DEBT AND CRISIS IN LATIN AMERICA: THE SUPPLY SIDE OF THE STORY (EXTERNAL FINANCE, TRANSNATIONAL BANKS, DEVELOPMENT)

Debt in Latin America has received much attention since the outbreak of a major crisis beginning in mid-1982. When examining the causes of the crisis, analysts in the North have typically focused on deficiencies in the debtor countries' economic policy and or conjunctural shocks that were emitted from the world economy in the early 1980s. Very little attention has been given to the role of the region's principal creditors--private banks--in the development of the crisis. The study proposes to round out the story of Latin America's debt problem by demonstrating that the banks were an endogenous source of instability in Latin America's credit cycle, tending to overexpand on the upside and overcontract on the downside. The analysis draws much of its support from an institutional examination of modern transnational banking. The approach derives insights on bank behavior that often run counter to conventional wisdom, which is guided by more ahistorical portfolio theory. The analysis additionally provides some technical support to the frequent Latin American assertion of co-responsibility in the crisis. The study also examines potential solutions for the debt crisis. By employing a framework of bilateral monopoly, it shows that the debtor countries should not await the arrangement of multilateral public solutions because disproportionalities in creditor-debtor bargaining power create an inertia in the North that will make comprehensive multilateral initiatives at best slow in forthcoming. It is concluded that to relieve the excessive burden of the debt, Latin American governments must imaginatively explore unilateral solutions to the problem. To this end the study examines some nonconventional repayment strategies that might produce opportunities to unilaterally reduce payments without a high risk of retaliation by the banks and their governments.