1 again) when the industrialized countries, which had barely recovered from the first shock, were thrown back into recession. Demand for Mexico's exports collapsed, eventually even the price of petroleum declined sharply (Cardoso and Fishlow, 1990). Interest payments on the debt accumulated during the re-cycling years absorbed a tremendous amount of export earnings and domestic savings, largely because most of the debt was at variable interest rates. At the same time the supply of capital from the rest of the world also dried up.
Increasing Trend of Borrowing
The decade of 1972-1982 constituted of series of overborrowing that was particularly escalated by the first oil shock in 1973. The progression of this trend can be depicted in the graph below:
Latin America's Persistent Debt 1975-1987
an elevating tendency of borrowing by Latin America can be vividly observed. Countries in Latin America including Mexico had a total debt of 68.5 billion dollars in 1975 and it escalated by almost 5 fold i.e. upto to 318.4 billion dollars by 1982 when the crisis occurred. This rate of borrowing and lending was rapidly making Mexico and other Latin countries very vulnerable towards financial adversity but nevertheless they optimistically borrowed unaware of the bubble that could burst into a calamity.
Increased Dollar interest rates and its adverse effects
In 1979, the chairman of US Federal Reserve Board (American Central Bank) Mr. Paul Volcker initiated anti-inflation campaign which required the Fed to tighten its money supply from 1979-1980. Accordingly, the dollar interest rate shot up sharply even up to 20% a year or above. The objectives of the anti-inflation campaign were met in the long run but in that period this caused economic slowdown in US and in rest of the world (FDIC, 1997). As mentioned in the previous point, Mexico was immensely indebted with huge amounts of funds and the rise of dollar interest rate gravely exacerbated their situation because of following reasons:
Debt service payments rose sharply in effect of rise in dollar interest rate. For this reason, indebted countries like Mexico suddenly had to face great difficulty in servicing their debt payments.
Also, since there was global economic slowdown, the demand of export also fell quantitatively which enlarged their trade deficits in the most inappropriate time as they were in the midst of huge debt burden (GRIPS, 2010).
Next, the world commodity prices of minerals and agricultural goods also declined. Mexico's productivity largely relied on the mobilization of resources such as minerals, agricultural goods and energy and this incidence further degraded its capacity to service its debt.
Furthermore, in early 1980's in response to high interest rate, the value of dollar exchange rate also started to increased. The value of dollar exchange rate in 1981 was 11 per cent and it rose to 17 per cent in the next year 1982 against strong currencies such as German Mark and Japanese Yen. Since Mexico's debt was mostly dollar denominated the difficulty to meet their debt commitments intensified. Despite such difficulties, Mexico continued to borrow heavily as seen in Figure 3 where overall Latin America's debt doubled from 1979 with 182 billion dollars to 1982 with 318.4 billion dollars (FDIC, 1997).
The Onset of the Debt Crisi
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