When, where, and why did the Debt Crisis start?

Question

What will be an ideal response?

Answer 1

The Debt Crisis started in Mexico on August 12, 1982 when Mexico announced that it could no longer make the scheduled payments on its foreign debt. Mexico requested loans from foreign governments and the IMF, and it started negotiating with its commercial bank creditors. This constituted the start of the Debt Crisis. By the end of the year, 24 other countries had requested restructuring on their commercial bank debts.
The Debt Crisis indirectly resulted from the large oil price increases that occurred in the 1970s. The OPEC countries saved their windfall income in the form of Eurocurrency deposits at international banks (usually denominated in dollars) at floating interest rates. The banks in turn loaned these "petrodollars," as they were called at the time, to developing countries, typically in the form of Eurocredits that were quoted at a spread above the floating interest rate they paid to the OPEC countries.
Banks viewed the lending as profitable and relatively riskless for three reasons. First, the loans were made at a spread over the banks' borrowing costs. Thus, the banks were not exposed to changes in interest rates, as they would have been if they had borrowed short term and loaned at long-term fixed rates. Second, the banks eliminated exchange rate exposure as the debts were denominated in dollars, which was the currency the OPEC countries had deposited. Third, the banks syndicated the loans, taking diversified exposures to a number of countries to avoid too much exposure to a single country. As a result, during the 1970s, the debt of non-OPEC developing countries owed to banks in industrialized countries, especially banks in the United States, increased significantly.
A mix of external shocks affecting industrialized countries and developing countries in the 1980s and macroeconomic mismanagement in developing countries triggered the actual Debt Crisis. The steep increase in the oil price in the late 1970s was met with a staunchly anti-inflationary monetary policy in a number of countries, particularly in the United States under Federal Reserve Bank Governor Paul Volcker. The macroeconomic situation in the developed world was now totally different than it had been in the early 1970s: Real interest rates were high, the global economy was in recession, and the dollar was strong. This situation contributed to low prices of commodities on the world markets and low demand for the exports of developing countries.
With the huge dollar appreciation and high dollar interest rates, the developing countries faced steep interest payments in dollars at the same time as their export revenues were falling. Suddenly, the default risk of the loan portfolios of international banks had greatly increased. The situation was exacerbated by the fact that developing countries often had not used the money they borrowed very productively and had run what were ultimately seen to be unsustainable economic policies.