Private International Banks, the Debt Crisis and the Apartheid State, 1982-1985¶
Vishnu Padayachee (1988). Private International Banks, the Debt Crisis and the Apartheid State, 1982-1985. African Affairs, Vol. 87, No. 348. Oxford University Press on behalf of The Royal African Society.
| Type | journal article |
| Scope | Economics and economic history of apartheid |
| Method | descriptive quantitative |
| Period studied | 1973–1987 |
| Regions | South Africa, United States, United Kingdom, West Germany, Switzerland |
| Themes | macro fiscal finance debt, sanctions divestment, business and state, politics ideology elections, resistance social movements |
| Citation key | padayachee1988 |
Argument¶
Padayachee explains the August-September 1985 collapse of South Africa's relations with private international banks, triggered by Chase Manhattan's refusal to roll over credit. South African borrowers, public and especially private, went on an 'orgy of borrowing' from 1982, increasingly short-term and dollar-denominated. Liquid international markets, a shortage of good borrowers after the Latin American and East European debt crises, and apparent political stability made this possible. Reserve Bank policy encouraged the borrowing but did not monitor it. The township and labour unrest from September 1984 stripped away the 'political stability' that had masked weaknesses, and banks, especially US banks, withdrew, forcing the debt standstill.
Evidence and method¶
Secondary and trade-press sources: Euromoney, Financial Mail, Rand Daily Mail, Business Day, The Banker, New York Times. Also BIS and OECD figures, SARB Quarterly Bulletin, reports by Militz (WCC) and Lind and Espaldon, and an unattributed financial analysts' report of March 1985. No archives or interviews. The article's own table draws on OECD Financial Statistics and Kaplan.
Place in the debates¶
- Sanctions/disinvestment and the role of financial pressure in the apartheid crisis (see Finance, capital flight, the 1985 debt crisis and banking). Treats the 1985 bank withdrawal as a result of combined internal unrest, disinvestment campaigns and underlying economic weakness. Banks reacted to political risk and economic fragility rather than to moral pressure alone.
- Dependency and the relative autonomy of the state (see Finance, capital flight, the 1985 debt crisis and banking). Argues that untied bank loans gave the state relative autonomy compared with direct foreign investment or IMF credit. Heavy reliance on Eurobank finance may still create a new 'mortgaged' dependency.
- Role of the IMF in supporting apartheid (see Finance, capital flight, the 1985 debt crisis and banking). Suggests the 1982 IMF loan reassured private creditors and signalled continued support for the status quo, citing a UN study and Militz.
- Responsibility for the debt crisis: macro mismanagement versus political shock (see Finance, capital flight, the 1985 debt crisis and banking). Stresses 'gross financial mismanagement' by monetary authorities and unsound bank practices as well as political unrest. Reserve Bank liberalisation and forward cover subsidies encouraged short-term foreign borrowing.
Findings¶
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Bank lending to South Africa came in two bursts (1973-76 and 1982), with a complete halt after Soweto. (p. 3)
medium to long-term international credit from private bank sources to dry up completely in 1977 and generally to ease off between 1977 and 1979.
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From 1982 South African public and private borrowers sharply increased foreign borrowing. (p. 4)
South African borrowers, in both the public and notably the private sector, went on what may best be described as an orgy of borrowing from private international banks
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The Reserve Bank subsidised foreign borrowing through cheap forward cover without tracking short-term debt. (p. 6)
It offered forward cover at cheaper than pure market rates, so that the total cost of foreign currency borrowing plus forward cover was lower than the domestic rand cost
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The short-term share of debt rose rapidly, leaving exposure to rollover decisions. (p. 8)
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South Africa's credit rating improved in 1982 because of other countries' debt crises rather than domestic strength. (p. 6)
South Africa's credit rating was upgraded to twentieth in the table of sovereign borrowers compared to thirty-sixth in September 1981 and as low as sixtieth in 1980.
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US banks were most exposed to short-term lending and so most sensitive to unrest, making South African liquidity vulnerable to their decisions. (p. 12)
They had a proportionally higher percentage of their total lending to South Africa in the form of short-term credits (85 per cent, compared to 57 per cent and 31 per cent for UK and West German banks, respectively).
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The 1980s loans reflected economic weakness, unlike the 1970s loans that financed productive investment. (p. 13)
the early to mid- 1980s loans were overwhelmingly short-term, trade and balance of payments-related credits, and reflected, if anything, the weakness and vulnerability of the economy rather than strength.
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Gold dependence deepened over time. (p. 14)
Gold, for instance, provided 41 per cent of exports (minus the net service deficit) from 1968 to 1976, but 64 per cent by 1984.
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The Reserve Bank admitted that lost export income was replaced with short-term finance instead of adjusting. (p. 14)
We were faced', admitted Chris Stals, then deputy governor of the SARB, 'with a big decline in exports in 1982 and 1983, and instead of adjusting we replaced lost real income with short-term [foreign] finance'.
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Chase's August 1985 move triggered other US banks' withdrawals and a unilateral moratorium on 1 September. (p. 14)
South Africa unilaterally proclaimed a moratorium on payment of the principal of the short-term debt
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The 1987 agreement only partially resolved the debt problem. (p. 15)
South Africa will pay a total of 13 per cent of the outstanding capital amount of debts trapped inside the standstill net in the next three years.
Evidence ledger¶
Sources used¶
| Source | Kind | Period | How used |
|---|---|---|---|
| OECD Financial Statistics, International Markets (various monthly issues) – foreign bank credits (medium and long-term) to South African borrowers, 1970-1985 | international trade or finance data | 1970-1985 | Table 1 gives annual medium and long-term foreign bank credits to South African borrowers, showing the 1973-76 and 1982 surges. |
| David Kaplan, 'South Africa's Changing Place in the World Economy', South African Review I (Ravan Press, 1983) | secondary literature compilation | 1970s-early 1980s | Co-source for the Table 1 credit series. |
| Bank for International Settlements data on South Africa's short-term debt share (as reported in Financial Mail and a financial report) | international trade or finance data | mid-1981 to 1984 | Establishes the rising share of short-term debt (46% mid-1981, 66% by 1984), the maturity structure that made the 1985 crisis acute. |
| Financial analysts' report 'South African Rand: reasons for the rand's degradation', March 1985 (unspecified authorship) | other | March 1985 | Source for money supply growth, the 66% short-term debt figure, and an assessment of South Africa's external finances as chaotic. |
| Euromoney (survey of sovereign credit ratings Sept 1982; June 1984 special survey; December 1985; Bank Report Oct 1985) | newspapers periodicals | 1982-1985 | Used for credit rating rankings, Reserve Bank forward cover policy, inadequate reporting, bank exposures, and ESCOM and SAB loans. |
| Financial Mail (various issues 1982-1985) | newspapers periodicals | 1982-1985 | Source for Reserve Bank policies, IMF loan reception, exchange control abolition, Nedbank's borrowing practice, and perceptions of South Africa's prospects. |
| Rand Daily Mail (7 Sept 1982; 20 Sept 1982) | newspapers periodicals | 1982 | Cited on bankers' view of South African creditworthiness and Horwood's Far East loan plans. |
| South African Reserve Bank, Quarterly Bulletin, March 1987 | official statistical series | 1981-1985 | Source for the current account deficit 1981-84 and the 1985 surplus. |
| G. P. C. de Kock, 'The Gold Price and the South African Economy', paper to the Cape Town Sakekamer, 28 April 1987 | other | 1982-1985 | Source for average annual gold prices 1982-1985. |
| E. Militz, Bank Loans to South Africa (World Council of Churches, 1985) | secondary literature compilation | 1983-1984 | Provides figure for 1983 private bank credits after the IMF loan and for 1984 strike days lost. |
| O. O. Lind and O. O. Espaldon, South Africa's Debt at the Time of Crisis (CN-ICCR, San Francisco, 1986) | secondary literature compilation | 1982-1986 | Source for the maturity structure of US, UK and German bank lending, the US bank withdrawals of August 1985, and the moratorium. |
| New York Times (21 Oct 1982; 1 Aug 1985) | newspapers periodicals | 1982-1985 | Reports the UN study on the IMF loan and Chase Manhattan's cessation of credit in August 1985. |
| Business Day (25 March 1987; 27 March 1987) | newspapers periodicals | 1987 | Source for the 1987 debt standstill agreement terms and the foreign debt total of $23 billion. |
| Financial Times (21 April 1987) citing OECD data on international borrowing | newspapers periodicals | 1983-1987 | Provides international capital market borrowing and bond issue totals and net transfers from developing countries. |
| UN study on South Africa's IMF loan application | commission or official report | 1982 | Used to argue the IMF loan signalled support for the status quo to the financial community. |
| South (magazine), August 1985 | newspapers periodicals | August 1985 | Source for wealthy Eurobond investors getting cold feet and the poor reception of ESCOM's July 1985 bond issue. |
| The Banker (May 1982) | newspapers periodicals | 1982 | Cited for private sector investments being financed from retained earnings until 1980/81. |
| Interim report of the de Kock Commission into Monetary Policy (1979) | commission or official report | 1979 | Mentioned as the inspiration for removing financial controls, culminating in abolition of the financial rand. |
Inference¶
Quantification: Illustrative figures.
Descriptive narrative case study of 1982-85 South African external borrowing, built from one table of OECD credit data, scattered statistics on debt maturity and exposure, and trade-press and secondary reports. Explanation of the crisis is by chronological reasoning about the international liquidity context, domestic policy, and political unrest.
Key claims¶
| Claim | Basis | Strength |
|---|---|---|
| Medium and long-term private bank credit to South Africa surged in 1973-76 and again in 1982, with a collapse after Soweto. (p. 362) | Table 1 from OECD Financial Statistics and Kaplan. | Systematic data |
| South Africa's foreign debt became sharply more short-term in 1981-84, leaving it vulnerable to roll-over refusal. (p. 367) | BIS figures quoted via Financial Mail and the March 1985 financial report; Lind and Espaldon on bank-nationality maturity structure. | Partial data |
| Reserve Bank policy on forward cover encouraged short-term foreign borrowing while its reporting was inadequate, so it did not know the extent of short-term debt. (p. 365) | Euromoney and Financial Mail quotations, including an unnamed bank director. | Illustrative or anecdotal |
| The 1985 crisis was triggered by township unrest and strikes from September 1984, which led US banks to cut exposure and Chase Manhattan to stop rolling over credit in August 1985. (p. 372) | Financial Mail, New York Times, Lind and Espaldon and Militz; press reports of unrest and bank decisions. | Illustrative or anecdotal |
| The 1982 IMF loan and abolition of the financial rand were intended to reassure private creditors and were welcomed by international banks, with 1983 bank credits unprecedented. (p. 368) | Financial Mail quotes, Militz, and the UN study. | Illustrative or anecdotal |
| Early 1980s borrowing was mostly short-term trade and balance-of-payments credit reflecting economic weakness, unlike the 1970s loans that financed investment. (p. 372) | Financial Mail commentary, Table 1 caveat and author interpretation. | Asserted |
| The economy's dependence on gold exports increased, with gold rising from 41% of net exports 1968-76 to 64% by 1984. (p. 373) | Unreferenced statistics, apparently from official series. | Asserted |
The author's caveats¶
The author states that comprehensive, comparable and reliable data on South Africa's relations with private international banks are hard to obtain because of banking confidentiality and secrecy, and notes that Table 1 excludes short-term credits and bond issues.
Gaps in the evidence¶
The argument lacks systematic loan-level or bank-level data on borrowers, maturities, lender nationality and terms, and relies on trade-press quotations and advocacy compilations for key points. BIS and Reserve Bank debt data by maturity and creditor country, plus rating agency and bank internal records, would test the causal story of why banks withdrew. Some of this existed then in BIS and OECD publications, and more is now available in archives and later official debt statistics.
Replicability: Data poorly documented.