Commercial Banking Meets the Cold War: The Politics of Regulatory Forbearance in the Latin American Debt Crisis, 1982-1989

The 1982 Latin American Debt Crisis was not only a grave threat to the legitimacy of debtor governments but also to systemic financial stability in the US and other creditor nations. When Mexico first threatened default in late 1982, US regulatory officials had to grapple with the potential insolvency of the largest US commercial banks, as well as the possible political consequences of instability in Latin America. This paper will explore the problems posed by the Latin American debt crisis to US commercial banks and US foreign policy interests from the point of view of the Reagan White House. Using the regulatory “forbearance” granted to US commercial banks (in the decision not to force banks to reduce their reported capital levels) and emergency credit facilities granted to Latin American governments as an example, this paper will demonstrate how deregulation of the financial sector was colored by the Cold War. Specifically, this paper will focus on discussions within the National Security Council (NSC) in the year between the initial emergence of the debt crisis in late 1982 and the Reagan administration’s successful drive to have congress expand US funding of the IMF in November of 1983. Members of the NSC had to balance a desire to curb the radical movements that might be fueled by draconian austerity measures with the need to ensure confidence in the US financial system. The process that began in the wake of the first Oil Shock in the early 1970s as the displacement of investment banks and bond issues in international finance by commercial bank loans and “petrodollar recycling”, therefore ended up fueling global uncertainty that had to be resolved by a political realignment in the 1980s. This paper will strive to center changing business practices in commercial banking in the creation of a global neoliberal political economic paradigm in the 1980s, solidified by the codification of the “Washington Consensus” in 1989.