The recycling of oil revenues by banks seemed to relegate the IMF to a niche within the international financial system as a lender to those countries not yet able to attract flows of private capital. However, the emergence of the debt crisis of the 1980s revealed weaknesses in private financial intermediation and provided the IMF with an opportunity to play a critical role in the global markets as a “crisis manager.” It also implicitly marked the group of developing nations that had borrowed extensively during the 1970s but now faced disruptions as the “weaker links” in the expanding international financial system.

This chapter deals with the IMF’s actions during the debt crisis of the 1980s. The IMF’s policies evolved during the decade, but it consistently sought to restore the debtor nations’ access to the international financial markets. The advanced economies separately used the BCBS to develop new financial standards, thus establishing a two-tier organizational structure to deal with financial instability.

The first section presents the outbreak of the crisis in 1982, which differed from previous ones in several ways, including the extensive involvement of the IMF. The crisis was precipitated by increases in interest rates and slowdowns in economic activity in the advanced economies. The nations that had borrowed extensively, which were concentrated in Latin America, were unable to meet their scheduled payments and sought some form of relief. The international banks that had lent to them formed committees to negotiate with the governments of the debtor nations.