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Latin American Financial Markets - Essay Example
Pages 11 (2761 words)
The beginning of the foreign debt crisis for many developing countries started early in the 1980s when the price of oil and other prime materials dropped sharply. This resulted in a reduction in export-related income for the producer countries at a time when they had to cover the servicing of growing foreign debt…
This situation reached a crisis in August 1982 when the government of Mexico announced a moratorium on the payment of capital totaling approximately $20 billion dollars scheduled for 1982 and 1983. This resulted in a complete suspension of new loans to indebted nations, placing a heavy burden on those countries in Latin America where almost 50 percent of worldwide debt was concentrated. The closure of international financing sources obliged the debtor nations, including Venezuela, to adopt adjustment policies that had a severe recessionary impact. Against this background, the Venezuelan government and the central bank agreed, in February 1983, on the establishment of a foreign exchange control system based on differential exchange rates. This allowed the granting of foreign exchange for basic imports and debt servicing at a preferential exchange rate, while the other transactions were directed toward the free market where the exchange rate was progressively devalued. The goal of these measures was to protect international reserves and to decrease aggregate demand, reduce consumption and investment expenses, while generating exchange savings that would permit servicing the foreign debt. ...
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