ABSTRACT
This chapter reviews the origins of the debt crisis, identifies the present dilemmas and recommends interest recycling as a policy that involves fair burden sharing and provides the best chance for all parties to come out ahead in what is presently a negative sum game. Sporadic debt difficulties occurred throughout the 1970s, but the system-wide problems only emerged in 1982 when Mexico, and soon most of Latin America, had to reschedule its external debt. The banks’ role in the debt crisis went beyond the initial overlending. An essential element was the halt on all lending once the debt service difficulties of lenders became apparent. Debtor adjustment programs were expected to show an improvement in creditworthiness sufficient to warrant a return to voluntary lending. The chapter describes three general types of solutions: interest capitalization, a public “debt facility” to purchase part of the debt, and unilateral action by key debtor countries combined with a plan for reconstruction.
