Pro-cyclicality, Debt, and Privatizations, Contributions to Debt Sustainability Concept: Latin America Counterfactual Scenarios

This article uses Latin America’s external debt problems in the 80s to show debt pro-cyclicality and how an alternative approach to its management could contribute to improving a quicker economic recovery, being counter-cyclical for rethinking the debt sustainability concept. The article constructs two counterfactual scenarios around the debt payments where countries buy back their own debt at discounted prices. The purchase of debt at lower prices was suggested to investors by the Washington Consensus to buy public assets and promote foreign direct investment. An early implementation of the Brady Plan (1989) solutions could have improved economic situations in these countries and solve debt problems earlier. What happened was possible because of structural power relations from Washington and some ruling groups in the countries. Debt sustainability should emphasize economic recovery as well as the possibility to use market operations with a multilateral space for debt restructuring and independent credit rating agency.