The shortest sovereign debt cycle in history: 1973-1982

Following the full collapse of international capital markets in the early 1930s, large-scale sovereign lending to developing countries recovered only after four decades, at the time of the 1973 oil shock. The existing literature insists at this point on the “petrodollar recycling” strategy of those years, the syndicated loans used in this market and the flexible interest rates they carried, which exposed debtor countries to swings in US monetary policy, as duly happened in 1979. This chapter analyses in more detail the contractual structure of the syndications, the absence of a market gate-keeper with the information and the incentive to vet borrowers, and lastly the extraordinary weakness of Western regulators in rapidly growing international bank operations. A spectacular quotation by Paul Volcker underlines the point. Besides, this chapter also analyses how the Fund conducted, in the late 1970s, a long process of trial and errors on debt restructurings, though below the radar and at the initiative of the staff. At the turn of the 1980s, the IMF did not exactly foresee the crisis, but when it hit, it could draw on this first, tangible know-how base.