
Structural adjustment program (SAP): this was a set of policies for LDCs to implement in order
to be able to repay their debt. These policies was urging the indebted countries to implement
export-oriented policies so to earn hard cash and in doing so to follow this steps:
 Liberalization: to open their markets to foreign investment and to promote
engaging free trade.

5.  Privatization of public companies
 Reducing the public spending
 Deregulations of the market activities.
Baker plan: after the implementations of the structural adjustment programs, LDCs were still in
deep indebtedness and the signs of recovery were obvious, the formation of further policies to
tackle this debt crisis become inevitable. On October 6, 1985, the U.S. Secretary of the Treasury,
James A. Baker concluded that the inability of the indebted countries to pay back lied under
three major problems.
1. Principle indebted countries bewilderment on the enforcement of the adjustment
program.
2. The given support by the creditors and multilateral institutions was into pieces
3. The commercial Banks overall lending was dropping.
October 8, 1985, in Seoul meeting, Baker delivered a speech in which is advocated the
“Program for Sustained Growth”. The program was stressing their points. First, he addressed
the importance of establish a Liberal market institutions. Second, he called the WB and Inter-
American Development Bank (IDB) to increase their spending to principal debtors by roughly 50
percent. Third, he encouraged the commercial Banks to resume lending money to heavily
indebted countries. Baker’s plan was to offer $26 billon to the indebted countries for the course
of three years. Unfortunately, the plan become ineffective because the program was based on
voluntariness and designated net amount of the money planed was not given.

6. Brady plan: After Baker plan failed a second plan was formulated by the Treasury Secretary
Nicholas F. Brady to deal with the debt crisis. The plan was encouraging the commercial banks
to rewrite the contracts and to reduce the debt service by countries who fulfill a set of economic
reforms and adjustments, in return banks were offered a credit enhancements. The Brady
program came into success and under it 18 countries agreed to forgive $60 billion worth of debt.
Conclusion
In 1980s debt crisis was one of the worst economic crisis after the Great depression in 1939. The
crisis was caused by the surplus revenue which OECD countries gained from the increase in oil
prices in 19870s; the petrodollar cash was deposited/invested by the European Banks which give
this money to the Less Developed Countries (LDCs) in form of loan. With a very low interest
rate and less regulations developing countries eagerly took a huge amount of credits from the
Western Banks. But, soon the interest rate skyrocketed due to inflation and the US Federal
Reserve decision to increase in order to control the inflation. The crisis started when the Mexican
government announced that it will not repay its debts in due-date due to lack of foreign
exchange, soon after Mexico, several Latin American countries declared their indebtedness and
shortly the global debt crisis swept through the globe. In order to prevent the international
monetary system to collapse and to restore the countries truest on the system, IMF and WB
launched a bailouts programs to help the indebted countries, in return, implementing some
Structural Adjustment was must for these countries to get the financial assistances.

7. Bibliography
1- https://www.investopedia.com/articles/financial-theory/banking-crisis-1980s.asp-
2- https://www.federalreservehistory.org/essays/latin_american_debt_crisis
3- http://www.grips.ac.jp/teacher/oono/hp/lecture_F/lec10.htm
4- http://newsrescue.com/how-the-imf-world-bank-and-structural-adjustment-programsap-
destroyed-africa/#axzz51RwJ7rfx
5- Silent Revolution: The IMF 1979-1989, October 1, 2001, Chapter 8 - The Crisis Erupt
6- Bentley College, Bentley Model United Nations Program 16th Annual BMUN High
School Conference, 28-31 May 2004
7- 2005-2008. Darby Overseas Investments
8-