`Playing for time' won't cure world debt crisis, authors warn
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.
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.
Of course, default is possible, especially if debt repayments become even more of a political problem for the leaders of developing countries. In the meantime, though, commercial banks are building their capital base at such a pace that default by one major debtor nation would not wipe them out, though default by several major debtors would require a central bank rescue. Moreover, interest rates are still coming down - so far. Each 1 percent decline saves a nation like Mexico, with nearly $100 billion in debts, about $1 billion in interest charges. That counts. Mexico will also benefit if OPEC's effort to raise petroleum prices by a new set of country production quotas succeeds.
Lever, in an addition to the book for its printing in the United States, calls the IMF strategy of dealing with each country's debt situation on a case-by-case approach ``a sign of intellectual bankruptcy, a euphemism for abdicating responsibility for the aggregate result of our actions.'' Yet that strategy may be less bumbling and offer more hope of at least partial success than he would judge.
Caution - and humanity - suggest that the industrial nations should do more to alleviate the developing countries' debt problems. The authors rightfully find objectionable the fact that nowadays more money (resources) is leaving the poorer debtor nations as debt service payments than is flowing back from the rich creditor countries. The balance amounted to an outflow from the debtor countries of $32 billion in 1985. ``A perversion of common sense and sound economics,'' they say. So they cheer the plan of US Treasury Secretary James A. Baker III to pump more credit into the debtor nations to permit them faster growth - if they carry out domestic reforms.
Lever and Huhne suggest that governments of the advanced countries should provide their commercial banks with guarantees on fresh lending to the debtor countries to ensure a flow of credit adequate to revive economic growth. In return for this safe and profitable business, the banks would write down each year, according to circumstances, that part of their existing debt ``which was judged bad or doubtful.'' Thus the banks would have time to clear up their balance sheets without impairing their profitability, capital position, or ability to lend.
Some would criticize such guarantees as ``bailing out'' the banks. But, as the authors point out, many critics lack a knowledge of the history of the crisis. Much of the bank lending to the debtor nations was a recycling of petrodollars during the 1970s and through 1981. They were encouraged by finance ministers, central bankers, and other government officials to make these loans when the governments themselves could not accomplish what should have been an official task. The authors quote the cheers from the sidelines of some leaders still in office. The banks enjoyed high profits on the loans - for a time.
A theme running through the book is the growing economic interdependence of nations. In an interview, Lever put it more simply: ``We can only enjoy prosperity in a world that enjoys prosperity.'' It's a valid statement.