By Olivia Ponitz
Debt Crisis of the 1980’s
 By 1981 US anti-inflation policy put world economy
into a recession
 There was a rise in interest burden that debtor
countries had to pay
 The dollar appreciated sharply
 Primary commodity prices collapsed
1980’s continued
 Crisis began in 1982
 Banks in industrial countries cut off new credits and
demanded payment on loans
 Which caused developing countries to not be able to
meet debt obligations
 By 1986 more than 40 countries were having severe
financial problems
Ending a Crisis
 Crisis ended in 1989
 American banks started lending to developing
countries again
 Turned to institutional reform and increased
government revenues
 Slashed import tariffs
 Cut government expenditures
 Major state companies were privatized
 Tax reforms
Convertibility Law of 1991
 Currency fully convertible to US dollar at a fixed rate
 Currency be backed by gold or foreign currency
 This worked for nearly a decade
 Affected inflation- under 5% by 1995
 Real appreciation of the peso
 Unemployment
 Growing current account deficit
After the Fact
 1997 country’s deficit grew uncontrollably
 2001 country’s foreign credit dried up
 Defaulted on it’s debt in December 2001
 Abandoned peso-dollar peg in January 2002
 Government defaulted the external debt
 Instituted a regulatory environment for domestic
financial institutions
 Removed explicit bailout guarantee
 A crawling peg was implemented
 1990 Chilean central bank was made independent of
the fiscal authorities
 New policy required inflows to be accompanied by a 1
year, non-interest bearing deposit
 The implied inflow tax set up to limit real currency
appreciation and reduce risk if foreigners withdrew
short term funds
 Between 1991 and 1997 GDP grew averaging 8% a year
 Inflation dropped from 26% in 1990 to 6% in 1997