Third World Debt and the Consequences of Default

A noted economic analyst explains the consequences of default if developing countries can't pay back their loans — a likely outcome given the scale of Third World debt.

| September/October 1984

third world debt consequences of default - illustration of a fat piggy bank and a starving piggy bank

Expect tight money and deflation as consequences of default if and when Third World debts aren't repaid.

Illustration by Fotolia/strels

Probably the single biggest threat to our national economy — and to our own individual abilities to make ends meet — is the likelihood that the billions of dollars loaned by U.S. banks to various Third World countries will never be repaid. And with that likelihood inexorably moving toward certainty, we think that the following essay by Vern Myers on Third World debt can provide a worthwhile description of what the overall consequences of default might be. Now, we're not saying that Vern's predictions are 100% sure, mind you, but we are saying that he's been too danged right too many times when his wisdom has graced this column in the past, and therefore he can’t be safely ignored.

"There is no chance of any principal being repaid for a decade or more." — Henry Kissinger.

Let's you and me take it as a fair statement that the debts [of the Third World countries] are not going to be paid for at least ten years, if ever.

How is this to come about, and what is the likely effect on us? Here are the possibilities:

[1] The debtor countries will declare a default, and the banks will go broke.

[2] The banks will declare the debtor countries in default, and the banks will go broke.

[3] Neither the banks nor the debtor countries will cry default, but the debtor countries will just stop paying — a de facto moratorium.

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