Dealing with Third-World Debt. Barber Conable considers possible solutions, while urging continued attention to poverty. WORLD BANK CHIEF SPEAKS
BARBER CONABLE, president of the World Bank, was at first a little reluctant to talk about the third-world external-debt problem. ``Debt is not the central issue,'' says the head of an institution that, with its affiliates, made some $20 billion in development-loan commitments last year. He sees the bank's greatest goal as alleviation of poverty: 90 million poor people in Latin America, where debt impedes economic growth; 280 million ``absolute poor'' in Africa, where the need is for more schools, roads, and other infrastructure; and 600 million in Asia where debt is not a serious problem.Skip to next paragraph
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Nonetheless, the World Bank and its sister institution, the International Monetary Fund (IMF), are expected to play a key role in the revised United States strategy for dealing with the $1.2 trillion in developing-country debts owed to the commercial banks and governments of industrial nations.
That altered strategy, outlined March 10 by Treasury Secretary Nicholas Brady, envisions three ways to reduce the debt burden of debtor nations. In one case, bank loans would be swapped for ``exit bonds'' of lower face value. The banks would take a loss on a portion of these loans. In a second case, bank debts would be traded for similar bonds, but with equal face value and a lower interest rate. The banks would lose on interest payments. Third, debts could be swapped for part ownership of businesses in the debtor nation.
How the bank and IMF will be involved in this process is not entirely clear. Bank officials expect details of the Brady approach to be fleshed out by precedents to be set when the debts of individual countries are rescheduled. The primary candidate for a test of this approach is Mexico with $102 billion in foreign debts.
Mr. Conable spoke just before Secretary Brady last Friday at a meeting of the Bretton Woods Committee, saying: ``A good place to start would be with Mexico. Mexico has indicated a willingness to engage in major reform, it has substantial prospects but substantial debt, and it has lived up to its obligations.''
In an interview here, he said, ``There's interest on all sides in letting the thing evolve some, in trying to include debt-reduction components in the workout schemes that we are trying to put together for these countries.''
Since the US federal government with its huge budget deficit finds itself in no position to accept any transfer of loan losses from the commercial banks, it will expect the World Bank, the IMF, and the Inter-American Development Bank to help in rescheduling deals. These institutions most likely will guarantee some ``exit bonds'' or a portion of new commercial bank loans that such debtor nations as Mexico need to assure future economic growth.
These multilateral institutions will also be expected to inject money into the debtor countries with what are called ``adjustment loans.'' These are not tied to any development project, such as a dam, but are used to help cover international-payments deficits in return for domestic economic reforms in the debtor countries.
However, Conable warns that any such measures must not bankrupt either the commercial banks or the multilateral institutions, ``or dissipate unnecessarily capital they need for their other responsibilities.''
The former US congressman undoubtedly had in mind the safety of the bank's capital, which a needed majority of the bank's 151 member nations agreed to nearly double last year.
Some commercial bankers have hoped that with the capital increase the World Bank could rapidly increase its lending. This would help the debtor nations grow faster and ease their debt-servicing burden.