Loans and Debt Resolution - The international debt crises

From the end of World War II to the 1973–1974 oil crisis, governments gave and loaned to other governments in various ways, but increasingly through international institutions. Defaults were rare. However, the oil crisis resulted in an increase in oil prices that led to the sudden availability of vast sums of "petrodollars" that banks desired to lend, often unwisely, and developing countries eagerly accepted. For example, the bank-held debt of non–oil developing countries increased from $34.5 billion in 1975 to $98.6 billion in 1982, with U.S. banks holding 36.7 percent of the loans.

With the Polish debt crisis of 1981 and Mexican crisis in 1982, the lending stopped abruptly, and since 1982 capital has flowed back from debtors to creditors, impairing the future of developing nations. In the early stages of the crises, at least nine large U.S. banks would have become insolvent if all of their foreign governmental clients had defaulted on their loans. By 1985 the severity of the crisis had passed for the creditor nations; however, the crisis was not over for developing countries, still confronted with staggering debts, who saw their standards of living decline significantly and found little hope for future relief.

Since the early 1980s, the heavily indebted developing nations have been involved in extensive financial negotiations with their international creditors. In 1992 the IMF was managing arrangements with fifty-six countries, twenty-eight in Africa, but the total number of agreements involved in the extraordinarily complex negotiations was much larger. These multilateral debt rescheduling and adjustment undertakings involved widely disparate parties, often with contradictory objectives, which included international financial institutions (such as the IMF, the World Bank, and the creditor clubs in Paris and London), plus a number of transnational banks and official aid agencies of the major creditor nations. While most Latin American debtor countries had borrowed heavily from private, transnational banks, most of the African countries had loans from official bilateral and multilateral agencies. And the debt problem varied greatly. For some nations it was a question of short-term financial liquidity; for others it was more a matter of basic financial solvency. As a result of these negotiations, a global debt regime evolved with most developing countries undertaking substantial economic reforms, but it was not evident that these reforms, by themselves, would deal with the problems.

In 1982, Mexican credits accounted for 41 percent of the total combined capital of the nine largest U.S. banks, threatening their existence should Mexico default on its repayments. In August, when Mexico did not have the $2 billion needed to meet its repayment schedule, Secretary of the Treasury James Baker's staff arranged for $1 billion from the Commodity Credit Corporation to guarantee purchases of U.S. agricultural surpluses. The second billion came in a complicated package from the Department of Energy for future oil deliveries to the Strategic Petroleum Reserve, for which Mexico ended up paying roughly 30 percent interest. The Reagan administration also provided Brazil with $1.2 billion in additional loans to allow it to meet its repayment schedules. Two other U.S. allies, Turkey and the Philippines, both of which faced defaulting on their loans, benefited from reloan packages worked out with the United States and the IMF. The United States, aiming to rescue American banks from their over-exposure, had put forward a number of plans—most notably Baker's plan (1989)—which sought to relend without incurring loan writeoffs.

The 1990s saw a continuation of international financial problems. When Mexico again needed financial assistance in 1994, President William Clinton arranged for loan guarantees amounting to some $25 billion despite considerable congressional resistence. In 1997 and 1998 currency speculators disrupted the financial systems of Thailand, Indonesia, South Korea, Malaysia, the Philippines and Taiwan, and eventually impacted the American economy. With U.S. support, the IMF was able to stabilize the situation.

By the end of the 1990s many people believed that the problems of the huge debt being carried by developing countries was threatening the survivability of the creditor nations. This concern was reflected in the popular protests against the World Trade Organization, the IMF, and the World Bank in Seattle, Washington (November 1999), Washington, D.C. (April 2000), and Prague, Czechoslovakia (September 2000). The protestors argued that the developed nations were draining the developing countries of the natural resources without adequate compensation and incurring an ecological debt. They contended that this debt should be used to pay the financial debts incurred by developing nations and owed to the IMF and World Bank.