Debt Relief During the five years since the debt crisis began, there has been little progress in moving beyond short-term relief schemes. The Reagan administration's solution to the one trillion dollar debt crisis, the embattled Baker Plan, has yet to receive widespread acceptance or to produce concrete results. As a result, it is becoming increasingly likely that Congress will step in and take legislative action to head off the possibility of default and global economic collapse. Announced at the World Bank-lMF annual meeting in Seoul, South Korea in October of 1985, the Baker Plan's objective is to enable debtor nations to grow out of their debts by encouraging debtor countries to enact economic reforms. Crucial to the plan, however, is that private banks would lend an additional $20 billion between 1985 and 1988. Neither of these two measures has been popular: debtor countries resent reforms such as elimination of economic subsidies, and banks are reluctant to throw good money after bad. Under the Baker Plan, debt has continued to mount and the net outflow of resources from debtor countries to lending countries has not slowed. Two years after he unveiled the "Program for Sustained Growth," Treasury Secretary James Baker remains optimistic about the plan that bears his name. Speaking at the World Bank-IMF annual meeting in Washington on September 30, 1987, Baker defended the "basic principles" of his plan - economic growth, "market- oriented reforms," and additional capital in the form of equity saying that they "remain as important and valid today as when initially proposed." But Baker realizes that criticism of his plan is mounting. In his statement in September, Baker vigorously attacked rival reform plans. He warned that "we should not be attracted by generalized debt relief schemes" because they "do not really offer significant short term relief, and they pose major long- term risks to the debtors. They also ignore the reality that many debtors have inherently strong economies with unlimited potential. Their course into the 21 st century must be built upon increasing their trade and financial linkages with the rest of the world, not undermining them." Baker may have good reason to feel that his proposal is threatened by rival reform proposals. Skepticism in Congress about the validity of the Baker Plan in Congress led several legislators to introduce rival proposals just a few months after Baker unveiled his plan. In the past few months, the pressure has increased. During the Venice summit in early September, Rep. Charles Schumer, DN.Y., said it was time for a "new way to get us out of this mess." Schumer said that "just about everyone, from one end of the political spectrum to the other, debtor countries, creditor countries, bankers, have agreed that the Baker Plan is more or less over." One of the earliest counter-proposals came from Sen. Bill Bradley, D-N.J., who introduced his "3-3-3 plan" in June of 1986. This plan consisted of annual cuts of 3 percent in both interest rates and principal over three years. It also recommended that the World Bank loan debtor nations an additional $9 billion. Although the "3-3-3" plan never received widespread support, it nonetheless had a significant impact on how creditors and debtors looked at the debt crisis. The importance of Bradley's proposal lay in the fact that a member of Congress sympathized with the plight of debtor countries and was trying to offer relief. One Brazilian economist said Bradley is "a hero" in Brazil. "I don't know how seriously his plan was taken, but his idea was important because of its international impact." Bradley's proposal also prompted other legislative solutions to the debt crisis. There are two broadly similar debt reform plans currently pending in Congress that may eventually supplement or replace the Baker Plan. Both propose creation of a debt management facility to help ease the debt crisis for borrowers and debtors alike. But these two bills, while similar in substance, have different objectives. The House bill places more emphasis on easing the plight of debtor nations, while the Senate bill leans more toward addressing the problems faced by the banks. The House legislation, which is based upon proposals made by Rep. Bruce Morrison, D-Conn., and Rep. John LaFalce, D-N.Y., is incorporated in the omnibus trade bill, which passed by a vote of 290-137 on April 30, 1987. This plan, which is one of the most comprehensive debt relief proposals ever offered in Congress, would create an international debt management authority set up by the Secretary of the Treasury to reduce banks' exposure to troubled loans and to foster growth in the stagnant debtor nation's economies. This debt management authority would purchase privately-held loans at a discount, the theory being that many banks would rather sell their loans at less than par value in exchange for liquidity rather than hold on to fully-valued, non-performing loans. The authority, which would assume the banks' role as creditor, would then negotiate with the debtor countries for restructuring or swapping of their loans in exchange for economic reforms or equity. If the facility works as planned, everyone benefits: the banks get liquidity, regulatory relief and reduced exposure, while the debtor nations obtain debt relief in the form of discounted loans. The ultimate result, it is hoped, will be increased economic growth in the developing world as a result of a diminished debt burden. The Senate proposal, which was passed on July 21, 1987, is an amended version of the House bill, but it is not as explicit about how the debt management authority is to work. The Senate version allows the Secretary of the Treasury to decide not to create the debt management authority if it can be demonstrated that the authority would cause a rise in the prevailing discount rate for debt, an increased likelihood of default on the debt or a higher possibility that service of the debt would be disrupted. The most important difference between the two proposals lies in the financial support for the debt management authority. The House bill suggests options for funding the authority, while the Senate bill requires that the authority be self-supporting and prohibits it from receiving money from the U.S. government. Although the two houses may not be able to settle their differences without a watered-down bill, there is growing support for the idea of a multilateral organization to come in and do what the banks and the governments of both the creditor and debtor nations have been unable or unwilling to do. Carlos Rodriguez, an economist at CEMA, an Argentine think tank, welcomed the plan: "The bankers alone can't make Argentina change its internal economic policies. Perhaps we need a third party to come in and execute long-term conditions to make Argentina pay back a realistic figure and to make necessary economic reforms." In the meantime, the situation of troubled debtor countries such as Brazil, Argentina and the Philippines will continue to deteriorate, thus making the job of the debt relief authority, if it ever comes into existence, even more difficult. -J.C.