Brady Unveils New Foreign Debt Strategy : Administration Plan Stresses Forgiveness to Settle World Crisis

The Bush Administration, responding to growing instability in Latin American countries straining under heavy debt loads, today unveiled a new strategy emphasizing debt forgiveness to deal with the problem.

The new approach was outlined in a major policy address by Treasury Secretary Nicholas F. Brady, who called for a “great cooperative effort” among all nations to resolve the debt crisis that has occupied the world for the last seven years.

“Our objective is to rekindle the hope of the people and leaders of debtor nations that their sacrifices will lead to greater prosperity in the present and the prospect of a future unclouded by the burden of debt,” Brady said.

Three hundred people were killed last week in rioting in Venezuela sparked after the government announced new austerity measures aimed at satisfying international creditors.

Response to Critics

The Administration plan is a response to critics both in debtor nations and major industrialized countries who have been calling on the United States to go beyond the debt policies of the Reagan Administration and then-Treasury Secretary James A. Baker III.

The so-called Baker plan, unveiled in October, 1985, rejected the idea of broad-based efforts to forgive debt, focusing instead on increased lending to debtor nations.

Unlike the Baker plan, the new Bush proposal endorses voluntary efforts on the part of commercial banks to forgive part of the $400 billion they are owed by the largest debtor countries, many of them in Latin America.

To encourage the banks to forgive the debt, the Administration called on the 151-nation World Bank and its sister organization, the International Monetary Fund, to help provide guarantees for the remaining debt owed by the poor countries.

‘Quite Substantial’ Reduction

A Treasury Department official, briefing reporters under ground rules that did not allow the use of his name, said the Administration believes that the new approach will provide a “quite substantial” reduction in both the debt burden and annual interest payments required of debtor countries.

However, the official refused to provide specifics about how much of the $400 billion in debt held by middle-income countries such as Brazil, Mexico and Venezuela would be forgiven under the approach.

While initial reaction was generally favorable to the Brady proposal, former Federal Reserve Chairman Paul A. Volcker, who also spoke at the debt conference, cautioned against looking for a single “magic elixir” to solve the crisis.

“If not well-managed, a process of debt reduction clearly could be hazardous to the health of debtors and creditors alike,” Volcker said in a speech before Brady’s appearance.