5 .sx International Financial Relations :sx The Debt Crisis .sx Ronald Barston .sx The contemporary international debt crisis which began with the Mexican and Brazilian financial collapses in 1982 has proved an intractable feature of modern international politics .sx It is in many ways different from earlier debt crises in terms of the number and frequency of reschedulings and widespread effects within the international system .sx The current debt crisis has given rise , moreover , to complex and innovative multilateral diplomacy involving creditor agencies , bank advisory committees , multilateral diplomacy involving governments , multilateral institutions and non-state actors .sx The profound complexity and need for mediation as well as innovation has also seen the emergence of figures previously behind the scenes , such as the Managing Director of the IMF and the Director General of the General Agreement on Tariffs and Trade ( GATT ) , as players with enhanced and exposed roles in international politics .sx This chapter examines the initial responses to the debt crisis ; the process of debt negotiation ; and the weakening of consensus over obligations and management of the crisis .sx The concluding section looks at some of the major international policy issues which have arisen in the course of the crisis .sx The main theme explored will be that of showing that , whilst in the short term the debt crisis has been successfully contained by innovatory procedures and measures , in the longer term consensus has not been sustained .sx The debt crisis has become an intractable and increasingly complex feature of the international system .sx BACKGROUND Debt and financial reschedulings of sovereign states have been a long - standing feature of the international system .sx Prior to the Second World War external long-term debt consisted primarily of bond issues floated abroad by sovereign states and other actors .sx During the nineteenth century there were a number of major defaults and rescheduling of foreign bonds .sx Following the high lending of the 1820s for railroads , construction and mining , most Latin American governments defaulted to some degree .sx In the mid-nineteenth century Latin America and countries in the Eastern Mediterranean ( Greece and Turkey ) featured as defaulters , whilst those after 1880 included Chile ( 1880-4 ) and Turkey ( 1881 ) , whose debt was rescheduled after the 1875 default ; also notable was the major borrowing of Imperial Russia .sx Brazil , which had largely remained in credit , required rescheduling in 1898 and 1914 .sx In the period up to 1918 , defaults followed in the wake of the Mexican revolution and the Russian revolution ; Turkey suspended its debt payments to the allies in 1914 .sx Subsequently , in the 1930s , most of Latin America , Eastern Europe , Turkey and China defaulted , added to which there was the breakdown of German reparations in Western Europe .sx In the postwar period governments became more directly involved in international debt rescheduling operations .sx In part this stemmed from the growing general governmental involvement in a wide range of external economic security policy .sx The spread of the Cold War beyond Europe and the attention paid to the economic component of security and military alliance are typified by the US-led Marshall Plan , to a lesser degree bilateral Soviet treaties and Council for Mutual Economic Association ( COMECON ) aid , along with regional economic arrangements such as the Colombo plan .sx The decolonization process , which intensified in the 1960s , was frequently accompanied by the continuation of post - independence economic links with the colonial power , at least in the early years , or through the formation of aid donor groups for individual countries .sx The role of multilateral institutions in financial aid and debt questions is a particularly notable feature of postwar international economic relations .sx Within the United Nations system , the creation of the International Finance Corporation in 1960 completed the so-called IMF/World Bank group .sx The setting up of the United Nations Conference on Trade and Development ( UNCTAD ) in 1964 brought increasingly onto the central agenda of international politics the broad issues of trade , development assistance and technology transfer , raising the level of political attention given to less developed country demands for greater trade access , framed subsequently in the concept of a New International Economic Order .sx Within the framework of the IMF , developing countries formed the Group of 24 in 1971 , partly as a counterweight to the Group of 10 industrialized countries , with the aim of articulating developing country positions on access to and use of IMF resources .sx The impact of the G-24 remained relatively limited until the late 1970s , when more cohesive developing country strategies began to emerge in the context of the North-South dialogue and second oil crisis .sx EARLY DEBT RESCHEDULING .sx Before the debt crisis began in 1982 , postwar debt reschedulings of official debt incurred directly by or guaranteed by governments had been relatively few and generally for amounts of less than US$ 300m .sx In the commercial sector no institutional machinery as such existed internationally for dealing with commercial debt .sx Debt in the official category was largely negotiated within official creditor groups , for example for Poland , Yugoslavia and Indonesia .sx The bulk of official creditor transactions have been conducted within the framework of the so-called Paris Club of OECD countries , at which the IMF , World Bank and other agencies such as UNCTAD are represented along with the applicant country and creditor governments .sx The Paris Club , which was initially set up in 1956 to deal with Argentine debt , normally meets under the chairmanship of a representative of the French Treasury .sx Debt problems , at least until the late 1970s , had been kept in manageable proportions .sx In the postwar period states have used a variety of different strategies to meet their external funding requirements .sx Liberia , for example , has relied heavily on official assistance from the United States and Federal Republic of Germany and , after joining the IMF in 1962 , had eight IMF standby arrangements up to 1970 .sx In Ghana's case , almost 80 per cent of external debt was in the form of suppliers' credits from Western and socialist countries whilst major profit funding , for example the Volta River project , came from the World Bank , United Kingdom and the United States .sx The overthrow of Nkrumah in 1966 , partly because of the dramatic rise in debt repayment to 25 per cent of foreign exchange earnings , resulted in a reorientation of strategy , including cancellation of trade agreements with the People's Republic of China and resumption of relations with the IMF .sx In Europe , Turkey relied heavily on loans and deferments under the US Marshall Plan , along with other funding from the World Bank and European Investment Bank , while Indonesia offset reductions in Western funding by shifting to the Soviet Union and withdrawing from the IMF , a policy later reversed under President Suharto .sx In contrast to the above examples , Mexico , with an essentially petroleum-based economy , has relied on access to foreign capital markets for bank credits and used bond issues to meet its financing , largely on the assumption that , given political backing from its US patron such access would continue , making it more easy to roll over these forms of financial instruments .sx THE 1982 DEBT CRISIS .sx The 1982 debt crisis broke quite suddenly , against the background of Poland's economic difficulties , with first the Mexican and then Brazilian collapses .sx The debt crisis spread to take in other parts of Eastern Europe , much of Africa and parts of Southeast Asia .sx While the factors for the payments difficulties of individual countries differed , several broad causes can be noted .sx In the first are those associated with public policy failures , such as ill-designed high cost-low return development projects .sx As regards external factors , oil importing developing country economies were badly hit by the 'shocks' of two sets of oil price rises , in 1973 and 1979 .sx Following the oil price rise of 1979 , developed countries in the main responded with restrictive economic policies , which tended to result in reductions in demand for developing country exports , already affected by deteriorating terms of trade .sx The more credit-worthy middle income less developed countries ( LDCs ) were able to contain the shock of oil price rises only by borrowing against the security of their growth potential as newly industrialized countries ( NICs) .sx South Korea , for example , continued as part of its debt security policy to borrow heavily on the commercial capital markets .sx Indeed the role of commercial bank lending in the lead-up to the 1982 crisis and subsequently was crucial .sx Financial innovation facilitated the growth of large-scale financial syndication .sx The development too of Euro-market facilities added to the available sources of funds , particularly for the offshore banking and parastatal agencies of debtor combines , such as Brazil .sx In banking terms , the business of lending to the Third World was highly profitable .sx The real debt of non-oil LDCs rose from US$169 billion in 1973 to US$294 .sx 7 billion in 1979 .sx INITIAL RESPONSES TO THE DEBT CRISIS .sx In the absence of any formal machinery for dealing with the debt crisis , the initial responses of necessity took the form of ad hoc rescue packages , or what has been called the 'fire brigade' approach .sx In the main , such operations involved stop-gap financial support , selectively orchestrated to a large extent by the United States , together with , in some cases , short - term balance of payments finance via bridging loans , arranged mainly through the Basle-based central bank organization , the Bank for International Settlements ( BIS) .sx In October 1982 , for example , the US Treasury provided a US$1 .sx 23 billion 90-day loan to Brazil , though this was not formally announced until President Reagan's visit to Brazil in December 1982 .sx The US$1 .sx 23 billion loan was also supported by a trade package , allowing for the relaxation of controls on Brazilian sugar exports to the United States and the continuation of Brazilian subsidies on steel exports for a further two years .sx In addition , Brazil secured US$600 million bridging finance from its six major bank creditors .sx Further short-term finance of US$1 .sx 2 billion was provided by the BIS in December 1982 , pending attempts to agree a financial rescue package involving the IMF and commercial banks .sx The Mexican and Brazilian crises highlighted what were to become four central problems in the management of the debt question :sx the need to mobilize internationally very large amounts of finance on a recurring basis ; the complexity of the negotiating process owing to the number of secondary banks and other agencies ; the need to coordinate the respective involvement of the IMF and commercial banks , and the inadequacy of IMF resources to meet the financial requirements of debtor countries over and above balance of payments financing .sx The experience of the Mexican and Brazilian debt negotiations laid the basis for the subsequent development of the IMF's coordinating role .sx Thus , by mid-December 1982 , Brazil had reached substantial agreement with the IMF for a Fund-supported programme , which was put to the Brazilian bank creditor group meeting in New York on 20 December 1982 , attended by some 125 bank representatives and the IMF's then Managing Director , Jacques de Larosi e-grave re .sx Nevertheless the position remained precarious , dependent on bridging operations , the maintenance of interbank lines and the mobilization of large amounts of commercial and international institution funding .sx Subsequently the ideas underlying the IMF's approach to assembling financial packages became based on what was known as the 'critical mass' doctrine .sx In essence , the doctrine , which shaped IMF policy until its modification in 1986 , required commercial bank commitments to have reached a critical amount , normally over 90 per cent of that required , before IMF funds would be committed .sx Following the Mexican and Brazilian crises , the debt position of a number of other developing countries also worsened substantially .sx In 1983-4 , 23 countries sought debt relief within the framework of the Paris Club .sx Normally the Paris Club requires an applicant country , if it is an IMF member , to have in place or under discussion an economic adjustment programme supported by Fund resources subject to upper credit tranche conditionality .sx The terms and conditions of the agreement take the form of an agreed Minute , which takes effect when bilateral agreements have subsequently been negotiated between the debtor country and each of its creditors .sx The acute nature and frequency of reschedulings in 1983-4 almost inevitably meant some relaxation of the Paris Club principle of limiting rescheduling to medium- and long-term debt , with the inclusion of some short-term , generally trade-related , debt with the overall agreement .sx Apart from the Paris Club agreements referred to above , 32 restructuring agreements were reached in principle by 26 countries through bank advisory committees , which were an important innovative feature of the debt crisis , during 1983-4 .sx