What happens after a country defaults on its debt?

The Latin American debt crisis occurred during the 1970’s and 1980’s when the region’s foreign liability became unaffordable. The phenomenon caused what is called a “lost decade” as 10 years where needed in order for the southern economies to get back on track. Today, Venezuela faces a similar threat which could have similar consequences, including international intervention in an otherwise sovereign economy.

What happened?

The conclusion of the Second World War led to the Bretton Woods meeting. In said reunion, the ruling powers of the world decreed that the U.S. dollar would become the world’s currency of reference as it kept gold as an underlying asset. In order to prevent communism from spreading, pro-development financial institutions such as the World Bank and the International Monetary Fund were created.

Following the post-war optimism, countries such as Brazil, Argentina, and Mexico borrowed large quantities of money from international institutions and private banks to build internal infrastructural capacities. Investing in public goods is a reasonable economic policy for development as it distributes wealth throughout the economy.

The remarkable performance of Mexico, Brazil, and Argentina called the attention of both western international funds and commercial banks who found a haven in Latin America’s treasury bonds. The good days wouldn’t last forever.

The greatest opposition to the western block in the post war scenario was OPEC, the alliance of non-aligned nations wielded large oil reserves and kept a substantial negotiating power regarding the global price of oil. In 1973, OPEC retaliated against the U.S. for its intervention in the Arab-Israeli war by placing an embargo on U.S. oil which led to a global hike in the prices of crude.

*Read here, what is OPEC*

As Latin development required large quantities of oil and its price surged, the liability’s burden grew aggressively as a result. In 1983, Latin America owed 50% of its gross GDP; nearly $315 billion dollars. The South American debt rose dramatically as oil exporting countries kept filling American bank’s vaults. Said funds were credited to Latin bonds that would soon default.

1980’s Mexico and 2010’s Venezuela defaulted as both nations ran out of productive means.

Once a country announces a default, creditors often open paths to renegotiate the debt and give certain aids to cover upcoming interest payments so the international financial markets don’t panic. As a legal agreement is broken, creditors usually seize obtainable assets as partial payments, just like the U.S. did with Venezuelan Citco or the Mexican government with its own private financial sector.

Latin American Post | David Eduardo Rodríguez Acevedo

Copy edited by Susana Cicchetto