The IMF’s “Concerted Lending” Strategy and the Problem of Unresponsiveness
As described in chapter 1, the IMF typically makes loans available after a two-stage process. First, countries must approach the Fund and express their interest in borrowing and then enter into negotiations to determine the size, maturity, and conditions of the loan. This process itself can be quite lengthy. After reaching an agreement with Fund staff, the prospective borrower submits a letter of intent to the IMF executive board along with a memorandum outlining the reforms that will be made in order to ensure timely repayment. At this point, with a simple majority vote, the board will make the determination whether to approve the loan. Prior to 1982, when a country approached the IMF for a loan, the standard practice for Fund staff was to first determine how much financing the borrower could expect to acquire from private as well as other official creditors before calculating the amount of financing the borrower needed from the institution. The Fund staff, in conjunction with the borrowing government, would spell all ofthis out in the letter of intent and memorandum of understanding. As Boughton explains, "That strategy collapsed, at least for the most heavily indebted countries, with the Mexican crisis of August 1982.” After the Mexican default, commercial banks actively sought ways to reduce their exposure to the most heavily indebted countries. This came as a shock to the Fund as well as US authorities. In the recent past, when the Fund got involved, the banks did not look to cut and run. Indeed, just a few years earlier Anthony Solomon helped convince Congress that the ESF’s new mandate would not lead to its increased use for international bailouts, explaining,
Usually when a country undertakes [an IMF] stabilization program, then the private capital markets typically increase their lending to that country. They do not bail out. On the contrary, the record shows quite clearly that they increase their lending after they get the so-called Good Housekeeping Seal from the IMF.
In other words, prior to 1982, IMF loans had the effect of "catalyzing” private lending. But this crisis was different from anything policymakers had ever experienced. As the Fund was increasing its lending to the economies in crisis, many commercial banks were preparing to do just the opposite. The result would have been little to no net increase in financing for the borrower country. Although it was in the banks’ collective interest to keep lending as a group, thereby keeping the indebted government liquid so it could continue servicing its debts, it was in their individual interests to pull out and let the IMF and other banks pick up the slack. Of course, as each bank pulled out, the risks facing the other banks that stayed in only grew. The banks faced a classic collective action problem: a counterproductive, pro-cyclical lending dynamic was unfolding that threatened to undermine the Fund’s efforts to stop the bleeding. In response, the IMF decided to alter its traditional approach and adopt a new strategy that became known as "concerted lending.” In short, the concerted lending strategy adopted by the Fund during the debt crisis relied on issuing an ultimatum: The IMF would not approve loan requests until the group of commercial banks (referred to as a "syndicate”) agreed to increase their exposures to the indebted economies. If the banks could not collectively act on their own, the Fund would make them.
In practice, concerted lending worked as follows. First, IMF staff and government officials would negotiate program details. Once agreement was reached, the prospective borrower would formally submit a letter of intent to the IMF. This was business as usual. However, things changed with the next step. Rather than immediately scheduling a board vote, the Fund would take the program as proposed in the letter to the banking syndicate. The board informed the syndicate that a vote would not be scheduled until it agreed to provide additional loans to the borrower in question. Only when a deal was reached would the managing director put the program to a vote before the board. Thus, concerted lending injected an additional round of negotiations between the Fund and the syndicate into the loan approval process. Unsurprisingly, this tended to slow down the IMF’s response speed. The process behind Argentina’s 1984 standby arrangement (SBA) request, a case I discuss more in chapter 6, is illustrative of this. On September 25, Argentina signed and filed a letter with the Fund requesting $1.2 billion in assistance. Despite the large size of the request, the Fund calculated that Argentina needed an additional $8 billion in financing to repay arrears to banks and official creditors, and to replenish its dwindling foreign exchange reserves. Managing Director Jacques de Larosiere set up a series ofbilateral meetings with official creditor countries and bank syndicates in order to round up additional money. These negotiations took months to complete. Once all parties had signed on, the Board approved the loan on December 28—a full 94 days after Argentina first filed its request for assistance. This is substantially higher than the 37-day mean for all loan requests between 1955 and 2009 (see Figure 2.1).
In effect, concerted lending allowed the Fund to secure larger overall financing packages by getting new money from banks. However, concerted lending also made the Fund an even less responsive ILLR. A review of executive board minutes early on in the crisis reveals that executive directors were aware that the strategy impacted the Fund’s responsiveness. One director remarked that the "ultimatum” approach resulted in "undue and costly delays,” while another noted that such delays were particularly worrisome in cases "where speed was essential to maintain confidence and momentum of adjustment.” Board members also cited a number of other drawbacks to the strategy, including fears that its overuse would render it ineffective and that it jeopardized the Fund’s impartiality in debt negotiations. In light of these concerns, a few directors suggested that concerted lending should only be used in "exceptional cases”—specifically, situations where the stability of the international financial system was threatened.
Despite these drawbacks, de Larosiere remained a staunch advocate of concerted lending. In one meeting he forcefully argued that the strategy remained necessary in many cases. Without it, the managing director argued, the institution faced "uncertainties” about whether new loans from banks would reach satisfactory levels to fully address borrowers’ financing needs. Insufficient commercial bank participation would jeopardize the success of Fund programs and put the institution’s resources at risk. One executive director echoed the managing director’s sentiments noting that when it came to deciding in which cases the strategy was appropriate, his preference was "to err on the side of caution and lengthen the list.” In the end, the executive board decided against formally limiting the use of the strategy and instead opted for a "case-by-case” approach. Concerted lending would remain the "prevailing strategy” for managing the debt crisis through at least 1987.
In a sense, the Fund’s decision to employ the concerted lending strategy is best viewed as a trade-off. Because of its finite resources and quota system that limited the overall size of individual loan packages, the institution was incapable of providing sufficient financing to fill the entire financing gap of some heavily indebted countries. However, by issuing
Days between IMF Loan Request to Approval, 1977-2002
banks an ultimatum, the Fund believed it could forcibly catalyze private lending to these countries, which would increase the size of the overall financing package. Thus, while the Fund could not "lend freely” like Bagehot’s ideal crisis manager, it could—through negotiations with commercial banks—indirectly increase its financial firepower. However, this strategy came with a price tag: The IMF gave up the ability to respond to the crisis swiftly. In essence, the Fund could not have both. Ultimately, it chose large lending packages over fast loans.
The effect of the concerted lending strategy on IMF responsiveness during the 1980s was substantial. Figure 4.2 plots the number of days that transpired between the date that borrower country governments filed letters of intent with the executive board and the date on which the board approved these loan requests. A total of 439 SBAs and Extended Fund Facility (EFF) requests between 1977 and 2002 are represented. On average, the mean approval period for IMF loan requests was 42 days with a standard deviation of 29 days. Notably, the lowess curve is elevated throughout the 1980s when the IMF managed the international debt
US Bank Exposure and IMF Responsiveness, 1983-1987 crisis. Between 1982 and 1989—the conventional dates assigned to the crisis—the board’s approval period lengthened, averaging 55 days with a standard deviation of 32. Moreover, on average, waits for approval were longer for borrowers where US banks were heavily exposed. Figure 4.3 plots survival curve estimates that model the probability a loan request will still be waiting for approval after a given number of days. As the figure indicates, a request by a borrower where US banks were highly exposed (about 3.4 percent of their foreign claims) was about 17 percent more likely to still be waiting on board approval after 60 days compared to a request by a country where US banks were less exposed (about 0.7 percent of their foreign claims). Thus, during the 1980s, the concerted lending strategy not only hurt the IMF’s responsiveness broadly speaking but also led to disproportionately longer waits for borrowers where US financial interests were elevated.
-  Boughton 2001, p. 406.
-  US Senate 1977, p. 32.
-  For more on this see Guitian 1992.
-  Boughton (2001) describes the moment this became the Fund’s new approach: "Theturning point came at the November 1982 meeting in New York . . . at which the ManagingDirector informed the banks that the Fund would not approve Mexico’s requests for anextended arrangement until the banks provided him with written assurances that theywould increase their exposure by enough to cover a substantial fraction ($5 billion) ofMexico’s scheduled interest payments for 1983” (p. 406).
-  Boughton 2001, pp. 393-394.
-  EBM 1983a, pp. 17, 37.
-  At one meeting, an executive director suggested that the IMF find a new crisis-management strategy that would not "jeopardize [our] neutrality as an intermediarybetween debtors and creditors” (EBM 1983b, 29). Others worried that banks were becoming dependent on the strategy and that the actions were being interpreted as a "guaranteeby the Fund for the security of bank loans” (EBM 1983b, 32). Lastly, others suggested thatoveruse of the strategy would weaken the Fund’s leverage vis-a-vis the banks and render itineffective (EBM 1983b, 28).
-  EBM 1983a, p. 21; EBM 1983b, pp. 22-23; Erb 1983.
-  EBM 1983b, pp. 29, 35-36.
-  Boughton 2001, p. 481. Bird and Rowlands (2004) date the strategy from 1982 through1986, while Caskey (1989) notes that the strategy was adopted during the Mexican debtadjustment program through 1987. For a discussion on the end of the concerted lendingstrategy, see Volcker and Gyohten (1992, p. 215).
-  Data were compiled by the author and assistants by recording the date on all SBA andEFF letters of intent between 1977 and 2002 via the IMF digital archives and counting thenumber of days until executive board approval of the request. The IMF’s digital archivescan be accessed at http://www.imf.org/external/adlib_is4/default.aspx; dates of Fundloan-request approvals after 1983 are available at http://www.imf.org/external/np/fin/tad/ extarr1.aspx. Additionally, to improve the figure’s readability, the following outlier isexcluded: Belarus (1994) at 277 days. A lowess smooth curve with a 95 percent confidenceinterval is included.
-  The Cox proportional hazards model is discussed in more detail in the appendix.