Definition of Debt Crisis. When a country cannot or will not pay the interest repayments on a debt. In the case of a country these are its external debt commitments.
In the 1980s there was a major international debt crisis because several less developing countries in Latin America and Africa defaulted on their debt repayments.
Causes of Latin American Debt Crisis 1980s
- Countries such as Brazil, Argentina and Mexico borrowed heavily during the 1970s to fund industrialisation.
- By 1983 the region had borrowed from other countries upto 50% of its GDP or $315 billion.
- The problems occurred in the mid 70s when oil prices shot up over 300%, most Latin American economies were net importers of oil so faced higher import costs. Also, the world economy slowed down.
- Growth in these latin American countries slowed down and they struggled to repay debt.
- These policies also led to depreciation in their currencies. This made it even harder to pay back the debts.
- Also in the early 1980s interest rates increased in the West. The combination of these factors meant that their National income was insufficient to meet interest repayments.
- The crisis contributed to the collapse of authoritarian regimes e.g. in Argentina
Response to Debt Crisis
The IMF lent money, but on conditions. These conditions involved:
- Removal of tariff barriers – switching from import substitution to export oriented trade policies