Economists disagree as to why the international debt crisis has gone on for so long. It is still going strong after nearly a decade; debtors' solvency problems are manifest and the drag on economic growth caused by a large external debt is indisputable. The historical record indicates that this is the first massive international debt crisis in which the bulk of the claims are held by commercial banks. A burgeoning body of literature discussing the problem has focused on several different aspects of the negotiations between creditor banks, creditor countries and debtor countries. Each of the different analyses emphasize the active role of commercial banks in exacerbating the crisis and the potential of the same banks to find a solution.
One viewpoint, for example, is that more often than not negotiations between creditor banks and debtor countries have emphasized incentive effects of immediate debt relief. This incentive/relief analysis states that debt reduction would be in the best interest of all parties involved, as the gains from the adjustment effort promoted by immediate relief would outweigh the costs of reducing the face value of the debt. This perspective suggests that offering relief to the debtors can improve the value of creditors claims and enhance repayment prospects. Another viewpoint highlights the ability of governments and international agencies to regulate and manage international financial exchanges. Still another viewpoint, which has become increasingly popular since the 1980s, calls into question the role of state intervention in managing international finance and demands a return to free market principles in order to resolve the debt crisis.
These competing theories of the international debt crisis will be compared and contrasted for their explanatory power of the debt situation in Latin America--specifically, the countries of Mexico, Brazil and Argentina. In order to more fully understand the nature of th...