World debts
South America or Latin America is a continent in the southern hemisphere. President James Monroe and his Monroe doctrine of 1823 effectively made South America an American back yard. This doctrine insulated South America against the European powers . The economic importance of the region for U.S. trade and investment can be gauged from the fact that two-way trade between the United States and South America has over $36 billion . U.S. companies have $19 billion of direct investment in Latin America, and U .S. banks hold more than $48 billion of the region\\'s commercial bank debt . However autocratic and whimsical dictatorships coupled with poor administration for the last 150 years have dragged Latin America deep into debt. In 1998 the problem reached insurmountable proportion when South America indebtedness increased. Despite the passage of time the countries of South America were still struggling to manage their foreign debt of approximately $300 billion. Of the 14 largest LDC debtors, nine (Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Peru, Uruguay, and Venezuela) are in South America . The crisis which began in 1982 has further aggravated and spiral upwards. By 1988, South American debt was over 20 percent higher than in 1981 .The debt has continued to balloon and presently is estimated at $820 billion.
The debt has had a negative effect on South Americas growth. The result is that development Latin America is greatly short financed. This is because servicing the debt to the debtor nations and the World financial Institutions alone consumes over half of any given Latin American governments annual expenditures. A telling example of the problems posed by external debt was the Argentine economic crisis . Argentina\\'s debt grew continuously during the 1990s, climbing above US $120 billion . Creditors however continued to lend money, while the IMF suggested less state spending, as recession deepened . The crisis exploded in December 2001. In 2002, Argentina defaulted on $93 billion of the debt . This led to investment fleeing the country and external capital flow completely stopped. The Argentine government tried refinancing the debt . The IMF could do little. The magnitude of the problem can be gauged from the fact that a single vulture fund run by Kenneth B. Dart, heir to the Dart Container fortune, claimed 700 million USD in a lawsuit against the government of Argentina .
For four years, Argentina was effectively shut out of the international financial markets. Argentina finally got a deal by which 76% of the defaulted bonds were exchanged by others, of a much lower nominal value and at longer terms . The exchange was not accepted by the rest of the private debt holders, who will continue to present a challenge to the country in years to come . However, in January 2006, President Kirchner announced the liquidation of all the remaining 9 .81 billion USD debt to the IMF .Another large South American Country,Brazil is in the throes of uncontrollable debt. In its six-monthly World Economic Outlook, the 30-member Paris based Organization for Economic Co-operation & Development organization said that the $260 billion debt that Brazil owes the rest of the world had the risk of destabilizing the entire Brazilian economy. Much of the debt is linked to short-term interest rates, and so the government hoped to bring rates down so as to save debt service costs and stimulate better growth than the 1 .2% growth achieved in 2002 and 2% in 2003 .Brazil\\'s debt rating is now four grades below "investment grade" - the rating that is considered to be safe for investors .
Standard & Poor\\'s has also said that its outlook on Brazil was "negative". President Lula of Brazil was seized of the problem and retired the IMF debt like President Kirchner of Argentina in 2006 . Much earlier the United States did not shirk its responsibility in the region and came up with the Brady plan. The aim was to help ease the debt burden of developing countries, including those of South America. The Brady Plan, the principles of which were first enunciated by U .S. Treasury Secretary Nicholas F. Brady in March 1989, was designed to address the so-called LDC debt crisis of the 1980\\'s . The debt crisis began in 1982, when a number of countries, primarily in Latin America, confronted by high interest rates and low prices of their commodities, failed to service hundreds of billions of dollars of their commercial debt . Because many of these countries\\' economies were then dependent on commercial bank financing, this period is referred to as the lost decade. This was the period when economic stagnation took precedence over everything.
Voluntary international credit and capital flows to these nations and their private sectors had also ceased .The plan switched the emphasis from new lending to debt reduction . This was a major policy shift. However new loans were encouraged. The principal means of reducing debt proposed by the Brady Plan are buybacks of debt, or exchanges of debt for other assets such as bonds, at discounted prices . The plan envisaged international lending institutions such as the World Bank, the International Monetary Fund, and rich countries such as Japan to help by providing funds to help finance these measures . The Bradys plan was a significant step in the restructuring of Latin American debt .A point worth mentioning here is that though Latin America\\'s citizens are putting aside large sums to invest, the private sector is starving for funds. Savings are going to government debt. In three of the region\\'s four major capital markets, Argentina, Brazil and Mexico, government debt is a huge part of total debt capitalization . Chile is the exception. If Latin America is to escape populism in economic policy, its causes must be addressed.
A brave new political realignment is needed. More international loans, are needed to get capital and labor to get together and lay down the framework of a social contract that will help create for Latin America\\'s inhabitants access to capital and opportunity. The latin American debt crisis is a test for the world and more so for the United States which still regards the South as its own backyard.
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