The Management of the External Debt Burden

The external debt crisis of the developing countries reflects the sharp changes in the economic environment for both the lenders and borrowers. Loans issued by oil exporters like Mexico and Venezuela when the oil price was $40 a barrel and increasing were much less valuable when the oil price was $29 and decreasing. Similarly, loans issued by Brazil and Chile when nominal interest rates were 10 per cent were much less valuable when nominal interest rates were 15 to 20 per cent. Loans issued by developing countries when their exports and real income were increasing at 8 to 10 per cent a year in nominal terms were less valuable when their exports and real income were declining. One aspect of the change in the economic environment was that the annual interest bill of the developing countries increased from $16 billion in 1978 to $46 billion in 1982. Export unit values of the non-oil developing countries fell by 10 per cent from 1980 to 1982, while the export earnings of all developing countries fell by $80 billion or 15 per cent from 1980 to 1982. The ability of the developing countries to borrow more abroad declined sharply, partly because the lenders associated increased risk with more loans to the developing countries as their export earnings and their national incomes fell.