The IMF as International Lender of Last Resort? A Reappraisal After the ‘Tequila Effect’

Abstract

The devaluation of the Mexican peso on 20 December 1994 marked the first crisis of confidence affecting international investors to follow the revival of portfolio flows to the ‘emerging markets’ in the first half of the 1990s. In its initial response the IMF agreed to lend $7.8 billion, the largest individual loan in its history, to support the country’s stabilization programme. Having indicated that it would seek an additional $10 billion of commitments from the central banks of other ‘emerging market’ LDCs, the Fund was later to announce its willingness to supply this sum as well after the governments approached were to prove unforthcoming. With the capital account nature of the crisis demanding a departure from normal practice in the immediate disbursement of the initial $7.8 billion open disagreement arose between the permanent members of the Fund’s Executive Board. The requirement to act decisively in a ‘last resort’ capacity (the $17.8 billion commitment represented 3½ times as much as any previous loan to an individual member) clearly conflicted with the normal application of Fund conditionality. Objective criteria for lending appeared to be undermined by political pressure for action from the Fund’s principal member.¹