Thirty years since Mexico’s default, Greece must break this sadistic debt spiral

We must retake control of our economies from the banks.

As Greece’s leaders pay down the latest multi-billion euro instalment on their debt, they would do well to take notice that tomorrow is the anniversary of an event of great resonance.

On 20 August 1982, Mexico declared a debt moratorium - effectively defaulting on its massive debts. Although debts in many Latin American countries had caused suffering for a number of years, this was the moment the leaders of the West were forced to confront what came to be called the ‘Third World Debt Crisis’.

Mexico owed over $50 billion, 90% to foreign private creditors - primarily US, Japanese and British banks. These banks had gone on a lending binge during the 1970s using the profits oil exporting countries had deposited with them from the oil spike. American overspending, notably on the Vietnam War, was recycled as debt to the rest of the world and, to help this, controls on international movements of money were dismantled.

Just as in our current financial crisis, bank loans to Third World countries had tended to be organised through syndicates: loans were packaged up together and then lent on in one go. This bundling meant many banks felt no need to conduct their own risk assessment. Four of the fifteen largest lenders to Latin America by 1982 were British banks: Lloyds, Midland, Barclays, and Natwest. American lenders included Citicorp, Bank of America, and Chase Manhattan.

At the end of the 1970s the US Federal Reserve sprung the trap, massively hiking interest rates in order to save their banks from inflation. The costs for this move were pushed onto Third World countries like Mexico. Two years later, the inevitable happened.

Now US and British banks faced a crisis. If loans from Mexico and other Latin American countries were not paid, they could go bankrupt. The banks stopped lending to Latin America, pushing more countries closer to default, and lobbied the US government to get them out of their mess. The US responded by getting the International Monetary Fund, and later the World Bank, to provide bailout loans to Latin American governments.

In 1982 the IMF lent Mexico $4 billion, which went straight back out of the country to pay western banks - a perfect mirror of what is happening with so-called bail-outs to Greece and other Eurozone countries today. At the same time, the IMF insisted Mexico introduce radical austerity and liberalisation. There were cuts in every area of government spending.

The economy collapsed and stagnated, many industries shut down, with the loss of at least 800,000 workers altogether. By 1989, the Mexican economy was still 11% smaller than 1981. Meanwhile, the debt doubled from 30% of GDP in 1982 to 60% by 1987.

The same story was repeated across Latin America. In 1990 Latin American economies were on average 8% smaller than they had been in 1980, and the number of people living in poverty increased from 144 million to 211 million. Former Colombian Finance Minister Jose Antonio Ocampo calls the bail-out responses "an excellent way to deal with the US banking crisis, and an awful way to deal with the Latin American debt crisis".

Meanwhile, government external debt more than doubled (from an average of 17% in 1982 to 44% by 1988). Just as in Greece today, the bailouts had nothing to do with long-term sustainable finances - they were bailing out reckless lenders who had over-stretched themselves.  

In fact, the banks gradually wrote-down the ‘book value’ of how much they regarded the debts to be worth, even while they were being repaid. They were allowed to set these theoretical losses off against profit for tax reasons, greatly reducing the tax bill of US and British banks. In 1987 alone, Barclays, Midland, Lloyds and Natwest received a tax relief subsidy of up to $1.75bn across the four banks. Then campaign organiser for War on Want John Denham accused the Thatcher government of "joining in the banks' attempts to have the burden of repayment pushed onto taxpayers."

The policies of bailout and austerity went on to be practiced across the world in the years that followed the Latin American catastrophe. That experience forced dozens of countries through two lost decades of development and enthroned the financiers as the new masters of the universe.

Today Greece, as well as other European countries, can share in the experience of Latin America from the 1980s. Then as now, bailout money was used to repay reckless banks, whilst austerity has served only to shrink economies and increase the relative size of the debt. Since 2010 the Greek government’s external debt has increased from 118% of GDP to 150% in 2012. The economy has shrunk by 15% since the start of 2010 and unemployment has reached 19%.

To repeat such failed policies is more than carelessness. The future of Europe’s economy, indeed the world economy, will be decided by a battle between the financial masters on the one side, and the peoples of the most indebted states in Europe on the other - Greece first. We either retake control of our economy from the banks, or we deepen an economic experiment which has had an incalculable cost in terms of the lives and livelihoods of millions of people. 

Nick Dearden is the director of the Jubilee Debt Campaign

Employees of Greece's ATEbank shout anti government slogans on August 3 in Athens. Photo: Getty
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I organised so much support for Maria, I wonder if I became part of the problem

She began to attend our appointments with a support worker in tow, almost as a symbol of her incapacity.

Maria hardly ever came to the doctor’s. So, it was surprising when, out of the blue, I took an urgent call from an occupational health adviser. Maria, he said, was sitting in his office, having been referred for an assessment by her employers. In the course of the interview, she’d disclosed that she was contemplating suicide. The adviser sounded rattled. He wasn’t prepared to let her leave unless he knew I was going to follow her up that day. I duly fixed an appointment, and told him I would take it from there.

So began a two-year relationship. Initially, I saw Maria at frequent intervals to develop an understanding of her situation. She had been suspended from work following an alleged breach of duties. She felt powerless against the juggernaut of disciplinary action that had been unleashed. Divorced some years earlier, and with volatile relationships with her parents and siblings, she had little social support. Suicide had come to seem the only way out as her world tumbled around her.

I started her on antidepressants, but more importantly I set about shoring her up. She was in a trade union, so I encouraged her to get assistance. I referred her to the mental health service, which allocated a key worker with time and expertise to come alongside. They put her in touch with an employment support team. Fairly soon, she was surrounded by an array of professionals, all of them fighting her corner.

Over the next five months the conflict with her employers polarised irretrievably, and eventually the union negotiated a severance deal that allowed her to walk away with a reference. Still more torrid times lay ahead as she sought to rebuild her confidence to seek new employment. Every so often there would be a new crisis in her personal life to complicate matters: various family members would cut off relations with each other or with her. Her mood fluctuated between guarded optimism and despair.

Then came the breakthrough: a job at a department store. It was seasonal, so not a permanent contract, and in many ways that seemed ideal, allowing a time-limited try-out of a new environment. And once she’d overcome her initial fear it went swimmingly. She enjoyed the customer contact, and found the return of structure and income positive. It was fantastic to see her happier again, and all the work of the preceding months seemed to have borne fruit.

As the temporary post drew to a close, she became despondent at the prospect of leaving. Her managers were evidently pleased with her and there was talk of a permanent contract. But, crushingly, it came to nothing.

That proved to be the last straw. What confidence Maria had regained, disintegrated. Over the ensuing year she became ever more entrenched in the sick role, the professionals around her now merely validating her fragility, rather than helping her move forward. I continued to certify her unfit so that her benefits were maintained, but persisted with our cognitive work, encouraging small steps, my memory of how transformed she had been when she worked at the department store still fresh. Maybe that was a misjudgement: she began to attend our appointments with a support worker in tow, almost as a symbol of her incapacity.

Eventually Maria was summoned for an independent medical to assess her ability to work. She was placed in the “support group”, meaning the benefits agency accepted that she was long-term unfit. I tried to establish how she felt about this, but couldn’t work out if it was a relief, or whether deep down it felt like being consigned to the scrapheap.

Shortly afterwards, she left my list and registered with a neighbouring practice. Perhaps she blamed me for her redundancy; or maybe my reluctance to give up hope was no longer compatible with how she saw herself. Either way, the rejection hurt – an inkling, perhaps, of the way Maria herself experiences the world in which she lives. 

This article first appeared in the 05 February 2015 issue of the New Statesman, Putin's war