Solving the Problem

With the Mexican crisis in 1982, the IMF took on the coordination of a global response. It realized that nobody would benefit if country after country failed to pay its debts.

The IMF had no magic remedy. The resolution of the crisis involved concessions from all concerned, to help debtor countries get back on track:

• Industrial Countries: An immediate infusion of cash from industrial country governments
  
• The Banks: Further lending and rescheduling of current debts by commercial banks, or "bailing the banks in"
• The Debtors: An adjustment program, usually with IMF financial assistance
  

The IMF’s initiatives calmed the initial panic and defused its explosive potential. However, a long road of painful reform in the debtor countries, and additional cooperative global measures, would be necessary to eliminate the problem.

"Bailing the Banks In"

When the Mexican crisis struck, Jacques de Larosière, the IMF's managing director, told the banks that the IMF rescue plan would not work without a sizable contribution from them. Instead of bailing out the banks, the IMF would "bail them in."

Mexico would need $8.3 billion in 1983:

• $1.3 billion from the IMF
• $2 billion from governments
• $5 billion from the banks

The banks regarded the program as "forced lending," but all 526 of them paid up within a month.

Conditionality for Debtor Countries

To qualify for IMF financial assistance, a debtor country had to set up an adjustment program, which usually included:

• Setting realistic exchange rates
• Reducing fiscal deficits
• Reducing inflation by restricting the creation of credit
• Limiting external borrowing to reasonable amounts for growth-oriented purposes.

Some countries, such as Chile and Bolivia, responded remarkably to the stabilization plan in only a few years. However, for many countries, the process was more painful and prolonged. Unemployment, inflation, and stagnant growth persisted into the 1990s.