The Debt Cycle in Latin America

Abstract

Changes in the volume of new loans issued by the developing countries in Latin America have had a significant impact on the foreign exchange value of their currencies, and on most of their domestic macroeconomic variables. During the 1972-82 decade, the annual increase in external debt of many of these countries exceeded the interest payments on this debt. The result was a net cash inflow derived from the sale of new loans abroad. Consequently, at the time, no real economic cost was associated with this increase in external debt. After 1982 this situation changed. The annual increase in external debt diminished to the point where it was less than the scheduled interest payments. At that point Latin American borrowers began to experience a net cash outflow on their debt account. Thus, in order to generate the foreign exchange needed to pay even part of these scheduled interest charges, the economy had to undergo a costly adjustment process.