The 1982 Debt Crisis and the Lost Decade

How falling oil prices and rising US interest rates led Mexico to default in 1982, triggering the Latin American debt crisis and a decade of stagnation.

In August 1982, Mexico announced it couldn’t pay its foreign debts.

Causes

Mexico borrowed heavily in the 1970s, expecting oil wealth.
Oil prices fell in the early 1980s.
US interest rates rose sharply under Paul Volcker, raising debt costs.
Capital flight as Mexicans moved money abroad.

Contagion

Mexico’s default triggered a Latin American debt crisis, as banks stopped lending to Brazil, Argentina and others.

The lost decade

The 1980s became the “lost decade” for Latin America.
Incomes stagnated or fell; inflation soared.
Mexico nationalised banks in 1982.

Resolution

IMF programmes and austerity.
The Brady Plan (1989) restructured debts, converting loans into bonds with partial forgiveness.

Shift in policy

The crisis pushed Mexico toward market reforms, trade opening and privatisation.

The oil gamble

Mexico borrowed against future oil revenue in the 1970s. When oil prices fell and US rates rose, its debts became unpayable.

Thinking the debt crisis was only Mexico's problem

It spread across Latin America, causing a lost decade.

Key takeaways

Mexico defaulted in August 1982.
Falling oil prices and high US rates caused the crisis.
The 1980s became Latin America's lost decade.
The Brady Plan restructured debts in 1989.