The 1980s Debt Crisis
How petrodollar recycling, reckless lending, and rising US interest rates triggered a devastating debt crisis across Latin America and Africa.
Petrodollar Recycling
The 1973 oil crisis sent oil prices from $3 to $12 per barrel, flooding OPEC countries with cash they deposited in Western banks. These banks needed to lend the money somewhere to earn returns, and developing countries eager for capital were willing borrowers. Commercial bank lending to developing countries surged from $5 billion in 1970 to over $130 billion by 1982.
The lending was reckless on both sides. Banks made loans with minimal analysis of borrowers' ability to repay, competing aggressively for market share. The chairman of Citibank, Walter Wriston, famously declared that 'countries don't go bankrupt.' Borrowing governments used the funds for a mix of development investment, prestige projects, military spending, and outright corruption. Much of the money was lent at variable interest rates -- a time bomb waiting for the moment rates rose.