Portico Press

The International Monetary Fund, or IMF, was created in the wake of World War II to finance the reconstruction of Europe.  The primary lender to this new global fund was the United States.  The rationale American’s had in financing infrastructure projects in Europe was two fold; money and power.  The bank would use American dollars and push a stock of dollars into European central banks to later encourage trade with the US.  The use of the American dollar in international trade would then lend the US greater influence over states globally.  Over the course of the twentieth century this fund would adapt to new economic modalities to offer struggling states a ‘lender of last resort’.  Within the IMF, America would entrench their global influence through a concept of ‘conditionality’.  A term that does what it implies: provides conditions.  The conditions that America would often dictate on recipient states were democratization, relenquishing capital controls, and opening their domestic markets to global trade.  America’s economic hegemony curated to its political interests, interests that would, in the latter half of the twentieth century, cause a series of debt crises.

‘During the 1980’s commercial banks in the US were stratified between the major commercial lenders such as; Citibank, Chase, and Continental Illinois, and many smaller regional banks. 

Developing nations in Latin America had been borrowing from American banks throughout the 1970’s to pursue domestic growth in their state-owned businesses. Continental Illinois bank had loaned well over their available assets, which would soon become a symbol of the domestic financial risks associated with international lending when it failed in 1984.  This situation became tenuous in the early 1980’s as real interest rates grew and an oil crisis caused prices to spike.  Contractually fixed repayment terms on loans to Latin American countries were jeopardized as stagnant national economic performance, caused by rising interest rates and declining export earnings, made repayment challenging (Lipson, 201).   The banks feared that the loans could be defaulted on, or that their exposed position could cause a run,  instead there was a coordinated effort between banks and the IMF to reschedule the debt.  Creditor committees were created to discuss rescheduling, chaired by major bank representatives; these committees aimed to come to agreements “in view of strong regional and national ties” (Lipson, 207).  The US government was incentivized to aid the commercial banks as a failure of a major bank could cause severe economic damage to the economy and potentially put other American banks in jeopardy of runs.  The United States position in the IMF allowed for its domestic interests to be exercised in the loans the Fund decided upon.  

The US had long been the dominant country in the IMF and during the 1980’s debt crisis this position proved greatly beneficial to their domestic monetary goals.  In 1982 the US held 19.64 percent of the total votes in the IMF and had the capacity to influence allies towards their aims (IMF, 183).  The effects were that US domestic interests proved paramount in considering the debt crisis and the most effective response.  Domestic goals are implicitly expressed in the IMF as the country’s representatives “reflect the political interests of the national governments they serve” (Thacker, 41).  For the US this meant that their overexposed commercial banks would need to be serviced by any IMF loans to Latin American countries.  Mexico became the first of the indebted Latin American countries to receive IMF lending in 1982 when it approached the US and the IMF claiming it could not repay its 80 billion USD debt (Brinke, 1).  The IMF scrambled together a 3.5 billion USD loan in response to the illiquid Mexican position.  US banks benefited from this loan as it was in their own interests to see Mexico return to economic stability, with the eventual expectation their own loans would be repaid. 

The IMF was aware of the importance of American banking positions as “‘money-center’ banks [made] up a key constituency [of] the IMF and lobby on its behalf” (Broz & Hawes, 374).  They further created political pressure to support IMF funding increases through campaign contributions to ‘pro globalization’ congressional candidates.  Since congress had “final authority to decide US contributions to the Fund” commercial banks pushed for candidates that help them maintain their financial practices (Broz & Hawes, 369).  American banks had shown their privileged access to the IMF; both as direct actors, and indirect actors through their US political representatives.  The US government acted in accordance with the banks interests by endorsing quota increases in the early 1980’s, but also pursued “tightening regulatory control over banks” to prevent the ‘moral hazard’ of the IMF rescue packages (Broz & Hawes, 379).  For those outside of the guilded financial sectors, the moral hazard here refers to the concept that actors may lend outside of their means because they trust that someone else will cover their losses, sound familiar?  The banks bore the side effects of tighter government control in exchange for significant protection from their risky loans.  The lending of the IMF, at the beginning of the crisis, was constrained by its usual dependence on austerity measures while by the height of the crisis in 1984 economic growth became necessary.

The Baker plan was emblematic of the domestic concerns that gripped the American banks by 1985.  The plan recognized the failing of austerity measures to address the debt crises and pinpointed growth as the optimal solution.  This occurred as three years into the crisis the banks had rolled over the debt to the extent that a point of no return was well behind them.  The first debtor country to adopt the plan was Mexico as it agreed upon a “12 billion rescue package”, half of the loans would come from US commercial banks (Bindert, 35).  This was not counterintuitive to the bank’s positions as it guaranteed commitments from the IMF to provide loans to Mexico and pushed requirements to transfer “inefficient state enterprises to the private sector” (Bindert, 34).  This plan progressed loans that American banks had previously classed as value impaired to a more favorable category of ‘Other Transfer Risk Problems’.  The Baker plan was effectively an intermediary of domestic US interests to the international monetary regime.  The plan came at a desperate time for the American banks as their loans to the four major Latin American debtors; Argentina, Mexico, Brazil, and Venezuela, amounted to an exposure of “between 75% and 135% of their primary capital at the beginning of 1986” (Bindert, 38).  The plan touted a domestic and international response that greatly helped the positions of the US commercial lenders.  

The relationship between the American banks and the IMF was effective because of reciprocity.  This relationship, while mutually beneficial, was sourced by the individual financial actors as the system level actions they sought could be enacted through other channels.  The IMF was a conglomerate of international interests, the strongest of which was the United States.  IMF conditional loans had beneficial effects for American banks as the debtor countries would be committed to austerity measures and for the markets the investments would be seen as more lucrative “by providing implicit insurance … investments [would] be underwritten by the IMF” (Bird & Rowlands, 5).  The IMF did not actually underwrite investments, rather the illusory effects of IMF backing allowed for the pretense of economic stability.  The results were that the IMF could help its US constituents and in return the US would continue to back the Fund.  

The 1980’s challenged the stability of international investments, due in part to loans made by major US banks during the 1970’s.  A myriad of external financial shocks made the 80’s a decade that crippled Latin American growth and propelled US banks to seek action through the IMF.  The effective coordination of US banks, in conjunction with American political influence, in international economic institutions meant that the individual domestic interests were successfully implemented.

Citations

Lipson, Charles. ”Bankers’ Dilemmas: Private Cooperation in Rescheduling Sovereign Debts”. World Politics, vol. 38, no. 1, Cambridge University Press, 1985. pp 200-225.

International Monetary Fund Annual Report 1982. https://www.imf.org/external/pubs/ft/ar/archive/pdf/ar1982.pdf

Thacker, Strom C. “The High Politics of IMF Lending.” World Politics, vol. 52, no. 1, Cambridge University Press, 1999, pp. 38–75

Brinke, Koen. “The Mexican 1982 Debt Crisis”. Economic Report, Rabobank. 2013, pp 1-6. https://economics.rabobank.com/publications/2013/september/the-mexican-1982-debt-crisis/

Lawrence J Broz & Micheal Brewster Hawes. “Congressional Politics of Financing the International Monetary Fund”. International Organization. 2006, pp 367-399.

Bogdanowicz-Bindert, Christine A. “The Debt Crisis: The Baker Plan Revisited.” Journal of Interamerican Studies and World Affairs, vol. 28, no. 3, 1986, pp. 33–45.

Graham Bird & Dane Rowlands. “Financing Balance of Payments Adjustment: Options in the Light of the Illusory Catalytic Effect of IMF Lending.” International Economic Studies. 2003, pp 1-28.