I
n August 1982, Mexico triggered a debt crisis when
it announced that it could not service its debt and
would begin a moratorium of at least three months on
debt payments to private creditors. Creditor banks, led
by Citibank, formed an advisory committee. Mexico
sought and received emergency assistance from the
International Monetary Fund and U.S. financial institutions.
In September, Mexico nationalized its banks
and introduced rigorous exchange controls.
In late September 1982, the annual World Bank–IMF
meetings took place in Toronto in an atmosphere of
panic. The greatest fear was that the stability of the
international banking system was in peril if significant
defaults on loans threatened the major banks. The
crisis swept through Latin America, Africa, and other
developing countries such as the Philippines and
Yugoslavia. A plan was devised that saved the banking
system but led to what is often regarded as a lost
decade (or more) of development in Latin America
and Africa.
Mexico was not only the first country to enter a debt
crisis but also a pacesetter in resolving it (despite some
smaller crises, particularly the so-called Tequila Crisis of
1994). After dramatic debt reduction in the late 1980s
and early 1990s, capital inflows have commonly assumed
the form of long-term equity rather than debt.
Before 1973, Mexico’s external debt, like that of
most developing nations was relatively small, primarily
official, and often based on concessional lending.
But major OPEC countries received a huge cash windfall
from the 1973 oil price rise, and they deposited
most of the funds in major American banks. Mexico
and other Latin American countries had a ready demand
for these funds. Following Citibank chairman
John Reed’s dictum that “sovereign countries do not
default,” large banks lent while often overlooking normal
criteria of lending risk. The value of outstanding
loans increased tenfold in less than a decade. Investment
as a share of GDP, however, hardly increased
in this period of massive borrowing. Consequently,
Mexico did not have the added capacity to produce
exports that could generate foreign exchange to repay
debt without necessitating a fall in living standards.