Lhe energy crisis of 1973 not only had an impact on inflation and production, but also profoundly disrupted the financial sector. If it paradoxically first created a favorable opportunity for banks, by providing the impetus for a new financial globalization, it also sowed the seeds of future crises.
The quadrupling of the price of oil between the fall of 1973 and the beginning of 1974 quickly aroused great concern among central banks and international organizations, such as the International Monetary Fund (IMF) and the Bank for International Settlements (BIS). . For Western banks, this financial shock also represents an increase in the default risks of customers who have become more vulnerable.
Especially since the oil shock of 1973 did not occur in a blue sky: since 1971 at least, the international monetary system, known as “Bretton Woods”, which defined the value of currencies in dollars and that of the dollar in gold , is in full decline. In 1973 it gave way to an exchange rate system “floating”, whereby the value of currencies is defined by the market, without direct or indirect reference to gold. For many economic actors of the time, this change constituted a real leap into the unknown.
But, paradoxically, it also presents an opportunity. Oil-exporting countries are at the head of a colossal accumulation of capital. With the blessing of the American Federal Reserve (Fed), the IMF and the BIS, banks ensure the transfer of capital accumulated by oil-producing countries to the countries where they are invested. Western (then Japanese) banks thus saw their resources increase. This is called the “recycling of petrodollars”. The oil shock was therefore a catalyst for growth in the financial sector, although the European and American economies emerged rather weakened.
Chronic instability
While many commentators are pleased with the market’s response to this financial challenge, it has nevertheless resulted in two major consequences: on the one hand, a boom in the international credit activity of banks; on the other hand, during the second oil shock, in 1979, the use of the same solution by the authorities on the basis of the successful experience of 1973. However, the combination of the two will have dramatic consequences on the international financial stability of the following decade.
The 1970s saw a strong growth in the financial activities of banks towards developing countries and, particularly in Latin America, towards authoritarian regimes which wished to attract foreign capital to finance their industry or their arms purchases. When the second oil shock arrived, in 1979, the Fed’s brutal increase in interest rates, to fight inflation, put major borrowing countries, notably Brazil, Mexico and Argentina, in difficulty. Banks which have lent massively to various public and private actors in these countries find themselves very exposed to the risk of default.
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