The effect of the recycled petrodollars of the 1970's on developing countries

Abstract

The rise in oil prices which began in October 1973 brought in a flood of money to the oil producing developing countries. Impudently, they placed much of this money in Western Commercial banks, which soon found themselves awash with 'Petrodollars'. Faced with sluggish loan demand at home many banks turned to the market for sovereign loans to invest their burgeoning liquid assets. Why should the poor citizen of the Debtor countries bail out banks that had made poor loan decisions? The banks that loaned the billions should have known better. Bankers behaved as if their brave new world of sovereign lending were exempted from history. Only much too late did the realization set in that many of the recipients of these loans would be unable to service them. Massive overborrowing, encouraged by the Western Commercial banks. Welcomed by the Borrower government, coupled with high interest rates not surprisingly led to the debt crisis.