The net effect of petrodollars on the world economy, however, was of rapid price inflation,
as too much cash chased too few goods. When US President Reagan's administration addressed
inflation by hiking interest rates, the emerging-market borrowers began to suffer. Zaire and
Turkey had already defaulted in 1976 and 1977. After 1980 the high interest rates, close to 20%
for six-month Libor, shook country after country off its perch.
Interest rates weren't the only reason. The drive for 19th-century-style industrial development
and import substitution piled up debt, so did the crippling price of oil imports. Without
structural reforms there was no increase in productivity. The World Bank and other multilateral
lending agencies were driven by lending volume. So were the banks.
Some of the early casualties were Zaire, Poland, Romania. Hungary might have followed, but its case
was somewhat different. The financial wizardry of its deputy central bank governor Janos Fekete had
kept the country afloat on short-term debt, but now he had reached an impasse. Fekete's good relations
with Fritz Leutwiler at the Bank for International Settlements, coordinated with Gordon Richardson at
the Bank of England - who saved the UK banking system in the 1970s - and Karl-Otto Pöhl at the
Bundesbank, got Hungary the lifeblood it needed, a $510 million injection of funds, pending its
membership of the IMF.
Turkey having suffered its rescheduling shock in 1977, had three more years of chaos until the military
coup of 1980. That set Turgut Ozal, as deputy prime minister, on his path to the presidency, and the
reform of the Turkish economy.
At around this time, Craven, having formed his own boutique, Phoenix Securities, was advising the
IMF on changing its charter, so that, like the World Bank, it could tap the capital markets and act as a
turntable, directing petrodollars to countries with balance-of-payments problems. It never happened.
Craven was also discussing a $3 billion financing for the Mexican oil company Pemex.
But that was overtaken by events. In August 1982 Mexico announced that it couldn't meet its foreign
debt obligations. "The [April 1982] Falklands war caused the Mexican crisis," opines Eurocredit
veteran Minos Zombanakis: "The investors wouldn't refinance the Mexican investment funds [fearful
that the US-Latin American relationship was ruined]." Brazil and Argentina soon followed. In the 18
months from January 1983 to June 1984, 19 countries rescheduled a total of $95 billion of debt.
It was hand-to-mouth stuff, trying to persuade banks to stay in the game, often to put in new money.
Leading bankers, who had met at Ditchley Park in England the year before and agreed to pool more
aggregate data on cross-border lending, founded the Institute of International Finance. Some heroes
emerged during that era: Jacques de Larosière, managing director of the IMF; Paul Volcker, chairman
of the US Federal Reserve; Bill Rhodes, head of rescheduling at Citibank.
The key to a deadlock
There were also smaller heroes, who started to disabuse the banks about the street value of their
emerging-market loans: Marty Schubert at Eurinam and Victor Segal at Singer & Friedlander were
among the first to buy and sell, or broker, these impaired loans at discounted prices. It wasn't long
before discounted debt was being quoted on Reuters screens and traded by banks and even investors. It
turned out to be the key to a deadlock between governments, banks and the major borrowers in default.
In 1985 US treasury secretary James Baker announced the Baker Plan, promising new money to
countries burdened with debt, in an attempt to keep banks in the game. It failed. European banks had
written down much of their emerging market exposure but the US banks had not. They were
maintaining the accounting myth that it was worth 100 cents on the dollar, while doing deals between
themselves at 50 cents.
as too much cash chased too few goods. When US President Reagan's administration addressed
inflation by hiking interest rates, the emerging-market borrowers began to suffer. Zaire and
Turkey had already defaulted in 1976 and 1977. After 1980 the high interest rates, close to 20%
for six-month Libor, shook country after country off its perch.
Interest rates weren't the only reason. The drive for 19th-century-style industrial development
and import substitution piled up debt, so did the crippling price of oil imports. Without
structural reforms there was no increase in productivity. The World Bank and other multilateral
lending agencies were driven by lending volume. So were the banks.
Some of the early casualties were Zaire, Poland, Romania. Hungary might have followed, but its case
was somewhat different. The financial wizardry of its deputy central bank governor Janos Fekete had
kept the country afloat on short-term debt, but now he had reached an impasse. Fekete's good relations
with Fritz Leutwiler at the Bank for International Settlements, coordinated with Gordon Richardson at
the Bank of England - who saved the UK banking system in the 1970s - and Karl-Otto Pöhl at the
Bundesbank, got Hungary the lifeblood it needed, a $510 million injection of funds, pending its
membership of the IMF.
Turkey having suffered its rescheduling shock in 1977, had three more years of chaos until the military
coup of 1980. That set Turgut Ozal, as deputy prime minister, on his path to the presidency, and the
reform of the Turkish economy.
At around this time, Craven, having formed his own boutique, Phoenix Securities, was advising the
IMF on changing its charter, so that, like the World Bank, it could tap the capital markets and act as a
turntable, directing petrodollars to countries with balance-of-payments problems. It never happened.
Craven was also discussing a $3 billion financing for the Mexican oil company Pemex.
But that was overtaken by events. In August 1982 Mexico announced that it couldn't meet its foreign
debt obligations. "The [April 1982] Falklands war caused the Mexican crisis," opines Eurocredit
veteran Minos Zombanakis: "The investors wouldn't refinance the Mexican investment funds [fearful
that the US-Latin American relationship was ruined]." Brazil and Argentina soon followed. In the 18
months from January 1983 to June 1984, 19 countries rescheduled a total of $95 billion of debt.
It was hand-to-mouth stuff, trying to persuade banks to stay in the game, often to put in new money.
Leading bankers, who had met at Ditchley Park in England the year before and agreed to pool more
aggregate data on cross-border lending, founded the Institute of International Finance. Some heroes
emerged during that era: Jacques de Larosière, managing director of the IMF; Paul Volcker, chairman
of the US Federal Reserve; Bill Rhodes, head of rescheduling at Citibank.
The key to a deadlock
There were also smaller heroes, who started to disabuse the banks about the street value of their
emerging-market loans: Marty Schubert at Eurinam and Victor Segal at Singer & Friedlander were
among the first to buy and sell, or broker, these impaired loans at discounted prices. It wasn't long
before discounted debt was being quoted on Reuters screens and traded by banks and even investors. It
turned out to be the key to a deadlock between governments, banks and the major borrowers in default.
In 1985 US treasury secretary James Baker announced the Baker Plan, promising new money to
countries burdened with debt, in an attempt to keep banks in the game. It failed. European banks had
written down much of their emerging market exposure but the US banks had not. They were
maintaining the accounting myth that it was worth 100 cents on the dollar, while doing deals between
themselves at 50 cents.
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