East Bloc, Third World Debts Seen Rising

Debts of East European and Third World countries are due to rise next year despite the plan of Treasury Secretary Nicholas F. Brady to ease some of the heaviest burdens on debtor countries.

“When you have a vibrant, growing economy--like Indonesia, for example--debt can be a good thing if it doesn’t grow too fast,” John M. Underwood of the World Bank said.

“It’s a sign that foreigners have confidence that it’s a good place to put their money.”

Indonesia’s debt rose from $43 billion in 1986 to $52 billion last year, according to figures that the bank issued this week. Indonesia had to pay nearly $8.5 billion in principal and interest to its creditors in 1988.

Third World leaders complain that such outflows leave them with little funds to build the schools and buy the equipment to create jobs for their growing populations. The bank calculated the outflow worldwide at more than $51 billion this year.

Until 1983, new loans to developing countries brought them more money than they had to pay out on the old ones.

Despite the cost, Third World governments still seek more loans, if only to help pay the interest on the old loans.

Underwood is top economist in the International Economics Department of the World Bank, the largest source of aid to Third World countries. The aid is also in the form of loans, over $21 billion in the year that ended June 30.

The bank plans to provide as much as $1.35 billion to Poland, which got nothing last year but already owes more than $42 billion. Its new non-Communist leadership is hoping to borrow $4 billion or more in the coming year.

Brady’s strategy seeks to ease the burden for 39 debtor countries, by combining debt and interest reduction with new loans from banks. So far, plans have been developed for three countries: Mexico, the Philippines and Costa Rica.

The World Bank estimated that his strategy could save as much as $6 billion a year for 19 “severely indebted middle-income countries” like Argentina and the Philippines, which owe much of their debt to private banks. Brady made his proposal last March, before the big changes in Eastern European countries, which now have better prospects for getting the new loans they want.

For the poorest countries, governments are the main creditors rather than banks. During the 1980s, 10 creditor governments have forgiven $2.3 billion owed to them. The United States, which was not among the 10, has promised to forgive $1 billion. New aid to these countries, most of them in Africa, is now largely in the form of grants.

Two officials of Resources for the Future, a private study group in Washington, said that the United States has an interest in easing the debt burden: The heaviest debtors are among the biggest buyers of U.S. goods. The less they have to pay out to banks, the more they have left over to buy the products of U.S. farms and industries, they pointed out.

“The net result of easing debt burdens would be more robust economies that would support more stable political systems and create stronger markets for U.S. exports,” wrote Elaine M. Koerner and George E. Rossmiller in the fall issue of Resource for the Future, the organization’s quarterly publication.

The World Bank predicted that the debt of 111 countries will rise to $1.189 trillion in 1990 from $1.165 trillion this year. Underwood said that the Institute of International Finance, which collects figures for major private banks, adds another $188 billion for 10 countries, including the Soviet Union, that the bank does not count. The Central Intelligence Agency estimated that the Soviets owed $42.3 billion to Western banks last year.

That would bring the current total to $1.353 trillion. The figure could be raised in 1990 by new lending to help East European governments as they switch to something more like the market economies of the West.