Rufus Folorunso Akinyooye - St Clements University

to close its gold window was unilateral and the run on gold that preceded the announcement
did not allow many banks to protect themselves. Because the Bretton Woods exchange rate
agreement was a universal one, its breakdown threw the entire economies of the world into
what was once the exclusive preserve of developed economies i.e. the printing and circulation
of fiat money. After the collapse of the Bretton Woods exchange agreement the first bank to
fail was Herstatt Bank in Germany in June 1974. The failure of this bank, which was the
largest, and the most spectacular failure in German banking history since 1945 (BCBS 2004)
was attributed directly to the collapse of the Bretton Woods exchange accord. The bank had
speculated on the foreign exchange market, which became riskier under the post Bretton
Woods free-floating currencies system. The bank’s failure reverberated throughout the world
as banks exposed to Herstatt suffered losses at the end of the day that its licence was
withdrawn giving rise to what became known as the “Hersatt risk” in the financial world’s
parlance (ibid).
To the rescue came the 1974 inflow of petrodollars to the oil producing nations of Middle East
and Latin American countries and their outflows to the banks in G10 countries. The increase in
fuel bill impoverished non-oil producing underdeveloped economies and they had to look for
funds to meet up. On the other hand banks in G10 countries were awash with loanable
petrodollars from oil producing countries and glee fully they lent to the hungry non-oil
producing countries, which were under puppet dictatorial, and corrupt regimes favoured by
the United States for their anti-communist postures. It is noteworthy that at this time most of
the G10 countries had put in place some sort of insurance over deposits in their commercial
banks patterned after the Federal Deposit Insurance Corporation (FDIC) in the United States
established by the Banking Act of 1933. Where a separate body did not exist, the country’s
Central Bank stood by the banks, which would be lending through the International Monetary
Fund (IMF) anyway. These lending G10 banks, which came to be known as “internationally
active banks”, lend as a consortium through the IMF, which would on-lend to be the lenders to
the third world countries having balance of payment deficits because of the oil crisis.
(Stambuli11998). It follows that any default would reverberate throughout the countries of
lending banks.
As less developed countries borrowed short term to service their debts through G10 banks
their debts grew by leaps and bounds because they must not default. Mexico was the first to
throw in the towel in 1982 by announcing on September 6 of that year the postponement of all
debt payments until the end of 1983. This was a potential crisis for internationally active
banks, which had lent Mexico huge sums over the previous eight years. Within the
international financial system several banks had lent to Latin American countries considerably
more than their total capital. In 1982, claims of selected U.S. banks on 4 major Latin American
debtors namely Mexico, Brazil, Venezuela, and Argentina were US $176billion. The eight
largest banks in the U.S.namely Citicorp, Manufacturers Hannover, Bankers Trust, Bank
America, J. P. Morgan, First Chicago Chase Manhattan and Chemical were owed US$37 billion
on that amount representing 147% of their capital and Reserves. If other countries were to
follow suit, a number of internationally active banks would have collapsed or forced to be
rescued at enormous cost to their countries taxpayers. Since half of the debts of less developed
countries originated from non-U.S. banks, the debt crisis became international. Memories of
the Great Depression of the 1930s loomed large (Lutz 2000). Once again the banks had over
lent and were faced with defaults. The IMF had to come up with subsidies, debt re-scheduling