Was Suez in 1956 the First Financial Crisis of the Twenty-First Century?

• Author: James M. Boughton
• Position: Assistant Director in the IMF's Policy Development and Review Department

The IMF's lending to the four countries directly involved in the 1956 Suez crisis, and particularly to the United Kingdom, raised the institution's profile and established its role in helping member countries cope with international financial crises.

In the past six years, the IMF has responded to a series of financial crises around the world by providing and coordinating large-scale packages of financial assistance while helping the affected countries reform their economic policies. When the first of these crises erupted in Mexico in December 1994, the IMF's then Managing Director, Michel Camdessus, called it "the first financial crisis of the twenty-first century." His point was that the world had changed. The world's capital markets were more fully integrated, flows of private capital were much bigger and could move more rapidly, and problems in one part of the world could now have dramatic effects in distant regions. To deal with this new situation, the IMF would have to respond more rapidly and more forcibly than ever before. When that "tequila crisis" was followed by outbreaks across East Asia in 1997, in Russia and Brazil in 1998, and in Turkey two years later, the accelerating demands of the coming century on the IMF began to look daunting.

Background

In the midst of a whirl of activity, it is easy to forget history. Nearly forty years before the pre-Christmas speculative attack on the Mexican peso, the IMF was drawn into its first international crisis, one that had many of the same aspects of speed and speculation that we recognize today as hallmarks of the globalization of financial markets. In this sense, did the twenty-first century really begin in 1956?

On July 26 of that year, Egypt nationalized the Suez Canal Company and unilaterally assumed control of the canal, displacing the international consortium that had run it for nearly a century. France, Israel, and the United Kingdom almost immediately began planning a joint military action to retake control while seeking to win international support for a diplomatic solution. When diplomacy failed, Israel invaded the Sinai on October 29, and France and the United Kingdom used Egypt's counterattack as an excuse to attack it by air. One week later, however, Britain undercut the operation by accepting a United Nations resolution for a cease-fire. On December 3, the British government announced that it would withdraw its troops over the next few weeks. France and Israel also soon withdrew, and Egypt reopened the canal under its own control the following April.

That this brief flare-up is universally regarded as a crisis is primarily because of the upheavals it engendered in political relations. The economic consequences were more subtle and temporary and would not by themselves have constituted an international crisis. For the United Kingdom, however, Suez was also a financial crisis. Throughout 1956 and 1957, the United Kingdom had a current account surplus despite the disruptions to its international trade, but the value of its currency came under speculative pressure. The Bank of England was forced to deplete its U.S. dollar reserves to defend the fixed value of the pound sterling against the dollar. Harold Macmillan (Chancellor of the Exchequer and soon to become Prime Minister) and Cameron Cobbold (Governor of the Bank of England) put up a brave front in characterizing the Bank's ability to stave off an attack, but by December the threat of a forced devaluation or float was very real.

These events unfolded at a time when the IMF was almost totally untested in crisis management. From its first financial operations in 1947 to the onset of the Suez crisis, the IMF had lent to member countries only sporadically and in small amounts (see chart). The concept of stand-by lending subject to agreed policy conditions was...