chapter  5
10 Pages

The Debt Crisis Erupts

WithRaúl L. Madrid

A downturn in the global economic climate brought on the Third World debt crisis of the 1980s, just as a similar shift had precipitated the wave of Latin American bond defaults some half a century earlier. The new credits that were extended between 1979 and 1982 only worsened the situation, magnifying the debt burden of developing nations and the banks’ troubled Third World exposure. Since the vast majority of the developing nations’ debt was denominated in dollars, their burden of servicing dollar debt became progressively more difficult. Economic mismanagement by the developing countries was partly to blame for the outbreak of the debt crisis. After 1979 the developing countries increasingly used their foreign loans to cover trade imbalances and debt servicing requirements. The banks performed these services in order to gain fees a source of funds, but the debt servicing problems the developing countries subsequently encountered as a result of the capital flight would far outweigh these short term benefits.