By Olivia Ponitz

Debt Crisis of the 1980’sBy 1981 US anti-inflation policy put world

economy into a recessionThere was a rise in interest burden that

debtor countries had to payThe dollar appreciated sharply Primary commodity prices collapsed

1980’s continuedCrisis began in 1982Banks in industrial countries cut off new

credits and demanded payment on loansWhich caused developing countries to not be

able to meet debt obligationsBy 1986 more than 40 countries were having

severe financial problems

Ending a CrisisCrisis ended in 1989 American banks started lending to

developing countries again

Argentina Turned to institutional reform and increased

government revenues Slashed import tariffsCut government expendituresMajor state companies were privatized Tax reforms

Convertibility Law of 1991Currency fully convertible to US dollar at a

fixed rateCurrency be backed by gold or foreign

currencyThis worked for nearly a decade

ResultAffected inflation- under 5% by 1995Real appreciation of the pesoUnemploymentGrowing current account deficit

After the Fact1997 country’s deficit grew uncontrollably2001 country’s foreign credit dried upDefaulted on it’s debt in December 2001 Abandoned peso-dollar peg in January 2002Government defaulted the external debt

ChileInstituted a regulatory environment for

domestic financial institutionsRemoved explicit bailout guaranteeA crawling peg was implemented 1990 Chilean central bank was made

independent of the fiscal authorities

ChileNew 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

ResultBetween 1991 and 1997 GDP grew averaging

8% a year Inflation dropped from 26% in 1990 to 6% in

1997