External Dependency and Internal Transformation: Argentina Confronts the Long Debt Crisis

In this paper, Jorge Schvarzer analyses the structural impact of the foreign debt crisis that erupted in Latin America at the beginning of the 1980s and persists today. Focusing particularly on Argentina, he traces attempts to deal with the crisis and shows how, far from resolving the problem, these efforts have gradually drawn many countries into a form of “debt bondage” that fundamentally restricts their capacity to improve social conditions.

The Argentine debt crisis began in the early 1970s, when transnational banks started to offer abundant credit to Latin American countries. Conditions were minimal, but the banks protected themselves to some extent by making short-term loans, so that they could adjust the rate of interest to the evolution of the market. Some countries made productive use of these loans. Under the Argentine military government, however, they were largely destined to prop up the exchange rate and to provide speculative windfalls to a small number of elites. The crisis broke in 1981, when the government changed and this dubious financial strategy collapsed.

The situation for all borrowers worsened at this time as an outgrowth of the decision of the US Federal Reserve Board to combat inflation through sharp increases in interest rates. These tripled—reaching 20 per cent in 1981—and were applied to all Latin American loans as they were renewed. Such a burden was unsustainable. Mexico threatened to default in 1982 and was promptly rescued in an operation led by the US government. Meanwhile, the banks attempted to defuse the crisis—and to protect their own accounts—by systematically rolling over loans. Total Latin American debt began to grow at around 20 per cent per year, simply as a result of the capitalization of interest, even if the banks accorded no new loans for other purposes.