Treasury Chief Opposes Shifting Burden From Banks to Governments : Brady Backs Present Strategy on Global Debt
U.S. Treasury Secretary Nicholas F. Brady said Tuesday that the present global debt strategy is still viable and should not be replaced by government-financed debt relief for Third World countries.
In a speech here at the annual meeting of the International Monetary Fund, Brady defended the current approach to the debt problem, which calls for commercial banks, rather than governments, to provide the needed capital to help Third World countries meet their interest payments and finance economic restructuring programs.
He warned that proposals to transfer the burden to governments or to international financial institutions such as the IMF or the World Bank would sap government treasuries and “produce only an illusion of progress.”
“Our firepower will be gone, there will be divisions among us, and we will be reduced to words, not actions,” Brady declared.
U.S. officials said Brady’s remarks, contained in his first public speech since taking office a week and a half ago, were intended as a warning designed to apply to a series of proposals that have emerged recently to have governments and the IMF directly bail out Third World debtor countries.
New Japanese Plan
For example, Japan announced Tuesday the outlines of a new debt-reduction plan that would allow Third World countries to convert a portion of their outstanding debt to bonds and back up their new issues by placing some of their reserves into an escrow fund operated by the IMF.
And Michel Camdessus, the IMF’s managing director, urged finance ministers Tuesday to broaden the present global debt strategy to enable debtor countries to reduce the amount of the debt that they owe rather than merely helping them obtain new loans, as has been the case up to now.
Brady said in his speech that the United States generally regards such debt-reduction plans “with skepticism,” and West German Finance Minister Gerhard Stoltenberg joined the Treasury secretary in expressing some reservations.
“It’s a problem we will have to discuss further,” Stoltenberg told reporters separately, alluding to the Japanese plan. Still, some analysts say the debt-reduction effort may gain more support.
The IMF sessions, along with a meeting last Saturday of finance ministers from other major industrial countries, constituted Brady’s first formal contact with his counterparts from other nations. He flew back to Washington late Tuesday night. The meetings here end Thursday morning.
Camdessus suggested that developing countries be allowed gradually to buy back portions of their outstanding debt from commercial banks for what it currently is worth on the private market--in most cases far less than the original face value of the loans.
At the same time, the IMF chief warned big debtor countries such as Argentina and Brazil not to hold out for new loans from commercial banks before embarking on needed economic restructuring programs at home, as some countries have threatened to do. He said countries that do put off needed action “risk achieving neither the financing nor the economic progress.”
Camdessus also called for continued budget cutting in the United States, arguing that reducing the deficit would lower interest rates worldwide, make financial markets less vulnerable to Black Monday-style crashes and help hard-pressed developing countries.
In a separate speech, World Bank President Barber B. Conable Jr. set reducing poverty around the globe as the central goal of the 151-country institution. He also pledged that the bank, which lends money to poor countries that cannot obtain such financing elsewhere, would beef up its requirements that borrowing countries adopt needed economic restructuring programs before they qualify for loans.
Camdessus’ suggestion that debtor countries be allowed to buy back some of their outstanding debt would mean in effect that commercial banks would be writing down their questionable loans to Third World nations--a move that they so far have undertaken in only a very limited way. American banks contend that writing down their bad loans would squeeze them financially.
Lending Increase Opposed
The Reagan Administration generally opposes the Camdessus approach, arguing instead for the current debt strategy, unveiled by former Treasury Secretary James A. Baker III in 1985, which calls on commercial banks to provide new loans to Third World countries to help them pay their existing debts and finance new projects.
In his speech Tuesday, Brady also strengthened the United States’ opposition to a pending proposal to increase the IMF’s available lending resources, serving notice that Washington will insist on seeing a plan showing how the organization intends to spend the money before it votes its approval. The issue is scheduled to come up at the IMF’s semiannual meeting next April.