Abstract
Chapter 3 investigates how some investors have been able to interfere with the debtor’s economic policy by insisting that measures be taken to reduce the risk of default in the short and medium term. Such interference can be direct or may be more subtle. Section 3.1 analyzes the role played by certain financial and economic advisors to foreign governments, many of whom were affiliated with a public or private institution that was a creditor to the focal country. Section 3.2 addresses the concept of conditionality and shows how states, bankers, and such international institutions as the International Monetary Fund (IMF) have made their lending conditional on the implementation of specific policies. There is a specific focus on the conditionality imposed by the International Monetary Fund. The IMF’s policy instruments have traditionally involved currency devaluation to boost exports, anti-inflationary measures to restore monetary credibility, and fiscal restraint to reduce public indebtedness.
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Notes
- 1.
- 2.
Naturally, this conflict of interest was not disclosed at the time.
- 3.
In this chapter, I address only macroeconomic conditionality.
- 4.
See Koeberle et al. (2005) for a review of conditionality as imposed by the World Bank.
- 5.
At the time, Rothschilds underwrote most of the Brazilian government bonds.
- 6.
This austerity plan depressed economic activity and contributed to the banking crisis of 1900.
- 7.
The terms “lending policy”, “adjustment program”, “stabilization program”, and “structural program” are used interchangeably hereafter.
- 8.
“An imbalance arises whenever the sum total of demands for resources in an economy exceeds the amount of those resources that can be generated internally plus those that can be attracted from abroad on an appropriate scale and on sustainable terms” (Guitian 1995, p. 798).
- 9.
These conclusions are drawn from a comparison of several IMF stabilization programs during the past five decades; see Johnson and Salop (1980) and Brau and McDonald (2009).
- 10.
Another group of critics have alleged that moral hazard problems are inherent to IMF-supported programs. Addressing such criticism is beyond the scope of this book.
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Gaillard, N. (2014). Preventing Sovereign Defaults. In: When Sovereigns Go Bankrupt. SpringerBriefs in Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-08988-1_3
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