Kyle Howe

                         

Eco 357L Summary

Business Week, 1983

A Plan for Stretching Out the Global Debt

By Felix Rohatyn

 

 

Basic Point:

Rohatyn thinks that the best way to deal with global debt and prevent further crisis is to change a number of things.  These are the his requirements for a long-term resolution:

-Coordination of Western growth policies.

-A more orderly international monetary system with closer ties between currencies.

-Long-term, low interest debt as opposed to short term, high interest debt.

-Liberalized trade/ Open trade policies

 

Summary:

He argues that we have become “prisoners of our own debtors”.  In support of this he states that Poland, Mexico, Argentina, Brazil and Romania have unilaterally defaulted on their debts and basically dictated the rescheduling of Western banks.  He feels that the $700 billion lent out to developing countries and the Eastern bloc can only be paid back if banks convert the debt into long- term (25-30 years), low interest debt.  The immediate savings on interest payments would relieve these countries’ need to keep borrowing from an already stretched out banking system.  This combined with tailored principal repayments to individual countries; commodity agreements and more practical IMF oversight should spark new development and growth. 

The creation of a new organization, backed by Western guarantees, would be helpful in converting short term, high interest debts into long-term, low -interest debts.  “We should create an institution that would be a substitute creditor for banks and would ease the financial burdens of ailing nations.”  Debtor countries, which would now have some breathing room, could set aside some revenues made on commodities to service the long-term bonds.  In effect this organization could pay the banks back as the countries pay the organization back.

He recognizes that this would be costly and that negotiations would have to be made amongst those who endure these costs. These costs need to be allocated amongst bank stockholders, taxpayers and countries.  Rohatyn says that the loss of current income by banks is outweighed by the increased safety of this proposal.   Political obstacles to this idea would include people arguing that this is basically “bailing out the banks”, but Rohatyn responds by saying that their potential loss in income makes it hard to define proposal as a bailout.  There will also be people opposed to the easing of credit abroad given the current American industrial slowdown.  Rohatyn feels that this would actually create American jobs and increase exports.

Amongst these new ramifications, Rohatyn wants to revert back to some sort of fixed exchange rate system.  He feels that the yen is undervalued and in order to reduce protectionism and increase trade liberalization, the yen, the dollar and European currencies need to have closer ties.  He hopes that this can be addressed in what may be a New Bretton Woods agreement in May of 1983.