US Third-World Debt Plan Praised. Treasury proposal includes debt forgiveness; IMF and World Bank would ease losses

CONGRESSMEN, bankers, and international-development officials are pleased, more or less, with the Bush administration's new approach to third-world debt. The strategy, unveiled Friday in a speech by Treasury Secretary Nicholas Brady, entails encouraging commercial banks voluntarily to forgive some of the loans. Funds from the International Monetary Fund and the World Bank would be used to ease the commercial banks' losses.

This represents a shift from the Baker plan of 1985. Named for its architect, then-Treasury Secretary James Baker III, the plan encouraged debt-burdened nations - many of them in Latin America - to continue borrowing so they could grow their way out of economic stagnation. That plan avoided any form of debt forgiveness, under the assumption that nations seeking relief would have a hard time securing new loans.

Bush administration officials say the Brady approach is not a complete switch from the Baker plan. Both call on debtor nations to continue borrowing. The new plan would also continue to reward nations that agree to adopt market-oriented economic reforms. Still, the United States government's admission of the need to forgive old debts was seen as a major breakthrough.

``He said the magic words: debt reduction,'' says Sol Linowitz, a former assistant secretary of state for Latin America.

``This means we're into Baker II,'' Mr. Linowitz says. ``The Latins aren't going to be completely happy with the new plan, but they have to understand this is the best they can get for now.''

Recent debt-related riots in Venezuela - which prompted the US Treasury to step in late Friday with a $450 million short-term loan - have highlighted the urgency of the debt situation all over Latin America. Ten of the 15 top debtor nations are in Latin America; collectively they owe $400 billion. Brazil is No. 1 with $120 billion, followed by Mexico at $107 billion, and Argentina at $60 million.

Venezuela's riots also heightened expectations over what Mr. Brady would say. But disagreement over the details of the US's new strategy persists among the Treasury Department, Federal Reserve, State Department, and National Security Council, leaving Brady to announce only the broad outlines of the plan. Some officials reportedly play down the potential effect of debt reduction, stressing instead the need for sound economic policies and continued lending by banks.

JAPAN, which endorsed Brady's speech even before it was delivered, will step up lending to debtor nations in amounts reported to be in the billions of dollars. Last September, Brady reacted coolly to a Japanese plan to step up bilateral lending that would parallel IMF loans. At last week's conference on third-world debt, where Brady delivered his address, Japanese officials touted the importance of US leadership in forging a united industrial-world approach to the debt crisis, even as Japan takes a more prominent role in lending.

What remains to be determined is exactly how much money the IMF and World Bank will have at their disposal to encourage debt reduction. This money, which would be put in special ``pools'' for debt forgiveness, would come from funds the two banks now use for general economic development.

These pools could be used in several ways. For example, a creditor bank might swap a loan for stock in a company in the debtor country at less than 100 cents on the dollar. Then the IMF or World Bank could guarantee dividend payments against the possibility that the company might be nationalized, or unable to make the payments, or unable to transfer the money out of the country. These deals would be worked out case by case.

The use of IMF and World Bank money for this purpose means that the taxpayers of member-nations - including the US, which provides about 20 percent of their funds - will help foot the bill for debt reduction. But given the precarious political situation in the debtor nations, many officials and analysts say this money would be well spent. And, they stress, it is key that everyone - the banks, the debtors, and the industrialized nations - share the burden of reducing third-world debt.

``In the final analysis,'' Treasury Secretary Brady concluded in his speech, ``our objective is to rekindle the hope of the people and leaders of debtor nations that their sacrifices will lead to greater prosperity in the present and the prospect of a future unclouded by the burden of debt.''

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