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

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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.

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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.