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The road to the 1980s write-downs of sovereign debt

Published online by Cambridge University Press:  11 January 2022

Edwin M. Truman*
Affiliation:
John F. Kennedy School of Government
*
Edwin M. Truman, Mossavar-Rahmani Center for Business and Government, John F. Kennedy School of Government, 79 John F. Kennedy Street, Cambridge, MA02138, USA, email: etruman@hks.harvard.edu.

Abstract

The Latin American debt crisis consumed the 1980s and was not restricted to Latin America. Starting from the August 1982 Mexican weekend, the crisis had three phases: Concerted Lending (1982-5), Baker Plan (1985-9) and Brady Plan (1989 to mid 1990s). This article describes the evolution of the debt strategy and the road to embracing debt write-downs at the end of the decade. In the absence of an external coordinating mechanism, four groups of parties had to reach agreement on any change in the strategy: the borrowing countries, their commercial bank lenders, the home-country authorities of those lenders, and the International Monetary Fund as the principal international institution. Each group could effectively veto any change in the strategy. This need for consensus is lesson number one from the 1980s for today. Lesson number two is that political economy aspects dictated that the strategy be implemented on a case-by-case basis. The article concludes with an application of these lessons to a similar, but even more global, potential debt crisis in the wake of the COVID pandemic.

Type
The past mirror: notes, surveys, debates
Copyright
Copyright © The Author(s), 2022. Published by Cambridge University Press on behalf of the European Association for Banking and Financial History

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Footnotes

I was Paul Volcker's and Alan Greenspan's principal international staff person at the Federal Reserve Board during the 1980s and 1990s. An earlier draft of this article was presented at the D-DebtCon Conference, September 2020. For their advice and support I thank Lewis Alexander, Lee Buchheit, James Boughton, William Cline, Sally Davies, Laurie DeMarco, Barry Eichengreen, Stewart Fleming, Anna Gelpern, Thomas Glaessner, Sean Hagen, Randal Henning, Patrick Honohan, Nancy Jacklin, Stephen Kamin, Clay Lowery, Adnan Mazarei, Maurice Obstfeld, Larry Promisel, Catherine Schenk, Jeffrey Shafer, Henry Terrell, Tracy Truman, Nicolas Véron, Mark Walker, Steve Weisman, Anna Wong, Jeromin Zettelmeyer and Eva Zhang.

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