The Latin American debt crisis of 1980, also called the "lost decade", resulted in many Latin American countries being unable to service their foreign debt. The origin of the crisis dates back to the 1970s, when two large oil price shocks created current account deficits in many Latin American countries. At the same time they also created current account surpluses with oil-exporting countries. Many US money center banks have proven to be willing intermediaries between the two groups thanks to the encouragement given by the US government. Banks provided a safe, liquid place for their funds and then lent those funds to Latin America. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an Original Essay Latin American lending from U.S. commercial banks and other creditors increased dramatically in the 1970s. In 1970, outstanding debt from all sources amounted to $29 billion. By the end of 1978, the debt skyrocketed to $159 billion, and by 1982 the debt level rose to $327 billion. In 1982, the largest UD money center banks held Latin American debt equal to 176% of their capital. In the late 1970s, the industrialized world's priority was reducing inflation, which led to the tightening of monetary policies in Europe. and the United States. Nominal interest rates rose globally, and in 1981 the world economy entered a recession. Commercial banks began charging higher interest rates and shortening the repayment period. Latin America soon discovered that its debt was unsustainable. The spark of the crisis erupted in August 1982, when Mexican Finance Minister Jesús Silva Herzog informed the Federal Reserve, the US Treasury and the International Monetary Fund (IMF) that Mexico would not be able to service its debt of 80 billion dollars. Other countries quickly followed suit. Ultimately, 16 Latin American countries and 11 least developed countries (LDCs) elsewhere in the world rescheduled their debts. The sudden and unexpected interruption of bank financing plunged Latin America into recession. Remember: this is just an example. Get a custom paper from our expert writers now. Get a Custom Essay The Federal Reserve and other international institutions responded to the crisis with a series of actions that ultimately helped Latin America alleviate the situation, albeit with some unintended consequences. In August 1982, the Federal Open Market Committee (FOMC) called an emergency meeting of central bankers from around the world to provide a bridge loan to Mexico. The federal government also encourages the U.S. government to participate in Mexico's loan rescheduling program. As the crisis spread throughout Mexico, the U.S. government took the lead in organizing a cooperative rescue effort between the IMR, commercial banks, and central banks. Under the program, commercial banks agreed to restructure countries' debt, and official agencies, including the IMF, lent funds to LCDs to pay interest. In exchange, the LCD countries agreed to eliminate budget deficits and undertake structural reforms of their economies. The rationale behind these reforms was to increase the exports of less developed countries and generate trade surpluses and dollars to pay their foreign debts. The reforms solved the immediate crisis but allowed the problem..