World Debt Crisis

Report Outline
Jeopardized Repayments
World Economic Context
Global Rescue Measures
Status of U.S. Banks
Special Focus

Jeopardized Repayments

Administration's Shift on IMF Lending

In a quiet but significant reversal of U.S. policy, Treasury Secretary Donald T. Regan announced in early December that the Reagan administration would support large increases in the International Monetary Fund's lending resources. The shift in the U.S. position cleared the way for the world's leading industrial nations to reach preliminary agreements on a “substantial” increase in IMF quotas. Just three months earlier, when the IMF and World Bank held their annual meeting in Toronto, the United States stood virtually alone in opposing a 50 to 100 percent increase in IMF quotas. President Reagan told the delegates that the “magic of the marketplace” would take care of world debt problems.

The reasons why Reagan and Regan reversed U.S. policy are not hard to find. During the final months of 1982, first Mexico and then Brazil — the world's two largest debtor countries — plunged into deep financial troubles that made it impossible for them to meet debt repayment schedules. As a result, international rescue operations of unprecedented scope had to be arranged on an emergency basis. Partly because of the large-scale involvement of U.S. commercial banks in lending to Mexico and Brazil, the Reagan administration took a leading part in the operations, commiting sizable U.S. resources to the two countries.

The Mexican and Brazilian bailouts, coming on top of a number of lesser but still serious repayment crises, have raised urgent questions about whether international institutions and arrangements are adequate to prevent a collapse of the world monetary system. They also have provoked a lot of controversy about whether the banks themselves are to some extent responsible for the crises, whether they deserve to be penalized and whether they could be penalized without bringing on a financial panic.