US Debt Write-Offs May Set Precedent

Several foreign debtors are expected to seek new aid

By , Staff Writer of the Christian Science Monitor

GIVEN the Bush administration's recent partial write-off of Egyptian military-sales debt and Polish debt, some economists in and out of government are asking the $64-billion question: Who's next? That $64 billion represents the total obligation foreign countries owe the United States government.

Some economists are concerned that a precedent is being set for US international financial relations. Debt write-offs to promote democracy in Poland or to thank Egypt for its loyal membership in the US-led international coalition against Saddam Hussein may become standard practice for achieving foreign-policy goals.

One State Department source says every foreign debtor is reassessing its relationship with Washington. "They're now looking for the most favorable way to be treated," he says.

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With Washington deep in debt, much of it held by foreigners, the US Treasury can ill afford to forgive international debts, many economists say. Brookings Institution economist Ralph Bryant, for example, says the US will be further strained "if it's too easy for debtors to borrow and then not repay."

Last week the Treasury wrote off 70 percent of Poland's $3.8 billion debt.

"Why did we do it?" a senior Treasury official asks. "It's a zero-cost method of buying friendship." There was no prospect of repayment, he says, just an unreasonable assumption by US bankers that growing debt should remain on US books. "For example, the US Export-Import Bank made $230 million in loans to Poland during the 1970s. Because of interest accrual, its debt is now over $500 million. No one expected that to be repaid."

The Treasury official says "the government shouldn't have made the loans in the first place. It was really a bad foreign-policy mistake to lend to a bankrupt communist regime whose economy was doomed in its ties with the Soviet Union and Eastern bloc trade."

Scott MacDonald, an international economic adviser to the Office of the Comptroller of the Currency (OCC), adds, "The government's reasons are two-pronged - a large Polish constituency in the US and the race to get the Polish economy up and running before the Soviets backslide [from reform] too far."

Aside from US political gain, forgiving debts may be good business.

That was the rallying cry of an elated Polish President Lech Walesa last Friday, when he told leading business executives at the US Chamber of Commerce "the returns will be much greater than the outlays.... You will see that my country is the best area for American economic expansion. We want to be the America of the East 201> to have pluralism in Poland but first of all in the economy. Every second company should be American - that's what I wish myself, and I invite you cordially."

Technically, Poland still owes the US the remaining 30 percent of its debt. "If we expect repayment now on the 30 percent," muses the Treasury official, "they'll actually have less money left than before the 70 percent was forgiven, when no repayment was expected at all."

Deputy Assistant Secretary of State for European and Canadian Affairs James Dobbins says last week's decision "has a potentially major impact for Poland's ability to borrow on the international market and for companies to invest in Poland and to believe it's going to be a credit-worthy economy."

Badly burned by bad Latin American loans in the 1980s, "US commercial banks are trying to shift the burden to the US government. Banks want the government to write off its loans so debtors can better service their debts to the commercial banks," says the senior Treasury official.

OCC's Mr. MacDonald says that the risk to lenders is lower when official debts are forgiven. To date, he says, US banks have little taste for "high risk" markets such as Eastern Europe.

Some economists are skeptical, however, of Undersecretary of the Treasury David Mulford's assurances that Poland and Egypt are special cases. One government economist says, "Treasury's policy begs the question: Who else is at the door? "

Scores of other governments argue their political and economic stability can only be achieved if they shake off burdensome debt. On the heels of Mr. Walesa's visit, a Nicaraguan delegation arrives in Washington this week, "to settle its arrears problem," according to Nicaraguan sources. The Nicaraguans will meet with the International Monetary Fund, the World Bank, the Inter-American Development Bank and, the Treasury.

Countries in the throes of economic reforms who do not owe large sums to the US government may see Washington's readiness to forgive debts as a way to garner more support for themselves. Hungary, Czechoslovakia, and governments from the Philippines to Bolivia, will likely seek concessions.

Heavily indebted to commercial banks, these nations will argue that because they don't qualify for debt reduction, Washington should offer commensurate relief - such as fresh aid.

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