Explain how the debt crisis of 1982 began and ended. What precipitated the crisis? What brought about an end to the crisis?
What will be an ideal response?
POSSIBLE RESPONSE: The oil shocks of the 1970s led to a surge in private lending to developing countries. In August 1982, following Mexico's lead, dozens of developing countries declared that they could not repay their previous loans. Interest rates had increased sharply in the United States, as the U.S. Federal Reserve shifted to a much tighter monetary policy to reduce inflation in the U.S. The United States and other industrialized countries sank into a severe recession. Developing countries' exports declined and commodity prices plummeted, while real interest rates remained high. The debtors' ability to repay fell dramatically. The debt crisis of 1982 ended with the Brady Plan. Beginning in 1989, each debtor country could reach a deal in which its bank debt would be partially reduced, with most of the remaining loans repackaged as "Brady bonds."
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