The Latin American Debt Crisis

Along with the stocks and bonds, there was also a high demand from foreigners wanting American goods. This occurred because the deflation from the United Sates made it so appealing to foreigners (Romer). On the other hand, because there was such a low income from Americans it reduced their demand for foreign products (Romer). Unfortunately other countries were trying to maintain an international gold standard in order to continue to meet the monetary contraction that was occurring in the United States (Romer). Sadly, this resulted in the deterioration of output and prices throughout countries all over the world. This downturn of other countries started looking like the one occurring in the United States (Romer). Banking panics along with financial crisis started occurring in other countries around the world, not just in the United Sates (Richardson, September 2007). By forcing countries to deflate, the gold standard reduced the value of bank’s collateral and made them more vulnerable to bank runs (Romer). Due to the overwhelming panics in banks and other financial market disruptions, countries globally experienced a tremendous depression in output and prices (Paul Evans).

Many investors believe that this means the United States will have problems repaying these loans in the future and will cause many economic problems in the future. The debt accumulated this much because of deficits in the national budget. These can be caused by new programs to help citizens or help the US economy. Tax cuts, military spending, and the economic stimulus package caused this national debt to skyrocket. On the USdebtclock.org website it shows our largest budget items are Medicare/Medicaid at $1 Trillion, Social Security at $886 Billion, defense/war at $583 Billion, income security at $303 Billion, net interest on debt at $224 Billion, and Federal pensions at $255 Billion.(usdebtclock1) These debts are large and spending on some of these programs must be cut.

When doing that, interest rates rose higher than anyone has seen since the Civil War. Not only did interest rate rise, the lending rate rose also. It rose from 6.8 percent all the way to 21.5 percent in five years. Everyone in every part of the world was effected one way or another by this disaster, but farmers and rural bankers were especially hurt.

During presidential bids for the White House and Congressional deadlines for increasing the debt ceiling, huge debates break out as to the enormous amount of debt incurred by the federal government. Throughout our nation’s history, national debt at this magnitude is a new things. The accumulation of this amount of debt has its consequences, especially when the debt hits the nations GDP (Gross Domestic Product), or the revenue the nation takes in per year.

The second and chief objective is to assess the impact of the crisis on the foreign exchange and stock markets. The report answers why the crisis adversely affected the Latin American market indices while the US market indices continued to rise.

Before the 60’s Mexico has experience a growth in their economy that was called the “Mexican miracle” because of the growth from 3% to 4% in just few time. However, after this period of growth, what followed was decades of debt. “In the late 1960s, Latin America

The lack of money became so bad in the US, UK, and Ireland, that the government had to bail them out. the realization of all this by the public lead to a complete loss of confidence by consumers and investors all around, this lead to less spending and investing. all this lead up to something called a credit crunch. a credit crunch is a sudden shortage of funds for lending. the credit crunch was driven by the bad handling of loans on mortgages that led to a rise in defaults and sub prime mortgages. these mortgages were in america, but the downturn was able to spread throughout the entire globe. people with poor income and poor credit were getting huge loans for mortgages that they werent able to pay back. a cause for this was probably due to the huge incentive for mortgage brokers to sell mortgages at high prices because that's how they got paid, and that played a huge roll in the rise of mortgage defaults. mortgage broker borrowed money to be able to lend mortgage, the lending was not financed out of savings accounts. for many of these mortgages, there was a 1 to 2 year period of low interest rates, at the end of these periods, interest rates rose dramatically, not allowing people to afford the mortgage

The United States at this stage was the world financial centre and sole superpower in the world (arguably). Once again the US was the creator of the crisis.

The heavy borrowing of the 1960s and 70s also however allowed countries to put in place unsustainable domestic policies. Many governments put in place populist policies that entailed using expansionary fiscal and monetary policies with little regard for inflationary risks, budget deficits, and foreign exchange constraints. Populism promoted growth and income distribution but did not address the risks of increasing debt. In addition to encouraging unsustainable policies, the low interest rates that Latin American countries became accustomed to actually discouraged saving which added additional fuel to the economic crisis.

In 1994, the world saw the decline of the Mexican Peso, leading to what is now considered as the Mexican Peso Crisis. The crisis was characterized by the drastic decline in the value of the Mexican Peso. The Mexican Peso Crisis is considered significant because of its impact on other parts of the region, including Brazil. The following is a discussion of the causes and impact of the Mexican Peso Crisis.

With the large capital surplus largely arising from foreign investments to support the huge trade deficits in the Mexican current account, all seemed to go well for the Mexican economy until several political crises erupted and several macroeconomics mistakes were left exposed in 1994 which affected foreign investor’s confidence.

During this time period the IMF took on a new role of lending to countries on the brink of default. By the mid 1980s, some observers noted that the loan qualifying austerity policies implemented by many borrowers were prolonging and deepening the debtor nations’ problems.

There are many causes for the debt crisis to start. Before world war II Europe had very strict trade barriers between countries examples being currency exchange fees and trade tariffs. Then World War II happened and was so detrimental to Europe they couldn’t continue to have such strict trade barriers. The barriers were then slowly removed with the first barrier removal being steel and coal. This worked well enough that it caused twenty-seven countries to sign the Maastricht Treaty thus forming the European Union (UN). This made trading throughout all Europe easier which caused more trade to occur within Europe.

The readily identification of debt crisis was Mexico’s inability to serve its outstanding debt of $80 billion debt. And the situation continue to worsen, and one year later, by October 1983, 27 countries owing $239 billion had reschedule debts or in the process of doing so.

companies and investments in financial instruments. Fourth, the currency turmoil affects U.S. imports and exports as well as capital flows and the value of the U.S. dollar; the U.S. deficit on trade was rising as these countries import less and export more. Fifth, the crisis is causing economic turmoil that is exposing weaknesses in many financial institutions in Asia; some have gone bankrupt. The economic problems of the troubled Asian economies are adversely affecting the United States, Japan, and others.