The crisis began in the early 1980s when countries across Latin America—such as Mexico, Brazil, and Argentina—could no longer service their external debt.
During the 1970s, governments borrowed heavily from international banks, supported by low global interest rates and large petrodollar inflows.
Loans financed infrastructure, industrialization, and government spending.
When U.S. interest rates rose sharply to fight inflation, debt service costs surged.
A global recession reduced demand for exports, and commodity prices fell.
In August 1982, Mexico announced it could not meet its obligations, triggering a regional debt crisis.

What Drove the Crisis

Countries borrowed excessively in foreign currency, especially U.S. dollars.
Many loans were short-term or floating-rate, making borrowers highly sensitive to U.S. rate increases.
The Federal Reserve raised rates above 15%, causing debt burdens to spike almost immediately.
Global banks had lent aggressively, assuming sovereigns would always repay.
Falling export revenues and capital flight eroded foreign reserves.
Once Mexico signaled default risk, lenders pulled back from the entire region, cutting off financing and accelerating the crisis.

Investor Lessons

Sovereign debt becomes unstable when borrowing is high, externally denominated, and exposed to global interest rates.
Emerging markets appear strong while foreign capital flows in but become fragile when global liquidity tightens.
Currency mismatch—borrowing in dollars while earning in local currency—is one of the most dangerous forms of leverage.
Macroeconomic shocks like rising U.S. rates or falling commodity prices can cascade through national balance sheets.
Assessing sovereign risk requires understanding debt structure, external accounts, global conditions, and domestic policy credibility.

The Latin American Debt Crisis (1980s)