Latin American debt crisis of the early 80’s

Rapid economic growth and rising oil prices flushed U.S. banks with cash in the early 1970s. With government approval and a keen interest in international expansion, financial institutions identified an opportunity to invest in developing countries. The strategy dubbed the "recycling of petrodollars," aimed to support developing oil exporters and funneled a staggering $239 billion into 27 countries from 1970 - 1978. 

The plan was on track at first, however, debtors began to experience issues since the loans were denominated in dollars. Despite using less valuable local currencies to fund daily operations, borrowers were forced to make payments in dollars. Over time, strength in U.S. currency and climbing oil prices put pressure on debt holders. 

The turning point came on August 12th, 1982, when Mexico's finance minister, Jesús Silva Herzog, informed Federal Reserve Chair Paul Volcker and the International Monetary Fund (IMF): that Mexico couldn’t meet its $80 billion debt payment due on the 16th. By October 1983, 16 other Latin American countries had followed suit, defaulting on their loans. The international debt crisis left U.S. banks facing $176 billion in losses.

To settle outstanding debts, banks revised loan agreements, increased reserves, and formed special advisory committees to handle negotiations. While the Ford administration had encouraged banks to lend to third-world partners, it underestimated the impacts of inflation. The international debt debacle is a powerful reminder that more risk doesn’t always equate to more rewards.

Citations

Federal Deposit Insurance Corporation. "The First Fifty Years: A History of the FDIC 1933-1983." FDIC, pp. 191-210, www.fdic.gov/bank/historical/history/191_210.pdf. Accessed 1/10/2025.

"Petrodollars." www.investopedia.com/terms/p/petrodollars.asp. Accessed 1/10/2025.

Bernanke, B. S. 2023. 21st century monetary policy. W. W Norton & Company LTD.