Paul Volcker’s Latin American legacy

That is the topic of my latest Bloomberg column, the history with Latin America is also a big part of the Volcker story, here is one bit:

Global banks raised their interest rates for lending and shortened their repayment periods. In the mid-’70s real lending rates to Latin America hovered in the range of zero, but by the early ’80s they were between 8% and 10%. Liquidity was cut off, and the underlying growth potential of the region’s economies was not strong enough to sustain the debt. This affected other parts of the world as well and became known as “the third world debt crisis.”

The crisis came to a head in 1982, when Mexico announced it would no longer be able to service its debt, sparking a financial crisis and currency collapse. Ultimately, 16 Latin American countries also were forced to reschedule their debt payments. This created problems for the banks too, since by 1982 the nine largest U.S. money-center banks had Latin American debts equal to 176% of their capital, a figure which rose to 290% when lesser developed countries elsewhere in the world were included. Eventually the U.S. led a bailout and debt-reduction program, with the participation of the International Monetary Fund.

But for Latin America, things would never be the same. Governments had to cut spending, which in turn led to further adjustment problems, akin to the eurozone crisis of more recent times. Poverty rates rose sharply, and the general mood turned pessimistic. By the end of the 1980s, Latin American per capita GDP had fallen from 112% of the world’s average to 98%, a stunning plunge and by some measures the worst financial disaster the world had ever seen, albeit a regionalized one.

And this:

Repercussions in the U.S. were more modest. The potential insolvency of some major U.S. banks, such as Citibank, was ignored amid forbearance and hope about their return to profitability. They did, eventually, but in retrospect one has to wonder if allowing so much non-transparent bank accounting — with the blessing of regulators, including Volcker’s Fed — was such a good idea.

That all said, I do not think Volcker had much operative choice on most of these matters, and the excess Latin American borrowing certainly was not his fault.  Note: the inspiration for this column came from a tweet by Pseudoerasmus.


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