Interest Rates example essay topic

352 words
WHAT IS THE WASHINGTON CONSENSUS and HOW DID IT EMERGE? August 1982. Mexican Finance Minister informed Washington it could not make it's debt repayments. The problem was that in the 1970's money was cheap, plenty of liquidity in the system - largest banks lent much cash to sovereign nations when inflation was high and real interest rates were practically negative. Effectively banks were effectively paying latin American governments to effectively borrow money.

Many of the latin American governments put the money into state projects or some form of political patronage or corruption. In 1979 after a decade of inflation, Paul Volker, then the chairman of the Federal Reserve raised Interest Rates massively, infact interest rates went from 0.5% to 13%. The new interest rate kicked in very quickly. Initially it was the view that the markets should sort this problem out, however it was wuickly realised that a more integrative approach was required.

The principal reason for this was that a group of about 15 banks were upto 200% exposed to Mexico, the lending frenzy of the 1970's meant that the banking sector was horribly over exposed to Mexico and was at risk of becoming itself part of a financial crisis if no government intervention occurred. By the spring of 1983, Brazil was faced with the same problem as Mexico. Basically many debtor countries to the US could not make payments. The response to this from Washington was to avert the crisis via a massive injection of cash to the SA governments. The IMF principally funded this. The money rolled back to the banks from the debtor point of view.

The cash came with several conditions. Phase I enough to pay the coupon - to get the debtors to embark on a period of stabilisation, ie reduce subsidies, reduce get expenditure, raise interest rates, get a stable exchange rate. For the banks this was a breather to bolster their own accounts, In most of the economies there were massive demonstrations against the governments & IMF.