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2 Brown J. World Aff. 219 (1994-1995)
Resolving the Banking Crises of the 1990's in Latin America

handle is hein.journals/brownjwa2 and id is 551 raw text is: Resolving the Banking Crises of the 1990s in Latin America LILIANA ROJAS-SUAREZ AND STEVEN R. WEISBROD Principal Economic Advisor at the Inter-American Development Bank; President of Weisbrod Group, Ltd. n sharp contrast to the 1980s, the early 1990s were a period of economic reform and progress in most of Latin America, and investor confidence in the region was reflected in large inflows of capital. In 1994, however, this trend was interrupted by a crisis of confidence in Mexico's ability to pay off its foreign debts in dollar terms. This turnabout led to a reversal of capital flows, causing a substantial loss in Mexico's international reserves, leading to a sharp devaluation of the peso, relative to the dollar. The crisis in Mexico had a nega- tive impact on investor sentiment toward a number of other Latin American economies-particularly Argentina, which also faced a loss of international re- serves, and experienced pressure on its exchange rate. The sharp increase in interest rates-resulting from the loss of interna- tional reserves and exchange rate pressures--caused severe problems in the banking systems of Mexico and Argentina. In both these markets, most bor- rowers hold short-term debt obligations, and consequently are faced with sub- stantial increases in their cost of debt service, driving many into bankruptcy. This phenomenon has led to fears that domestic financial institutions, prima- rily banks-which lend to domestic borrowers-are no longer sound. A crisis of confidence in domestic financial systems-resulting from international capital flight-is not a new phenomenon in Latin America: a similar series of events occurred in many markets in the early 1980s. Many of the poli- cies put into place during the late 1980s and early 1990s to insulate domestic financial markets from volatile international capital flows-as well as programs to restructure banking systems devastated by capital outflows-have been shaped by policymakers' interpretations of events of the 1980s. Summer 1995 - Volume II, Issue 2

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