Politics and international debt: explaining the crisis

Since mid-1982 the existence of a “debt crisis” has been almost universally acknowledged; many would argue that the crisis had existed unrecognized for much longer, despite alarms sounded regularly over the preceding decade. The definition of the crisis in the Northern industrial countries was remarkably uniform: the onset of widespread difficulties in servicing the mountain of developing country debt threatened the stability of the international financial system. The nightmare in the North was an episode of onrushing financial collapse in the mold of those described so vividly by Charles Kindleberger—a default by a major debtor country (or domino defaults by debtors large and small), followed by the failure of a major bank or banks, a collapse of confidence in the financial system, and ultimately a sharp contraction of economic activity and international trade. The model was that of a panic; the fear, that the financial system, which had appeared so robust in dealing with successive shocks in the 1970s, might prove less so in the harsher circumstances of the 1980s.