Latin America's Lost Decade: Petrodollar Loans, Volcker and the IMF

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After the 1973 oil embargo quadrupled prices, oil exporters deposited huge petrodollar profits in Western commercial banks, which recycled them as syndicated loans to Latin American governments on the belief that countries do not go bankrupt, with the IMF's endorsement. Mexico borrowed in US dollars against expected oil revenue, and between 1975 and 1982 the region's commercial bank debt grew more than 20 percent a year, lifting total external debt from about $75 billion in 1975 to over $315 billion by 1983, around half of regional GDP. A global recession, a second oil spike and a sharp drop in world trade in 1981 followed, and Paul Volcker's interest rate increases from 1979 raised payments on variable-rate, dollar-denominated loans as the dollar strengthened against local currencies.

In August 1982 Mexican finance minister Jesús Silva Herzog announced a 90-day moratorium, and banks halted new lending to the region and refused to roll over short-term loans. Between 1982 and 1985 Latin America paid $108 billion in debt service while per capita GDP shrank almost 9 percent, real urban wages fell 20 to 40 percent over the decade, and capital flight, hyperinflation and half-built infrastructure followed. IMF rescues required structural adjustment: abandoning import substitution industrialization, opening markets, privatizing and imposing austerity, which critics said put Western banks ahead of citizens. Brazilian officials vowed never again to sign IMF agreements, and in 1988 the Paris Club concluded the debt was unpayable and allowed the first partial write-offs.

• Syndicated loans let groups of banks pool money and share the risk on very large projects such as hydroelectric dams.
• Banks believed short-term loans protected them because they could simply decline to renew them.
• The US banking exposure threatened to wipe out the collective banking profits made since the nation's founding.
• Chile and Costa Rica adopted slightly more reformist approaches than the standard IMF mandate.
• By 2015 Brazil owed over $535 billion in external debt and Mexico over $438 billion.