Kyle Howe

                         

Eco 357L Summary

Wall Street Journal, 1983

Foreign Debt Difficulties Prompt

Proposals for Drastic Restructuring

By Lawrence Rout

 

Basic Point:

            This article points out critiques of current (1983) solutions to foreign debts and discusses a couple of new proposals in how to deal with them.  The current problem is the following:  “Developing countries can’t pay their debt, so they postpone their principal payments, get new bank loans and in return, they pay higher interest rates and slash their debt.”  Exports aren’t strong enough to finance their loan payments and unemployment worsens the situation.  Governments must implement austerity, which adds further instability.  Economists are beginning to fear the possibility of these governments walking out on their debt.  Felix Rohatyn (Lazard Freres and Co.) and Peter Kenen (Princeton University) have proposals that emphasize the long-term and lower interest rates on loans. 

 

Current Strategy:

Currently, established banks and the IMF are extending loans that are due within a couple of years while raising the interest rates on these loans.  However, countries need to borrow more money (due in less than 10 years).  These countries agree to tighten their budgets (impose austerity), and are supposed to grow, eventually allowing them to finance their debt with exports while paying back the banks.

 

Two Points of View of the Problem:

There is debate over whether the problem is a result of a liquidity crisis or whether it is a question of long- term solvency.  The banks tend to side with the liquidity faction.  That is they believe that as soon as economic conditions improve, countries will export more and in three to four years, countries will be able to start repayment.

Rohatyn, (who believes the problem is of solvency), argues that the money could only be realistically re-paid if the debts are long-term (20-30 years) with lower interest rates.

By doing this he argue, the new savings made on the interest would be significant enough to promote effective long-term growth and help reduce the risk of total debt repudiation.

 

Mr. Kenen takes this one step further.  He believes that an international organization should be set up by industrialized nations that would buy developing countries debt for 90 cents on the dollar.  Banks would receive a long- term bond due within 10-20 years that would pay an interest rate lower than that of the interest rate on the developing countries loan.  “It would in effect act as a broker paying the banks back as it gets paid back by the developing country”.  He argues that this would be safer for banks even though they lose some return, the burden on developing countries would be lessened, and that they wouldn’t need to keep borrowing money.

 

Opposition:

Some analysts are skeptical of these programs saying that they doubt their feasibility.   Banks are most opposed to these proposals because they lose assets.  They seem to be convinced that the strategies in place will work and the problem can be solved in the short- run by “buying time”.  They also feel that these proposals could ultimately nationalize banking.