In the first sentence of an article in the March 2000 issue of Finance and Development, Pedro Pou, Governor of the Central Bank of Argentina, refers to the 'eighties as the "first debt crisis" which is one of the few official recognitions that many emerging economies are, in the late 'nineties, in a second debt crisis. This may be a sign of change since Finance and Development is an IMF publication and the IMF, U.S. Treasury, G7 ... have been in a massive state of denial, using sterile medical metaphors like the "Asian flu" and "contagion" to announce their inability to explain the phenomena. A Y2000 example of the usual official position is an IMF Occasional Paper by Donal McGettigan entitled "Current Accounts and External Sustainability in the Baltics, Russia, and Other Countries of the Former Soviet Union." In this lengthy paper which thoroughly reviews a large literature, the problem, the cause of crisis, continues to be seen as the lack of commitment or political will to engage in needed economic reforms nothwithstanding the fact that the bulk of the 38 page paper is about debt, per se. If only the authorities of the emerging economies, Russia's Putin, Indonesia's Wahid, ... and their administrations had political backbone the crises, according to the "official" view, would have never have occurred or, at least, be over.

In this web site I argue that the level of political commitment to engage in further "reform" is nearing exhaustion such that "the problem" is going to be increasingly recognized as the level of debt. I argue that the beginning of a second debt crisis was signaled by the Mexican devaluation of December '94 and that the transmission mechanism underlying the popular metaphors "Tequila effect," "Asian Flu" and, especially, "contagion" is overindebtedness. The resolution of this crisis will be, I predict, a wave of defaults and/or moritoriums, as happened in the 1930s. And by "default," I do not mean a temporary suspension of payments which are then rescheduled for a latter date. Although the first crisis in the late 'eighties was referred to as an "international" debt crisis, the rate of bankruptcy in 1989-90 was significantly greater in the US than is generally recognized. The widely publicized S&L crisis was seen primarily as a scam following deregulation and large number of bank failures were less widely recognized and part of the same phenomena. Most of the 1988-90 corporate defaults shown in the Moody's graph below were in the United States.

The first wave of defaults as recorded in Moodys international set of 5000 rated corporate bonds is centered around 1989. According to a Moodys 14jul00 Report

Helping drive defaults higher are the class of 1997 and 1998, extremely-low-rated bond issuers who entered the market during a period of extremely high risk tolerance and who are now at the age that most firms historically face the greatest threats to their survival.

"At the beginning of the year, some on the Street expressed the opinion that the high failure rate that we had seen among this class of issuers in 1999 was a one-time event and that the risk was largely over coming into 2000," Moody's analyst David Hamilton says. "But we believed the lull we were seeing was only the eye of the storm."

At least one reason for IMF and G7 official unwillingness to acknowledge the role of external indebtedness is obvious -- they can not admit the existence of overindebtedness while simultaneously "solving/addressing" the problem with yet more debt. They addressed (and thought they solved) the debt crisis of the 'eighties with debt writedowns (especially the Brady plan). In 1996 the IMF acknowledged the inability of HIPCs (Heavily Indebted Poor Countries, mostly African) to repay their debt with (inadequate) debt writedowns. But the G7/IMF prescriptions of yet-more-debt for emerging economy crises makes it impossible for the officials in charge of administering additional debt to admit to yet another "debt crisis" despite the hundreds of news stories that focused on debt and high default rates during the 1997-98 debt crisis.

If the late 'nineties is a second wave of defaults, not that dissimilar to the first wave of defaults in the 'eighties, why are the authorities responding in such a different manner? Massive "bailouts" orchestrated by the IMF have not been the usual historical response to countries declaring moratoriums on their debt service obligations. The reason for the difference, I suggest, is that "we" don't want a repeat of the "lost decade" of the 'eighties. And, in particular, the creditor countries do not want a repeat of the period in the mid-eighties when their banking system was jeopardized because questionable loans loomed greater than bank capital. To keep northern creditors out of financial jeopardy, bailouts (money which goes to creditors but for which debtor countries assume responsibility) are essential. To keep a repeat of the 'eighties from happening, to make additional loans subject to demands for economic adjustment (to external financial payments), we can not admit that the late 'nineties was the beginning of a period manifesting yet another round of overindebtedness.

Not only have Western authorities been in denial about a second international debt crisis, but there is an enormous disagreement among mainstream economists as to just who is getting bailed out -- the indebted countries or their creditors. The initial response was that the indebted countries were being bailed out but, with contributions by luminaries such as Milton Friedman, George Schultz and Alan Meltzer, the mainstream is increasingly willing to admit that the several hundred billion dollars of "bailouts" largely constitutes round-trip money from G7 taxpayers to G7 creditor institutions.