International Debt

Chaired by Kurt Furgler
24-25 September 1987
Wolfsberg, Germany

I. INTRODUCTION

1. Since the eruption of the Mexican debt crisis in 1982, the issue of international debt ranks high on the international agenda, as today many developing countreis are struggling with the consequences of unprecedented levels of indebtedness.

2. This development calls for a manifestation of political will and leadership. Any strategy to tackle the multifaceted debt problem hs to conform to the principle of achieving sustainable, long-term growth and must preserve the long-term growth and must preserve the long-term political stability of the countries concerned. Otherwise, the debt crisis will become unmanageable.

3. Since 1984, the InterAction Council has advocated that the principle of joint responsibility is the key factor to a comprehensive solution of the debt crisis as to all other world problems. All parties involved have to contribute: debtor and creditor countries, multilateral financial organizations, commercial banks and the private sector.

4. Temporary relief has been gained as a result of "muddling through" policies. Nevertheless, the overall situation has shown less improvement than expected. In many important aspects the situation has even deteriorated. Debt-induced developments have led to social unrest and tensions, political instability and threats to democratic structures and institutions.

II. DEVELOPMENTS IN THE WORLD ECONOMY

5. The current economic situation is marked by sluggish growth and acute protectionist pressures in the industrialized countries.

6. Extreme volatility of exchange rates within a relatively short time frame has coincided with persistent high real interest rates.

7. Commodity prices have fallen to low levels causing a deterioration in the terms of trade of many developing countries.

8. Growing absolute levels of debt and a deterioration in the financial situation of developing countries have brought about the collapse of their domestic investment.

9. Since 1982 the net investment position of the United States has dramatically changed. At the beginning of this decade the rest of the world owed the U.S. some US$l5O billion. By the end of the decade the strongest economy of the world will owe foreign investors some US$6OO billion, even if it should succeed in eliminating its current account deficit over the next four years.

10. This unprecedented level of indebtedness has been accrued as a result of a series of current account deficits mushrooming from US$8.7 billion in 1982 to U5$141.4 billion in 1986. The United States who should be a net capital exporter is thus drawing heavily on the resources of the rest of the world.

11. Obviously the debt-induced growth of the U.S. economy has had positive effects on the exports of its trade partners - among them highly indebted countries like Brazil, Argentina, and Mexico. Although its debtor position may be considered as digestible to the U.S. there is widespread concern about the future of the unwinding process. These concerns have been justified by the recent dropping-out of private capital influx into the U.S. during several months.

12. So the situation is highly unstable, as nobody can foresee how long creditors of the U.S. will patiently transfer the needed capital. Macroeconomic mismanagement by the U.S. could bring about a global economic crisis with sky-rocketing interest rates and retaliatory protectionism.

III. GENERAL PRINCIPLES

13. The debt issue is a common problem, to be jointly addressed by all parties concerned, yet without a universally applicable solution.

14. Its resolution requires acceptance of certain commitments and obligations by all involved. In that context, conditionality is indispensable. It must, however, be reviewed to take into account real economic potential, social circumstances and objectives as well as the particular impact of certain debtor countries in their respective regions.

15. The prospects for the success of debt payment solutions are related to adjustment policies and depend heavily on the readiness of industrialized countries

- to liberalize trade and access to their markets without undue delay;
- to improve and enlarge financial assistance flows;
- to realize higher growth rate for their economies; and
- to avoid measures causing an increase in interest rates.

16. All debtor countries should initiate, adopt and pursue growth-oriented, long-term structural adjustment policies, taking account of specific local needs and circumstances, aiming at economic reform and strengthening of national economic management while safeguarding and making possible human development.

17. Debtor countries should, through policy and economic reform, increase overall economic efficiency and faster export growth (the range of measures could include, inter alia, a substantial reduction of state intervention and regulation; a reduction of budget deficits; the adoption of realistic exchange rates; and the reduction of barriers to imports and exports).

18. To support debtor countries in their adjustment efforts, new liquidity should be created without imbuing inflation. This could be accomplished through a World Bank capital increase or a new allocation of SDR on a selective and non-quota basis.

19. OECD countries should agree on better management of the process leading to an elimination of their external imbalances. In particular, a situation should be avoided where an improvement in the US trade balance would negatively affect exports by developing countries.

20. Industrialized countries, in particular the Federal Republic of Germany, Japan and other surplus countries, should aim at higher non

21. The United States should take more vigorous steps to reduce her budget and trade deficits. Improvements in the letter should, however, not be brought about by import restrictions and other protectionist measures. Moreover, the US should contribute to a reinforcement of the financial base of multilateral financial and development organizations.

22. If arms control agreements by the superpowers entail reductions in military spending, a substantial portion of the funds thus released should be allocated to development purposes. Given the high percentage of military expenditures in budgets of developing countries, they equally should pursue policies, such as non-aggression pacts, that would lead to lower levels of armaments and related spending.

IV. SPECIFIC MEASURES PROPOSED FOR LATIN AMERICA AND OTHER HIGHLY INDEBTED MEDIUM-INCOME COUNTRIES

23. To maintain and restore long-term credit worthiness, and to secure export opportunities, the central approach to commercial debt should be on the basis of full-value maintenance to be arrived at through voluntary negotiations between all parties involved. Multi-year rescheduling of 20-30 years, with smaller spreads above reduced interest costs, remain the most appropriate way for containing annual debt repayments.

24. Negotiated supplementary or alternative mechanisms, available on a voluntary basis, could usefully include:

a) exit bonds (banks not wishing to participate in new money packages may exit by replacing their old loans through bonds issued by debtors at a concessional discount - conceivably with international guarantees);

b) buy-backs (repurchase of loans by debtors at a discount based on econdary market value);

c) discounted debt-equity swaps (loans acquired at a discount in the secondary market are converted into local currency for the purpose of investment in the debtor country); and

d) interest caps.

25. Under certain circumstances, negotiated payment ceilings (e.g. export share limits or limits related to GNP growth) might be considered. The imposition of unilateral ceilings, however, can be counterproductive for a country and may isolate it from financial markets.

26. New lending by commercial banks should principally, and to the extent possible, be in the form of bond purchases. As countries did previously not reschedule bonds, a continuation of this practice would mean that fresh money obtained through issuing bonds would de facto be accorded preferred status over past debt. This might provide an incentive for new lending.

27. To induce exclusively productive investment and trade, commercial banks should provide additional new finance through syndicated loans based on medium-term floating rates. Safeguards should be taken to ensure that such loans not be used for balance of payments financing or military procurement.

28. Export-credit agencies should assume a more active role and with less conditionality.

29. To induce new commercial lending the World Bank and regional development banks and their affiliates should take the lead in a further expansion of lending to countries making adjustment efforts and in fostering private sector investment.

30. As military expenditures absorb a significant portion of national budgets, all peace efforts in Latin and Central America should be strongly supported and the conclusion of regional non-aggression pacts be promoted which might bring about an overall reduction in levels of armaments.

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31. All these measures could lead to such a change in the overall economic environment and climate that further capital flight might recede and previous capital flows even be reversed.

V. SPECIFIC MEASURES PROPOSED FOR LOW-INCOME SUB-SAHARAN AFRICAN COUNTRIES

32. Industrialized countries that have not yet done so should retroactively cancel all outstanding official debt (including that of export-trade agencies) for those countries suffering from severe debt problems and judged to have little chance of early access to capital markets.

33. All industrialized countries should provide new additional finance through a substantial increase of long-term ODA on concessional terms.

34. The IMF Board of Governors should conclude, by the end of 1987, an agreement to triple the Structural Adjustment Facility aimed at providing long-term support for domestic policy reforms.

35. An agreement for a substantial increase in World Bank capital should be speedily concluded, enabling the Bank to increase significantly its assistance to African countries. The early decision of the US Congress will be crucial for the realization of this proposal.

36. A new allocation of SDR on a non-quota basis, and coupled with specific conditions favoring low-income countries, could be a further source of additional external finance.

37. Industrialized countries could increase the soft loan facility of the African Development Bank to foster increased lending.

38. Bilateral and multilateral donors should co-ordinate their approaches so as to avoid conflicting or cross-conditionality.

39. Unrelated to adjustment policies, commercial banks should urgently step up trade financing, especially for short-term purposes, to reinforce the otherwise scant export opportunities of African countries.

40. Private sector corporations should be encouraged to increase direct investment, leading to an inflow of new non-debt creating capital.

41. Multilateral financial organizations should waive requirements for counterpart funds to avoid delayed implementation of projects and programmes.