Missing the Mark on Debt
The World Bank and International Monetary Fund are proceeding with caution on implementations of debt relief for developing nations with plans devised by Japan, France and, now, the United States. Their caution is appropriate.
U.S. Treasury Secretary Nicholas F. Brady has offered the latest plan by way of fulfilling President Bush’s campaign promise to do something about the debt issue. Unfortunately, the plan is still lacking in substance and in detail, and some of its fuzzy elements seem to create risks for both the Bank and the IMF that must be avoided at all cost. The imprecision of the plan may reflect a decision to act precipitously, to give the appearance of action in an effort to prevent a repetition in other nations of the riots that took place in Venezuela at the end of February when debt-driven economic reforms were put in place. The effort to shift the burden of the problem onto the World Bank and IMF, already hard-pressed to meet the normal demands for their resources, reflects the desperation in the Bush Administration to avoid any action that would undermine the President’s opposition to new taxes.
The new initiative has helped gain the attention that the problem warrants. There are two problems. There is the staggering debt owed commercial banks by Brazil, Mexico, Argentina, Venezuela and the Philippines. And there are the enormous debts owed to other governments and to international agencies by many of the sub-Sahara nations of Africa. Together these debts are crippling economic development, creating a net outflow of resources from poor nations to rich nations, compounding the misery of the poorest nations, undermining unsteady democracies and raising risks of conflict. Per capita consumption declined last year in 11 of the 17 most indebted nations. The debt crisis clearly is a crucial humanitarian, economic, strategic and security issue.
But the decision to involve the World Bank and IMF places at risk their normal functions in development and economic stabilization. The World Bank, should it guarantee bonds to cover money owed commercial banks and provide subsidies for debt-service interest rates, as proposed by Brady, could see a deterioration of its optimum rating for its own borrowing. That, in turn, would force the bank to charge more for its loans, an unreasonable and unfair penalty to impose on the developing nations. The use of public funds to bail out commercial banks who made imprudent loans is controversial at best. At the same time, neither the bank nor the IMF can turn its back on the debt, because it is the single most serious obstacle to development and stability.
The 17 most highly indebted countries now owe commercial banks about $380 billion. It is Brady’s hope that the banks will make huge write-offs of that debt, and exchange at least some of the remaining debt for bonds, guaranteed by the IMF and World Bank, or for equity in enterprises in the debtor nations. He also hopes that the banks will accept big cuts in debt-service charges, with the IMF and the World Bank subsidizing some of the cuts, while also increasing their flow of new funds to these same nations. The banks’ real intentions are now being tested with an IMF loan to Mexico. But the resources for leveraging these reforms will be extremely limited. The talk now is of an international fund of not more than $30 billion to guarantee bonds and subsidize interest. That fund is not likely to grow when the United States, richest of all nations, asserts it can make no contribution, and Japan, the only major contributor so far, has offered $4.5 billion, less than expected.
As matters now stand, a World Bank-IMF task force is sorting out proposals. Time will tell whether a realistic response can be devised. The goal is an agreement that can be carried to the economic summit in France in July. Those summits have a history of dealing with the debt with eloquent declarations rather than meaningful remedies. This one could be an exception.