The Latin American debt crisis caused by the supply-side debt business of US is the theme of the book Debt and Crisis in Latin America: The Supply Side of the Story by Robert Devlin.
The author blames the predatory US bankers as equally responsible for the Latin American debt crisis as much as the reckless and corrupt Latin American governments which were willing victims and had mismanaged their economies. Devlin, an American economist, who works in the Economic Commission for Latin America and Caribbean, has extensive knowledge of both the creditors and debtors. He has done in-depth case studies of Peru and Bolivia. His study is focused on the decades of seventies and eighties when large debts had accumulated and lead to crises. The debt crisis combined with the impact of neoliberalistic policies forced on Latin America by the US had made eighties as a “Lost decade” with increase in poverty and inequality. The governments of the region had to cut down the budget for education, health and poverty alleviation and they were forced to use the export earnings for repayment of external debt.
According to Devlin, the US bankers had taken the initiative in most cases to lend indiscriminately to some Latin American countries even when there was no clear need for borrowing. The banks went on a spree of loan marketing after they received large petrodollar deposits from OPEC countries in the seventies. The banks sought the markets of developing countries since the profitability in the domestic US market was generally flat and the depressed OECD economies had little demand for credit after the oil shock. Also the banks found that they had more freedom in the financing of foreign governments and corporations than in the domestic market which had tight regulations. The bankers proactively encouraged the Latin American countries to issue bonds and marketed them enthusiastically to gullible investors.
The banks chose their victims carefully. They went after those Latin American countries (Brazil, Argentina, Peru, Bolivia, Venezuela, Nicaragua, Chile and Mexico) which were misgoverned by illegitimate military dictators and corrupt caudillo presidents. These characters knew that they were in power only for a short time till the next coup or election and wanted to make the most money in the least time. They borrowed huge amounts knowing that they would not be there when the time for repayment would be due.
One country where the bankers did not succeed until 1980, was Colombia, which had a responsible policy of resisting the bankers’ overtures. The country had gained a reputation in financial circles as the "prickliest" borrower in the developing world. The frustration of the banks to break into the Colombian market was so much that the banks made the rare concession of not insisting on the waiver of sovereign immunity by the government.
Bankers, by profession, are expected to be conservative, risk-conscious and prudent. They are supposed to do rigorous due diligence about the capacity of the borrower to repay. But the big brash US bankers did not care for such professional and traditional norms. They lent money freely for non-productive purposes. For example, in the case of Peru, 49 per cent of the lending was to refinance old loans, 28 per cent was of free disposition (totally untied), and only 15 per cent was directly linked to projects or capital goods imports. In Bolivia, 18 per cent of the lending went to refinance loans, 43 per cent were of free disposition, and 33 per cent were linked to projects or capital goods imports. The free-disposition loans gave the freedom for the corrupt rulers to fill their Swiss Bank accounts or use it for personal and family business.
Questioned on the environment in Lima during the development of the credit cycle in the early 1970s, one local banker remarked, "Foreign bankers wanted to give us the money before we asked for it." An official from COFIDE, the Peruvian state development bank mandated to contract foreign loans for the public sector, has commented that during the 1970s, "the banks were eager to lend and would lend for anything."
Foreign borrowing was the way the Peruvian dictator Velasco maintained his position. Ministries were the fiefdoms of the generals who headed them. Each general did whatever he wanted. There was a lot of borrowing for corruption's sake: the generals wanted their kickbacks. They received their percentage from the contract regardless of the merits of the project, so they borrowed for anything. Generals got rich from the projects and banks wanted to lend; the merits of the project were unimportant.
Some banks trapped the debtor countries in ponzi schemes. They made the countries dependent desperately on new loans to pay interest on the old ones and repay the instalment of the principal.
The big bankers were careful not to take the risk by putting up their own money. They preferred to raise syndicated loans with contributions from dozens of other banks including a number of smaller banks from Europe and Japan. Big banks such as Citibank and Bank of America, who had presence and networking in the debtor countries, took the lead in raising syndicated loans. Typically they would put up 10 per cent or even less and raise the rest from other banks. The smaller banks in the consortium had less knowledge of the debtor countries and relied on the expertise and contacts of the lead banks. True to the herd mentality, banks did not want to be left out and rushed to join the big syndicated loans.
One immediate advantage for the lead bank was that one-fifth of its own return on the loan came from fees that were paid up front and risk free. This provided an incentive to churn large loan volumes. Bigger the loan, larger was the fees. In 1973 to 1974 Peru's loan syndications were frequently oversubscribed, meaning that more money was generated and pumped into the country than the government needed.
Secondly, syndication spread the risk among so many other banks. If the client did not behave, the banks would gang up and use their collective strength to bully and bargain. It was also a clever way of political insurance. If the debtor country were to default, the governments of Europe and Japan whose banks were part of the consortium, could be counted on to put political pressure on the debtors. The lenders could also count on the clout of these countries in IMF and World Bank to turn the screws on the debtor country. So, the debtor is trapped and faces punishment and isolation from the entire western capital market. This actually happened in the case of Argentina after the country restructured its debt in 2002 on its own terms defying IMF and the governments of US and Europe. Argentina was thereafter shut from access to all bilateral, multilateral and private finances in the western world.
After the Wall Street bankers killed and took the best part of the meat of the hunt, the vulture funds from US descended on the left over corpses to feast on the left overs. They bought the Latin American bonds for pennies and forced the governments to pay the full value plus interest and made obscenely enormous profits. They did this with help from the US Congress, government and judiciary. For example, NML capital of New York paid 49 million dollars for Argentine bonds worth 832 million dollars. They harassed and blackmailed Argentine government and forced them to pay over a billion dollars as settlement.
Many Latin American governments had learnt lessons from the past debt experience and have now become more prudent in taking external debts. But a few continue to repeat the past mistakes. Argentina has been trapped yet again in a debt crisis now, after having come out victorious in the fight against the greedy bank creditors and vulture funds in 2002.
Drug business
In contrast to the supply-driven debt business, the drug business is demand-driven by the US consumers. Millions of Americans pay billions of dollars for the Latin American supply of cocaine. According to a study by Rand Corporation the business of Cocaine was valued at 28 billion dollars in 2012. This is part of the total US business of over 100 billion dollars Including heroine and other drugs. Here is the share of the stake holders in the drug business according to the Netflix documentary The Business of Drugs.
The Colombian coca leaf producer gets 500 dollars for a ton of leaves from which 1 kg of cocaine is made. The Cartels which process them into cocaine get 5000 dollars for a kilo. When it reaches Mexico its value increases to 12,000 dollars. And finally, the American consumer pays 100,000 dollars for a kilo or 100 dollars per gram. This means out of every 100 dollars of cocaine business, the Colombian farmers get just 50 cents while the Colombian cartels get 5 dollars and their Mexican counterparts 7 dollars. This means that 88 dollars out of 100 dollars in cocaine business is within the US itself. So, if the US wants to stop the use of cocaine it has to cut off the 88 dollar link. But the US government covers up this reality and maligns the Colombians and Mexicans. This is not just unfair but egregiously wicked. The US has changed the narrative and misled the world with its so-called drug war in which Latin America is portrayed as villain, as in the Netflix serial Narcos.
In any case, if Latin America stops supply, it is not such a big deal for the US consumers. They have other options: heroine, synthetic drugs and opioids from other external as well as internal sources.
The drug war spawns yet another business for US. The counterdrug funding is $35.7 billion in the US 2021 budget. The US Drug Enforcement Authority (DEA) gives billions of dollars of contracts for supply of surveillance helicopters, aircrafts, patrol boats, x-ray and other equipment to detect cocaine shipments in airports and ports. Besides selling to US ports, airports and DEA, the US government forces these items down the throat of the Latin American governments in the name of drug war cooperation. There is a huge US business lobby with a vested interest in the continuation of the multibillion dollar drug war.
While the drugs come into US from Latin America, there is a reverse trafficking of guns worth millions of dollars into Latin America from US. According to a study of University of San Diego, over 200,000 guns are smuggled from US to Mexico every year. On average, there are more than three US gun dealers for every mile of the 1,970-mile border between the countries. A significant proportion of the US gun sellers depend on the illegal demand from Mexico. It has been reported that over three fourth of the guns used in the fights between the gangs in El Salvador are of US origin. The illegal American guns kill more Latin Americans than the number of Americans killed by cocaine.
Also there is illegal transfer of billions of cash dollars from US to Latin America in exchange for the drugs. American banks have been caught in the drug money laundering of the Latin Americans
The US government does nothing much about the trafficking of guns and dollars and makes noise only about the drug trafficking.
Addiction to drugs and debt
Both the drug and debt businesses have resulted in addiction. The Americans have got addicted to Latin American drugs and the US bankers have made the Latin Americans get addicted to debt.
While there are prospects for the Latin Americans to come out of the debt addiction, there does not seem to be any hope for end of the US addiction to drugs in the near future.
The author is an expert in Latin American affairs
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