MAY 1989 - VOLUME 10 - NUMBER 5
E C O N O M I C S
Doublespeak on Debt
by Samantha Sparks
Third World Debt continues to be one of the most pressing items on the international economic agenda. Unfortunately, the sampling which follows demonstrates that although talk is easy, creativity is limited and action is rare.
"The major international
banks tend to view the basic LDC [Less Developed Countries] debt problem
as one of liquidity rather than solvency.
"We must recognize a fundamental fact: We have become prisoners of our debtors. Poland, Mexico, Argentina, Brazil and Rumania have all, unilaterally, defaulted on their debts and are, in effect, dictating rescheduling terms to our banks ... The reality of the situation is a significant part of the $700 billion presently loaned to the Third World and Eastern bloc will only come back over a very long period of time, if ever. Instead of maintaining the fiction that these are short-term, high-interest loans, and asking the banks to increase their commitments, it might be better, both for lenders and for borrowers, to create a mechanism which would stretch existing loans out to 25-30 years, at much lower interest rates."
-FELIX ROHATYN, CHAIRMAN,
"Today we find ourselves in a different world ... upbeat, positive and forward-looking. Financial flows have at least temporarily been restored. And developing countries from Mexico to Asia are adopting and implementing policies that will make them, once again, strong members of the free world's trading and financial systems."
"The improved situation in Mexico has provided encouraging evidence that sound economic policies can eventually return the debtor nations to economic and financial health. More generally, the progress of the past two years has brought it increased confidence in the evolution of the current debt problem."
-MARTIN FELDSTEIN, CHAIRMAN,
"Ministers noted that the [Latin] region is going through an unprecedented crisis characterized by a severe decline in per capita product, which is now at the levels of a decade ago, and that this has led to the unemployment now affecting over one- fourth of the region's work force, as well as a substantial fall in real wages, all of which is likely to have serious political and social consequences .... They re-emphasized the need for international political consideration of the debt issue, since it clearly has political and social consequences, and it is only through the joint commitment of the governments of the borrower and lender countries that it will be possible to remove the existing obstacles to the achievement of appropriate and lasting solutions."
-THE CARTAGENA CONSENSUS
"If the debt problem is to be solved, there must be a 'Program for Sustained Growth,' incorporating three essential and mutually reinforcing elements: first and foremost, the adoption by principal debtor countries of comprehensive macroeconomic and structural adjustment policies ... Second, a continued central role for the IMF [International Monetary Fund], in conjunction with increased and more effective structural adjustment lending by the multilateral development banks ... Third, increased lending by the private banks ... What I am suggesting is that adequate financing can be made available through a combination of private creditors and multilateral institutions working cooperatively, but only where there are reasonable prospects that growth will occur. This will depend upon the adoption of proper economic policies by developing countries ... Our assessment of the commitment required by the banks to the entire group of heavily indebted, middle income developing countries would be net new lending in the range of $20 billion for the next three years..."
"Our assessment of the Fund [IMF] is that with sound national policies and effective international cooperation, indebted countries can expect to achieve reasonable rates of growth over the medium term while restoring external viability and a manageable debt position .. In the coming years the Fund staff envisages bank lending to the non-oil LDCs continuing to rise at moderate rates consistent with adjustment needs and the debt service capacity of borrowing countries on the one hand, and a significant decline in banks' exposure in the developing world on the other."
-JACQUES DE LA ROSIERE,
"Numerous schemes have been proposed that would ease the debt burden for developing countries. Some are already in use, and are acceptable to banks ... Others are more severe, including capping of interest rates, capitalization of interest, buying out the banks at a loss, limiting debt payments to some fraction of export receipts and many others. The proponents of these try to justify the loss inflicted on the banks with the need to make the banks share in the cost of a perhaps basically misconceived loan. But the loss of credit worthiness for an indefinite future is a high price to pay for current debt relief."
-HENRY C. WALLICH,
"These past seven years we
have faced a major challenge in the international debt problem ... for
which no one set of actions or circumstances is responsible.... Ultimately,
resolution depends on a great cooperative effort by the international community....
In 1985, we paused and took stock of our progress in addressing the problem
... it is appropriate that now, almost four years later, we again take
"[T]he Treasury Department has reviewed
many international debt facility proposals. Most of these proposals have
several common elements, including a significant, up-front injection of
capital and the assumption of full risk on principal and interest ...