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`Playing for time' won't cure world debt crisis, authors warn

By David R. Francis / January 8, 1987



Debt and Danger: The World Financial Crisis, by Harold Lever and Christopher Huhne. New York: Atlantic Monthly Press. 168 pp., $16.95. To some degree, the leaders of the industrial world and the major commercial banks are trying to muddle through the developing-country debt crisis. They are playing for time through debt rescheduling.

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Time gives the banks an opportunity to build up their reserves. Thus, a default by a major debtor nation would be less dangerous to the banks' financial position.

Time offers hope of a healthier world economy with lower interest rates, and increased demand and better prices for the exports of developing countries. It also gives debtor nations a chance to reshape their economies to make them more competitive.

But to Lord Harold Lever and Christopher Huhne, the two British authors who wrote this compact, excellent book on the $1 trillion debt crisis, such stalling is not enough. They argue that the crisis is far from over.

Lord Lever, who was an adviser to British prime ministers Harold Wilson and James Callaghan and a senior member of their cabinets, and Mr. Huhne, economics editor of the Manchester Guardian, point out that burgeoning exports from the developing countries could foster increased protectionism in the industrial nations. And stagnation in the developing countries could cause dangerous political instability.

This pessimistic view is well argued. Also, the book provides a balanced analysis of the origins of the debt problem. But it could well be that the world will avoid economic catastrophe. The global financial system is proving far more resistant to the severe blows it receives than many imagined.

The authors hold that almost everything must go right for the International Monetary Fund (IMF) strategy of dealing with the debt problem to succeed:

``The industrial world has to grow relatively quickly,'' they write. ``It has to keep its export markets open. Oil prices must not move sharply either up or down. Moreover, any slight divergence in one of these factors could only too easily be compounded by changes in the others.... The advanced countries' banks have to be prepared to increase their exposures to the developing countries despite the experience of 1982 [the start of the debt crisis], and the developing countries themselves have to resist the temptation to use the trade surpluses earmarked for debt-service dollars to increase their imports, growth and living standards instead. Every number of the IMF's card must come up, and then the prize is merely to get back to where the crisis began.''

Not all these criteria have been met. Oil prices have plunged. Commercial banks have increased their loan exposures hardly at all. But when Mexico, with its reliance on oil exports, got into trouble, the United States and the commercial banks moved to keep the crisis from escalating with fresh loans.

Lever and Huhne would argue that such new loans are merely putting off an inevitable default, that austerity is not accomplishing its purpose of restoring economic health to the developing nations.