Untangling the global debt challenge
THE current world debt scenario is an unresolved crisis composed of personalities, cash flow, and the inherent lack of real political determination and economic ability of all parties to end a status quo position. Bolivia's debt is different from that of Poland and of the United States, but in each country it is caused by borrowing and maintained by an inability to pay creditors. How can countries so much in debt repay it when most need new loans just to pay interest, in effect paying interest on interest? Is there a way to stop this continual mounting of ever greater debt? The banks promote the present situation by putting themselves into a tighter corner, with every dollar of ``new'' money lent to pay only interest on old loans. Is there credibility among lenders and borrowers continually digging themselves deeper into a crisis about which they complain?Skip to next paragraph
Subscribe Today to the Monitor
US banks and consequently their shareholders are generally lulled into a wait-and-see pattern, but they work against themselves (though in favor of management) by sporadic deficit lending to developing-country borrowers. Though the banks show payment on interest, they are depleting the borrowers of resources that could strengthen the borrowers' economies while simultaneously placing ``tombstones'' on them by increasing the debt load. The loan capital isn't repaid as the problem is aggravated. US Treasury Secretary James Baker's plan, calling for the establishment of yet another international agency to channel funds to developing-country borrowers, is still in diapers.
The developing-country borrowers exaggerate by claiming that all their economic woes are caused by the international bank lending, so dramatically extended in the 1970s. They have a point, but they were willing participants in the game. Fast and large US assistance to selected countries like Mexico can bandage the critical economic debt wound, but it makes the debt assistance more inequitable with respect to countries like Bolivia that don't have funds to pay for vital imports, much less pay interest on interest of debt. Whatever the borrowers feel or think about debt, the fact is that there are not enough dollars to pay. A slight rise in US interest rates or even a mild recession here is enough to send the developing world into an economic landslide to further catastrophe. The banks may then have to recognize unpayable foreign country loans as such.
The Baker plan has to be modified to include further opening of markets on the part of all industrialized countries to receive imports from all developing countries, particularly the small ones that are now just beginning to diversify their economies away from sole dependence on two or three commodities. It is in the interest of countries like Japan, South Korea, and West Germany to give up part of their growth-market shares and keep the world economy alive. In the mid-1970s the International Monetary Fund decreed that a borrowing country could safely indebt itself to the point where it used up to 25 percent of its export receipts to service its debt. In some countries, the actual figure has been double the recommended percentage and rising. Little room is left for investments or savings. In the case of Latin America, the US is the prime trading partner. The two faces of this coin are that America has to reduce its trade deficit while maintaining trade with these countries on the economic critical list.
One solution is to reduce the US market share of already industrialized countries and assign a portion of that share to developing countries. The same should be done in all the other industrialized countries. This would foster investment and capital flow into the indebted countries and reduce the need for US assistance.
Japan, France, Britain and others will have to forgo market shares to give debt-ridden developing countries a chance to earn the currencies to pay the debts to the countries' respective banks.
Banks have been swapping loans from, say, their excess Brazil portfolio for another bank's excess Mexico loans. This gave an appearance of balance in the loan portfolio, but it solved nothing for the borrower. The practice of buying the debt of less-developed countries at a discount and then cashing in at the borrowing country at prices close to face value will only solve a fraction of the total indebtedness under current market practice. Here, we have the beginning of the solution. Money is being saved and profits made. It is only the first step in solving the debt crisis. Governments and other, private borrowers as well as creditors need to use outstanding debt as a trade vehicle, recognizing outstanding promissory notes as partial payment for export goods in a manner conducive to trade and buildups of central bank reserves.
Trade and investments, along with foresight, can solve the debt dilemma, using the same motivation that got the players into the mess in the first place -- profits. Debt-ridden countries can pay the debt by increased trade in traditional and nontraditional products and services, pragmatic secondary market use of existing debt, and the determination of the key players to solve the crisis.
A sounder, healthier world economy is at hand. The committed participation and relatively small sacrifices of all the industrialized countries are required in trade, with anything less leading to a deeply disturbing global economic situation.
Rodrigo Valderrama, president of the Multilateral Group Ltd., served as a senior Bolivian officer in the Ministry of Finance.