CCEA WORKING GROUP ON LDC FINANCIAL PROBLEMS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84T00109R000100020013-5
• Release Decision: RIFPUB
• Original Classification: U
• Document Page Count: 100
• Document Creation Date: December 21, 2016
• Document Release Date: May 12, 2008
• Sequence Number: 13
• Publication Date: January 20, 1982
• Content Type: MEMO

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DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20220
OFFICE OF
ASSISTANT SECRETARY
FOR INTERNATIONAL AFFAIRS
MEMORANDUM FOR NORMAN BAILEY
NATIONAL SECURITY COUNCIL
JIM BURNHAM
COUNCIL OF ECONOMIC ADVISORS
DOUG ANDERSON
CABINET COUNCIL OF ECONOMIC AFFAIRS
MAURICE ERN ST
CENTRAL INTELLIGENCE AGENCY
STEVE FARRAR
OFFICE OF MANAGEMENT AND BUDGET
WILLIAM MILAM
DEPARTMENT OF STATE
.COSTAS MICHALOPOULOS
AGENCY FOR INTERNATIONAL DEVELOPMENT
Attached is a revised version of the Background Paper on(LDC
Debt. Comments received from members of the Wor ing Group ha
been incorporated in this draft. In addition, a few sections
have been updated or edited to make the paper more suitable for
transmittal to the CCEA.
eAeis Rieffe
Developing Nations F nance
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lk
DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20220
~7K9
OFFICE OF
ASSISTANT SECRETARY
FOR INTERNATIONAL AFFAIRS
MEMORANDUM FOR NORMAN BAILEY
NATIONAL SECURITY COUNCIL
JIM BURN HAM
COUNCIL OF ECONOMIC ADVISORS
DOUG ANDERSON
CABINET COUNCIL OF ECONOMIC AFFAIRS
MAURICE ERN ST
CENTRAL INTELLIGENCE AGENCY
STEVE FARRAR
OFFICE OF MANAGEMENT AND BUDGET
WILLIAM MILAM
DEPARTMENT OF STATE
.COSTAS MICHALOPOULOS
AGENCY FOR INTERNATIONAL DEVELOPMENT
SUBJECT: CCEA WORKING GROUP ON LDC FINANCIAL PROBLEMS
Attached is a revised version of the Background Paper on LDC
Debt. Comments received from members of the Working Group have
been incorporated in this draft. In addition, a few sections
have been updated or edited to make the paper more suitable for
transmittal to the CCEA.
eAexis Rieffe
Developing Nations F nance
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I
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BACKGROUND PAPER
ON
LDC DEBT
CCEA Working Group on
LDC Financial Problems
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20 January 1982
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Executive Summary i
I. The Dimensions of LDC Debt
A. Trends in LDC Debt and Debt Service
B. Distribution and Composition of LDC Debt
C. The Near-Term Outlook
II. Debt-Servicing Difficulties
A. Types of Debt-Servicing Difficulties
B. Causes of Debt-Servicing Difficulties
C. Procedures for Assisting Countries in Difficulty
D. Terms of Debt Relief
E. The "Crisis" Countries
III. U.S. Exposure
A. Government
1. Level and Composition
2. Estimates of Short-falls and Budget Impact
B. Private Lenders
1. General
2. Exposure by Class of Bank
3. Exposure to Major Borrowers
4. Maturity of Lending and Nature of Borrowers
5. U.S. Guarantees of Commercial Bank Claims
6. Exposure Risks
IV. U.S. Policies and Procedures 47
A. Statutory Responsibilities and Congressional Interest 47
B. Delinquent Foreign Debts 50
C. Debt Relief 53
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Table of Contents (cont.)
V. Areas of Policy Concern 56
A. Official Credits 56
1. Lending to Uncreditworthy Countries 56
2. Approaches to Countries with "Prolonged" Debt Crises 56
3. Preferred Status for USG Agencies 59
4. Interest Charges on Rescheduled Debt 60
5. Debt Relief as a Substitute for Aid 61
6. Debt Relief from Non-Traditional Creditors 62
B. Private Capital Flows 64
1. Relationship of Official and Private Debt Relief 64
("Comparability")
2. Recycling
3. Lending to Uncreditworthy Countries
C. The Roles of the International Institutions
1. Participation of MDBs in Official Debt Relief
Operations
2. IMF Link with Paris Club Operations
3. IMF/IBRD Technical Assistance
4. G-77 Pressure for Generalized Debt Relief and
Institutional Reform
Appendix A: Excerpts on causes of debt problems from IMF debt study
of LDC Debt (SM/80 /27 4, 30 December 1980, pp. 3-4)
Appendix B: UNCTAD TDB Res 222(XXXI)
Appendix C. NAC Actions on Foreign Arrears
Appendix D. NAC Action on U.S. Debt Policy
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. The Dimensions of LDC Debt *
The total long- and short-term external debt of all 143 LDCs
amounted to $489 billion at the end of 1979 (IMF estimate). Four-
fifths of the total was long-term debt. The external debt of
the non-oil LDCs grew at an average annual rate of 22% during
the 1970s in nominal terms -- but only 6-9% after adjusting for
inflation.
Debt service payments for the non-oil LDCs grew more rapidly
(28% nominal) during the decade, reflecting a shift toward
borrowing from private lenders that entailed shorter maturities
and higher interest rates. In terms of ratios, the trends were
mixed. The ratio of debt outstanding to exports declined from
126% in 1970 to 109% in 1979, and the ratio of foreign-exchange
reserves to debt outstanding rose from 29% to 43%, suggesting a
lightening of the debt burden. By contrast, the ratio of debt
service to exports rose from 16% to 19%.
Perhaps the most important feature of LDC debt is the
concentration of debt and debt service among a small group of
LDCs which are either oil exporters or major exporters of
manufactures. Ten countries account for 50% of the long-term
debt of all 143 LDCs. These are Brazil, Mexico, Algeria, India,
Indonesia, Korea, Yugoslavia, Argentina, Egypt and Turkey.
The global environment remains unfavorable for countries with
emerging debt problems. While the environment may improve some-
what in 1982, there are enough countries with weak balance of
payments situations to keep the incidence of debt crises at a
relatively high level during the next two to three years.
I. Debt Servicing Difficulties
Three degrees of debt-servicing difficulties can be distin-
guished: mild, serious and critical. Critical difficulties
are indicated by the country's decision to seek debt relief.
An IMF analysis of the causes of debt-servicing difficulties
included several notable points: (a) the difficulties evolved
over a period of several years; (b) the single most important
cause was the adverse impact of fiscal and monetary imbalances
on the external sector, especially through rapid import growth;
and (c) the imbalances were often related to ambitious development
plans or social/political pressures. There is evidence that
another important cause was political instability.
* A separate paper on East European debt is being prepared.
However, most of the information contained in Part II, IV, and V
applies as much to East European (or other) countries as to
LDCs.
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Since World War II the international community has developed
relatively effective ad hoc procedures for assisting countries
experiencing debt-servic ni g difficulties. The IMF plays a central
role in these procedures. The procedures followed by official
creditors, as embodied in the "Paris Club" are fairly standard.
The procedures followed by private creditors (especially commercial
banks) are more informal. Typical terms for official debt-relief
arrangements are consistently different from those for private
arrangements.
The eight most troublesome debt situations at the present
time concern Zaire, Sudan, Senegal, Liberia, Bolivia, Jamaica,
Costa Rica and Tanzania.
I. U.S. Exposure
U.S. Government exposure in the LDCs at the end of 1980
amounted to $40 billion associated with direct credits and $13
billion with guaranteed credits. AID accounts for almost $15
billion of the direct loans. The other major creditor agencies
are Eximbank, DOD, and USDA. USG exposure on direct credits
is heaviest in Israel, Egypt, India, Korea, Pakistan, Brazil, and
Indonesia. (All over $2 billion.)
Arrearages on all post-WWI USG foreign credits at the end of
1980 were close to $1 billion, but 83% of these were "extraordinary
political arrearages" (Cuba, Iran, Vietnam, etc.). LDCs accounted
for about two-thirds of the total arrearages. By contrast,
collections in CY 1980 were $3.9 billion. However, the arrearage
figures do not reflect receipts forgone as a result of debt-relief
arrangements. For FY 1981, these shortfalls have been estimated
at $412 million (excluding Poland). The budgetary impact of
these shortfalls is significant.
The exposure of US banks in non-oil LDCs at the end of 1980
was $111 billion. The nine largest banks accounted for 75% of
this exposure. Just four countries (Mexico, Brazil, Korea and
Argentina) accounted for 50% of the exposure. Sixty percent of
these banks' claims on non-oil LDCs had a remaining maturity of
one year or less.
U.S. policies on extending debt relief to foreign countries
spring from the broad responsibilities of the Executive Branch and
from the legislation establishing specific foreign credit programs.
In a 1970 opinion, the Attorney General concluded that the
Executive Branch has considerable flexibility in modifying loan
repayment terms, especially when the borrowing country is in a
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situation of default or imminent default. There is substantial
Congressional interest in US debt policy which is reflected in
provisions of several authorization and appropriations acts.
Since 1970, the USG has adopted relatively rigorous procedures
for identifying and eliminating delinquent payments. There is a
formal reporting system that supports these procedures. The
principal interagency body concerned with these procedures is the
National Advisory Council (NAC) on International Monetary and
Financial Policies.
In 1978, the NAC adopted a statement of US policy on debt
reorganization. The Treasury Department and the State Department
have a joint responsibility for USG participation in debt-relief
negotiations --in collaboration with the creditor agencies
concerned.
V. Areas of Policy Concern
A. Official Credits
1. On numerous occasions, in recent years, USG agencies
have extended loans to countries already unable to meet their
existing debt-service obligations to the USG.
2. In certain "prolonged" debt crises (Turkey, Zaire,
Sudan and Poland) the traditional approach to debt relief appears
to have been inadequate and perhaps hurt efforts to re-establish
the countries' creditworthiness.
3. On several occasions in recent years, Eximbank and
OPIC have sought and obtained preferred creditor status in debt-
rescheduling operations.
4. In 1981, Eximbank, USDA and DOD changed the basis
for charging interest on debt relief granted for non-concessional
loans. USDA has also proposed charging higher rates on its con-
cessional loans that are rescheduled.
5. In 1981, as an exception to policy, the US extended
debt relief to Pakistan when Pakistan was not in a position of
imminent default. If repeated, this could lead to increased
pressure from LDCs to use debt relief as a form of aid.
6. Non-OECD creditors (e.g., Kuwait, Venezuela and Brazil)
have been invited to participate in Paris Club negotiations
(when they have been important creditors). Generally they have
not participated, and there is some evidence that they have been
treated as preferred creditors by the debtor countries.
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I. The Dimensions of LDC Debt
There is concern in some quarters that the developing
countries as a whole are accumulating too much external debt
and that a number of them will have debt servicing problems
with serious consequences for commercial bank and government
creditors. This section indicates that there is no generalized
LDC debt problem, but that uncertainties in the international
economic outlook call for careful monitoring of the LDC debt
situation. It must be emphasized at the outset that there
are serious deficiencies in the existing debt statistics.
However, the underlying trends are relatively clear.
A. Trends in LDC Debt and Debt Service
According to a "baseline" IMF study, published in 1981,
the total long- and short-term external debt of some 143 LDCs
amounted to $489 billion at the end of 1979 (see Table 1).
Table 1
Total External Debt of Developing Countries, End 1979
(In billions of U.S. dollars)
Long-term debt of 143 developing countries
and territories
as reported by OECD
$391
Short-term debt
85
Use of Fund credit
8
Arrears
5
Total
$489
Breakdown of Long-term Debt
Public (incl. publicly guaranteed)
long-term debt of 87 non-oil LDCs
$239
Private
of
unguaranteed long-term debt
87 non-oil LDCs
60
Public long-term debt of 7
oil-exporting LDCs
49
Private unguaranteed long-term debt of
7 oil-exporting LDCs
11
Total long-term debt of 49 other LDCs
32
$391
Source: IMF, External Indebtedness of Developing Countries,
Occasional Paper 3, May 1981, page 5. This estimate presumably
does not include all outstanding military debt.
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Long-term debt (maturities of over 1 year) comprised almost
four-fifths of the grand total. Arrears amounted to slightly
more than 1 percent. While such comprehensive data is not avail-
able for other years, the trend of LDC debt volume is thought to
be reflected accurately enough by the IMF/IBRD's statistics on
the long-term debt between 1960 and 1979 of 7 major oil exporting
(essentially OPEC) and 87 non-oil LDC borrowers.*
The indebtedness of the non-oil LDCs in nominal terms grew
tremendously during the 1970s, at over 20 percent annually (see
Table 2), resulting in a four-fold increase between 1972 and 1979.
Table 2
Debt of 87 Non-Oil Developing Countries
(In billions of U.S. dollars)
Avg. Rate of
Change (%)
1972-1979
1. Total long-term Debt outstanding (year end)$ 299 22
Official creditors
119
17
Private creditors
180
26
2. Debt Service
$ 51
26
Official creditors
10
19
Private creditors
41
28
3. Public Debt Outstanding (end of year)
$ 239
a. Disbursements
58
25
b. Amortization
24
27
Net capital flow
34
c. I
nterest pay
ment3
13
30
d. D
ebt Service
(b plus c)
(Amortization plus Interest)
37
28
Net financial flow (a less d)
21
Source: IMF, Occasional Paper 3, p. 7
* The IBRD published a new edition of "World Debt Tables" in
December 1981 that contains data on the long-term external debt of
99 LDCs as of the end of 1980. Changes in coverage, definitions
and presentation make it difficult to calculate all the 1980
figures that correspond to the 1979 figures included in the IMF
paper on which this analysis is based. However, for the 1979 figure
of $239 billion for public debt of 87 non-oil LDCs, the corresponding
1980 figure is $282 billion, representing an increase of 18 percent.
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More importantly, there was an even larger (fivefold)
increase in debt service payments (amortization and interest),
reflecting the shortening of average maturites and the rising
average interest rates that occured as a result of the rapid
growth of private borrowing during the decade (see Table 3).
Table 3
Average Terms of Public Debt Commitments for
94 Developing Countries, 1972-79
AVG
1972
1974
1976
1978
1979
72-79
Interest Rate
Official creditors
4.3
4.4
5.5
5.0
5.0
4.8
Private creditors
7.3
9.7
6.8
7.9
11.6
9.0
Average
5.6
7.0
6.8
7.9
9.3
7.1
Maturity
Official creditors
24.2
23.4
22.1
24.8
25.0
23.9
Private creditors
8.9
10.1
8.1
8.9
8.9
8.9
Average
17.6
16.9
14.3
14.5
14.6
15.7
Source: IMF, Occasional Paper 3, p. 9
The IMF found that the single most important factor in the
rapid growth of total long-term debt was inflation. The IMF
analysis indicated that the deflated value of debt increased
an average of only 6-9 percent annually during the 1970's, sub-
stantially lower than the estimated 12 percent average annual
real growth during the 1960s (see Chart 1). With regard to debt
service, however, the analysis indicated that the deflated value
of debt service increased at about 11 percent annually during
both the 1960s and the 1970s.
The IMF also investigated trends in various debt ratios.
As shown in Table 4, these ratios deteriorated very badly during
the 1960s (1970 vs 1960). During the 1972-74 export boom they
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Public External Debt and Debt Service for 87
Non-Oil Developing Countries, 1972-79
Debt Outstanding
Deflated by
import unit values
Deflated by
export unit values
import unit va/L_'s
Source: IMF, Occasional Paper 3, p. 13
r T%s T--- r----An
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improved substantially, but then worsened in the second half of
the decade, with the overall result that the ratios of outstanding
debt to exports and of reserves to outstanding debt improved during
the decade, but the debt service ratio (i.e. the ratio of principal
and interest payments to export earnings) rose substantially.
Debt to Ratios for 87
Non-oil Developing Countries
1960 and 1970-79
(in percent)
1960
1970 1972
1974
1976
1978
1979
Debt outstanding/
exports
49
126
111
85
108
116
109
Reserves/debt
outstanding
54
29
38
44
32
36
43
Debt service/
exports
7
16
15
13
15
18
19
Source: IMF, Occasional Paper 3, page 6
B. Distribution and Composition of LDC Debt
Perhaps the most important aspect of the LDC debt
situation is the concentration of debt and debt service
among a small group of 28 LDCs which are either oil exporters
or major exporters of manufacturers (See Table 5). Among
the 94 LDCs, this group of borrowers accounts for about 70
percent of total debt, about 80 percent of total debt owed
to private lenders, and about 75 percent of total debt service.
Eleven of the twelve largest borrowers are all members of-this
group (See Table 6).
In contrast, the group of about 30 low-income non-oil LDCs
(including Bangladesh, Pakistan and Zaire) accounts for only
about 8 percent of total debt and debt service, and less than
4 percent of debt owed to private lenders.
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Table 5
Outstanding Long-term Debt of 94 Developing Countries by
Income and Creditor Source, End of 1979
(in billions of U.S. dollars)
Official Private
Creditors Creditors
Share in
Total
Total Debt
28 exporters
of oil or
manufactures
$ 81
$ 260
72
(Share in
group total)
(31)
(69)
100
36 other net oil
importers
31
(Share in
group total)
(44)
(56)
30 low-income
countries
23
(Share in
group total)
(75)
(25)
100
Total
$ 134
$ 226
$ 359
Source: IMF, Occasional Paper 3, page 8
Outstanding Debt and Debt Service of Developing Countries
with Largest Outstanding Debt, 1979
(In billion of U.S. dollars)
Debt Outstanding
Debt Service
Brazil
$ 51.8
$ 10.8
Mexico
33.5
7.8
Algeria
17.2
3.1
India
16.9
1.1
Indonesia
16 .0
2.1
Korea
15.8
2.5
Yugoslavia
12.5
2.3
Argentina
12.0
2.4
Egypt
12.0
1.3
Turkey
11.4
1.1
Venezuela
10.8
2.2
Israel
10 .0
.9
* List includes all countries with outstanding debt at end-1979
above $10 billion.
Source: IMF, Occasional Paper 3, p. 9
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The composition of LDC debt changed markedly during the
1970s. Borrowing from the private sector, particularly from
international banks, increased by almost 26 percent annually
(see Table 2). This caused the share of debt owed to private
lenders to increase from 50 percent in 1973 to 58 percent in
1979-80. Because private-sector loans generally have shorter
maturities and higher interest rates than official loans, this
resulted in faster growth for debt service payments than for
total debt outstanding during the 1970s.
C. The Near-term Outlook
The 1980 IMF study of LDC debt concludes that most
debt-servicing difficulties have their origin in inappropriate
domestic economic policies. Nevertheless, the global economic
environment is also relevant because it can serve to precipitate
latent difficulties or to mask them. While there is no simple
or direct link between debt crises and oil prices, for example,
it is possible to view the rash of rescheduling operations in
the 1978-81 period as a fallout of the initial round of oil-price
increases in 1973-4 and the second "shock" in 1979-80. In some
cases, the debtor country's difficulties stemmed from its
inability or unwillingness to adjust domestic policies to changes
in the external environment.
Projections for the near term indicate that it will probably
take longer for the non-oil LDCs to adjust to the 1979-80 oil
price increases than it took with respect to the 1973-74 oil
price increases. In 1980, the non-oil LDCs had a current
account deficit, excluding official transfers, of $80 billion,
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representing a $24 billion increase over 1979. The deficit is
expected to rise to above $90 billion in 1981 and to remain at
roughly the same that level in 1982. In contrast, the non-oil
LDCs' deficit increased substantially in both 1974 and 1975, but
declined significantly in 1976 and 1977.
The financing situation for non-oil LDCs worsened drama-
tically in 1980 and was reminiscent of the situation that
existed in 1975. A significant number of countries resorted
to accumulation of external payments arrears and/or debt
relief from external creditors. For the non-oil LDCs as a group,
there was a virtual cessation of reserve accumulation, short-term
credits increased sharply as a proportion of their total external
borrowing, and the terms of long-term borrowing in international
capital markets hardened.
In 1981, the financing situation continued to be difficult.
A larger number of countries experienced extreme balance of
payments difficulties. For the second year in a row, reserves
fell as a percentage of imports for the non-oil LDCs as a group.
They were able to finance their large aggregate deficit largely
because of stepped-up IMF lending and the readiness of banks to
continue to lend substantial amounts. The financing outlook is
expected to remain strained in 1982. A major uncertainty in
1982 is the impact of the U.S. recession on world trade.
The evolving debt situation for the non-oil LDCs will require
careful monitoring because of: (1) the rising trend in the
ratio of debt service to exports since the mid-1970s; (2) the
poor results from LDC adjustment efforts in 1980-81; and (3) the
low ratio of foreign exchange reserves to imports and to debt
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Chart 2 Non-Oil Developing Countries: Ratios of
Debt to Exports of Goods and Services and to
Domestic Output, 1974-80
(In per cent)
50
40
RATIO OF DEBT TO EXPORTS
OF GOODS AND SERVICES
Other countries'
1 I
Ma/or exporters of manufactures
I I I
50
40
Chart 3 Non-Oil Developing Countries: External
Debt Service Payments, 1973-80
(In per cent)
' Consisting of middle-income countries that, in general, ex-
port mainly primary products.
' Annual interest payments as percentage of annual exports of
goods and services.
' Consisting of middle-income countries that, in general,
export mainly primary products.
Annual amortization payments as percentage of annual ex-
ports of goods and services.
Source: IMF, Annual Report 1981, page 35.
7 TMTmt'r rI t't'T!'T TT T70 L~
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outstanding at the end of 1981. In addition, some oil-exporting
LDCs may encounter debt-servicing difficulties if world oil
prices remain at their current level or fall.
In general, the global environment remains unfavorable
for countries with emerging debt problems. However, commodity
prices should begin recovering in 1982 from cyclical lows, there
should be relative stability in oil prices, and interest rates
on international borrowing should remain below the peaks of
1981. Furthermore, it appears that many countries with weak B/P
situations are beginning to implement more effective adjustment
policies partly in response to the tougher conditionality asso-
ciated with IMF arrangements. These considerations suggest
that the incidence of new countries experiencing critical diff-
iculties may slack off in the next few years. Nevertheless,
there are enough countries with weak B/P situations to keep the
incidence of crises at a relatively high level during the next
2-3 years. The most vulnerable countries would appear to include
Israel, Egypt, Morocco, Costa Rica, Dominican Republic, Ghana,
Zambia, and Tanzania.
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II. Debt-Servicing Difficulties
A. Types of Debt-Servicing Difficulties
Debt-servicing difficulties among the LDCs since 1970
have had different causes and have ranged from minor to severe.
The various cases can be crudely divided into three categories
in ascending order of their seriousness. Typically, countries
with "critical" debt-servicing difficulties have passed through
the "mild" and "serious" stages.
1. Mild Difficulties
In these cases, the only symptom of difficulty is an
"abnormal" level of arrears. It must be recognized that, for
administrative reasons alone, virtually every country has some
occasional external payment arrears. These can be considered
"normal" if they affect different creditors on a random basis
and are cleared up quickly when they are brought to the attention
of the borrower. An "abnormal" level of arrears is indicated by
the existence of a "queue" for borrowers seeking foreign exchange,
or a non-random pattern of arrears to lenders in a particular
country or category.
When an "abnormal" level of arrears exists, these are
considered as payments restrictions within the meaning of Article
VIII of the IMF's Articles of Agreement, and must be reported to
the IMF. In the 1981 report of the IMF, Exchange Arrangements
and Exchange Restrictions, 26 countries were identified as having
arrears (within the meaning of Article VIII) at the end of 1980.
Of these, five countries were experiencing mild debt difficulties
and the others more serious difficulties. (See Table 7)
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Table 7
Countries with Article VIII Arrears
at the End of 1980, by Category
1. Mild Debt-Servicing Difficulties (5)
Chad
Congo, P.R.
The Gambia
Guinea
Guinea-Bissau
2. Serious Debt-Servicing Difficulties (8)
Costa Rica
Dominican Republic
Ghana
Guyana
Mauritius
Somalia
Tanzania
Zambia
3. Critical Debt-Servicing Difficulties (11)*
Bolivia (P)
Central African Republic (0)
Jamaica (P)
Madagascar (0)
Nicaragua (P + 0)
Senegal (P + 0)
Sierra Leone (0)
Sudan (P + 0)
Togo (P + 0)
Uganda (0)
Zaire (P + 0)
* P = Debt relief from private creditors in 1980-81
0 = Debt relief from official creditors in 1980-81
Treasury/IDN
5 November 1981
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Generally, a country experiencing "mild" difficulties is able
to overcome these difficulties without policy.changes or with rela-
tively small changes. Moreover, such a country does not usually
seek an upper credit tranche arrangement with the IMF.
2. Serious Difficulties
The essential difference between mild and serious
difficulties lies in the measures necessary to overcome the
difficulties. Generally, a country experiencing serious
difficulties has a deteriorating balance of payments situation.
Its current account deficit has reached an unsustainable level,
or trends are clearly moving the external accounts in that direc-
tion. Private lenders become reluctant to provide new financing,
and capital flight may be evident. In these circumstances, it
is necessary for the country to undertake substantial economic
policy reforms either to reverse trends or to reduce the deficit.
Symptoms of serious difficulties include long queues for
foreign exchange, rising spreads on borrowing in international
capital markets, drawdown of foreign exchange reserves, increased
recourse to short-term lending, and efforts to obtain extraordinary
B/P financing from official creditors. Countries with serious
payment difficulties usually seek an upper credit tranche arrang-
ement with the IMF.
Eight countries with Article VIII arrears at the end of 1980
fell in this category. (Table 7.)
3. Critical Difficulties
The essential difference between serious and critical
difficulties is the debtor country's decision to seek debt relief.
Generally, countries with critical difficulties are unable to
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meet payment obligations to external creditors even after
implementing major economic reforms. In some cases, debt relief
from private creditors only is sought. In others, debt relief
from official creditors only is sought. In most cases, however,
relief is sought from both private and official creditors.
In virtually every case where debt relief is obtained, the
creditors condition their relief on the conclusion of an upper
credit tranche arrangement with the IMF. Eleven countries with
Article VIII arrears at the end of 1980 fell in this category.
(Table 7.)
B. Causes of Debt-Servicing Difficulties
It is hard to improve on the analysis of causes of debt-
servicing difficulties provided by the IMF staff a year ago.
(SM/80/274, 30 December 1980). This analysis was based on the
experience of eleven countries that sought and received debt
relief through multilateral negotiations with official creditors
during the period 1975-1980.* The Fund staff's description of
this analysis is contained in Appendix A. The main points of the
analysis are the following:
-- Debt-servicing difficulties evolved over a period of several
years and could not be explained by developments immediately
preceding the debt-relief negotiations.
-- The single most important cause of payments difficulty was
the impact of fiscal and monetary imbalances on the external
sector.
-- These imbalances created demand pressure that was reflected
in rapid import growth. The sharp increase in world oil
* Chile, India, Zaire, Sierra Leone, Turkey, Gabon, Peru, Togo,
Sudan, Pakistan and Liberia.
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prices was also a major determinent of higher imports.
The demand pressures nearly always could be attributed to
domestic factors and particularly to expansionary budgetary
and financial policies. Budgetary imbalances were often
related to ambitious development plans or social and political
pressure.
-- In most cases, the difficulties were exacerbated by declining,
stagnating, or strongly fluctuating exports.
-- Typically, the countries attempted to finance current account
deficits through external credits with short maturities and
commercial interest rates.
-- Inappropriate debt management was a primary cause in some cases.
-- Sharp declines or outflows of private capital were a major
factor in some cases.
Presumably, for "diplomatic" reasons, the Fund paper glosses
over political instability as a cause of debt-servicing difficulties.
In at least five of the eleven cases studied by the IMF, the
governments in power believed that they did not have a sufficient
margin of power to implement economic stabilization measures in
the face of their domestic opposition.
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C. Procedures for Assisting Countries in Difficulty
Since World War II, the international community has
developed fairly simple and mostly ad hoc, procedures for
assisting countries experiencing debt-servicing difficulties.
The central role is played by the IMF -- which is involved at
every level of difficulty.
In the case of countries with mild difficulties, the IMF
provides an indirect "early warning system" through its annual
reports on Exchange Arrangements and Exchange Restrictions.
More importantly, in its annual Article IV consultations with
member countries, the IMF staff has a responsibility to alert
the member to an emerging debt problem and to suggest procedures
for avoiding the problem.
For countries experiencing serious difficulties, the IMF
assists them in formulating an economic program that will correct
the underlying imbalances, and provides temporary balance of pay-
ments (B/P) financing that allows them to avoid a sharp contraction
in economic activity while their program is taking hold.
For countries with critical difficulties, foreign creditors
as well as the debtor country rely heavily on the Fund. The
debtor country relies on the Fund for the normal B/P financing
and advice. In addition, it can obtain assistance from the
Fund staff in preparing for negotiations with its foreign
creditors. The foreign creditors rely on the Fund to ensure
that the debt relief they provide is not "wasted". This is
accomplished by insisting on an upper credit tranche arrangement
with the IMF as a condition for negotiating a debt relief
arrangement, which entails having the IMF staff monitor perfor-
mance while the debtor country is benefitting from debt relief.
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The IBRD plays an important but more limited role. For
many years, the World Bank has required that its borrowers provide
to the Bank detailed information on their external indebtedness.
The "Debtor Reporting System" which has evolved is the starting
point for most analytical work done on LDC debt, both for individual
countries and groups of countries. In addition, the IBRD has
assisted countries in establishing or improving debt management
systems.
In crisis situations, when debt relief is necessary to
avoid default, parallel procedures have evolved for arranging
debt relief from official creditors on the one hand and private
creditors on the other. Each are described briefly below.
1. Debt Relief from Official Creditors
There are no treaties governing international debt-
relief operations, nor are there any formal "rules" that have
been adopted by creditor countries for multilateral "creditor
club" negotiations. The current approach has evolved from a
multilateral operation in 1956 involving Argentina -- in effect
a "common law" approach to this form of financial assistance.
However, in September 1980, the Trade and Development Board
(TDB) of the United Nations Conference on Trade and Development
(UNCTAD) adopted a resolution on "Debt and Development Problems
of Developing Countries" that provides some formal recognition
of the current approach, while also giving some recognition of
possible alternative approaches. This resolution is contained
in Appendix B.
The procedures that are generally followed at the present
time (as embodied in the "Paris Club") include the elements
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listed below.*
1. Consideration of debt relief must be initiated by the debtor
country. (Normally this is accomplished by a letter
addressed to the French Treasury requesting a meeting with
major creditor countries.)
2. Debt relief is only granted to countries in a situation of
default or imminent default.
3. Prior to negotiations, the debtor country must undertake an
economic program designed to re-establish its creditworthiness.
(A program supported by an upper credit tranche arrangement
with the IMF typically allows debtor and creditor countries
to avoid direct negotiations over the content of an acceptable
program.)
4. The debts subject to negotiation are those arising from
credits extended, guaranteed or insured by the creditor-country
governments. (Unguaranteed credits from commercial banks
and other private lenders are dealt with separately.
Credits from the IBRD and other multilateral institutions
are exempt from rescheduling by tradition.)
5. The debtor country must agree to provide most-favored-nation
treatment tc governments providing debt relief. (This
means that COMECON or LDC creditors end up giving debt relief
on the same terms as the western creditors agree to.)
6. The debtor country must seek to obtain "comparable treatment"
from other categories of creditors, e.g. commercial banks.
* While the majority of debt reschedulings have been negotiated
in the "Paris Club" forum, there have been exceptions, notably
negotiations in the OECD Consortium for Turkey and IBRD Consortia
for Pakistan and India. In the cases of India (1968-72) and
Pakistan (1981) debt relief was granted as a substitute for
aid since these countries were not encountering debt-servicing
difficulties. In the case of Pakistan (1981), a presidential
decision was made to extend debt relief to Pakistan as an
exception to U.S. policy. There were also unusual aspects of the
1981 del' ' ' ' ' - - - . 11 Poland
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(This is usually accomplished in parallel arrangements nego-
tiated with a bank steering committee sometimes referred to
as the "London Club".)
7. The multilateral debt relief arrangement that is negotiated
is ad referendum in nature, and must be implemented by
separate bilateral agreements with each creditor country.
(In the case of the U.S., the bilateral agreement is followed
by separate agreements with each creditor agency.)
It should be stressed that the ad hoc nature of these nego-
tiations is especially significant to the U.S. and most other
creditor countries. In various international negotiations since
1976 (mostly in the North/South context), the U.S. has success-
fully defended the principle of a case-by-case approach to debt
relief. These efforts have included resistance to any institution-
alization of the "Paris Club". The U.S., in principle, is prepared
to participate in negotiations chaired by any creditor country
in any location, and we have been adamantly opposed to the
establishment of an international secretariat for the "Paris
Club". The rationale underlying this position is that the existence
of a permanent institution responsible for debt-relief operations
will encoura,?e debtor countries to seek debt relief as a normal
form of financial assistance. The debt relief process must
remain unattractive (by being somewhat unpredictable and painful)
in order to maintain discipline in the financial system and
preserve respect for financial contracts.
The Government of France has a standing offer to host
debt-relief negotiations in Paris with the understanding that
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it would chair these negotiations. The French Government bears
all the administrative costs associated with the negotiations
(conference facilities, translating services, compilation and
distribution of data, and preparation of documents), and in
return achieves some influence over the negotiating process.
The current "Chairman" of the Paris Club is Michel Camdessus,
Director of the French Treasury (a rank equivalent to the U.S.
Treasury Department's Assistant Secretary for International
Affairs). Mr. Camdessus has been a polished and effective
chairman, although there have been occasions when he appeared
to use his position to produce an outcome biased toward French
interests. In international negotiations relating to procedures
for debt-relief operations, the French have also appeared
willing to compromise creditor-country objectives in order to
obtain developing-country acceptance of the "Paris Club" as a
legitimate international financial institution.
2. Debt Relief from Private Creditors
Debt-relief arrangements with private creditors
have taken many forms including formal rescheduling arrangements,
programs for eliminating arrears, compensation in the form of
term deposits, and settlements in local currency. The only
form of arrangement that was studied by the IMF staff in its
baseline report last year was the "London Club" arrangement
involving commercial banks -- which is also the financially
most significant form of arrangement.
For most LDCs, there are generally many foreign banks that have
extended loans, with head offices in a number of different
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countries. When the borrower fails to make payments in a timely
manner, the banks form a "steering committee", usually consisting
of the one or two banks with the heaviest exposure from each
country. When the steering committee has reached agreement in
principle with the debtor country, all the banks must approve
of the agreement before it goes into effect. Because of the
large number of banks involved these negotiations can become
quite protracted.
In the typical case, the bank debt being rescheduled is
long-term debt. However, in some cases, e.g. Turkey (1979),
short-term lines of credit and deposits also have been included.
D. Terms of Debt Relief
1. Official Creditors
The terms of debt-relief arrangements with official
creditors are arrived at in an ad hoc manner, but with close
attention to precedents. Conceptually, creditor countries have
resisted the notion that the terms of relief must be set to
close a particular financial gap -- because this would imply an
obligation on the part of creditors to help the debtor country
achieve a pre-determined level of economic activity (growth
rate). Instead, debt relief is viewed as one of several
distinct forms of extraordinary financing available to fill an
external resource gap (others include IMF credit, bilateral
balance-of-payment loans, and short-term financing from commercial
banks). Also, the size of this gap is not a given but depends on
internal policies adopted by the country and on external factors
(like commodity prices) over which it has no control. The
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terms of debt relief, then, are set as hard as possible consistent
with the country's efforts to re-establish its creditworthiness.
However, some consideration is given to the level of development
of the debtor country. A relatively poor and less developed
country may be offered more generous terms than a relatively
wealthy and advanced country with a similar debt problem.
It is also essential to understand that each debt-relief
arrangement involves a package of terms. Because there are
financial trade-offs among terms, it is possible to construct
two packages that are financially equivalent (in terms of their
present value), but appear very different. For example, one
package may include a higher percentage of payments rescheduled,
but the repayment period would be shorter. The maximum terms
granted in recent reschedulings for each of the major variables
are described below. Any package including more generous
terms for any of these variables would represent a precedent
that creditors could have difficulty avoiding in future
operations.
a. Consolidation Period: one-plus-one-plus-one
(Turkey, 1980)
In the typical official operation, the debt
relief granted is limited to payments falling due in a specific
period (the consolidation period). Official creditors prefer
to limit the consolidation period to one year. However, in
recent years, creditors have agreed to provide a second (or
third) year of relief on the same terms on the condition that
the debtor country remains eligible to draw under an appropriate
standby arrangement with the IMF.
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b. Payments Covered: principal plus interest
(Liberia, 1980; etc.)
Creditors prefer to reschedule principal
payments only (as is the custom with commercial banks). However,
the 1978 Peru operation was the only official operation in
recent years that did not also include interest payments.
c. Percent of Payments Consolidated: 90 percent
(Zaire, 1979;
Turkey, 1980)
The lowest percentage of payments consolidated
in recent years was 70 percent (Chile, 1975).
d. Grace Period: 5 years (Sierra Leone, 1980)
Repayment Period: 11 years -- including grace
(Sierra Leone, 1980)
The shortest grace and repayment periods
offered in recent years were 3 and 7 1/2 respectively (Peru,
1978).
e. Non-Consolidated Debt: repaid over the grace
period of 5 years
(Turkey, 1980)
At the least generous extreme, non-consolidated
debt is paid according to the original contracts. It should be
understood that stretching out non-consolidated debt over the
grace period is financially equivalent to rescheduling 100
percent of the debt falling due during the consolidation period.
f. Interest Rate: negotiated bilaterally
Debtor countries have invariably requested
concessional interest rates on the amounts rescheduled. Creditors
have been adamantly opposed to this for two reasons: (a)
interest rate structures vary tremendously among creditor
countries, so that any given rate would represent a concessional
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rate for some and an excessive rate for others; and (b)
implementation would be complicated because credits from
different agencies of the same creditor country carry widely
different interest rates. Therefore, the general practice is
to charge interest on the rescheduled amounts on the same basis
as the original contracts. For example, when AID and PL480
loans are rescheduled, the U.S. charges 2-4 percent on the amounts
rescheduled. Until recently, when Eximbank, CCC or military
credits were rescheduled, the U.S. charged the current lending
rate for new loans of equivalent maturity. (This could be a
higher or lower rate compared to the weighted average rate of
the original contracts.) In mid-1981, largely under the influence
of the Poland debt-relief arrangement, Eximbank switched to a
policy of charging its current borrowing rate on rescheduling
credits instead of its (subsidized) lending rate. This had
the effect of moving the rate from the 9-10 percent range to
the 13-15 percent range. At the same time, it decided to make
the rate variable at six month intervals. Similar actions
have been taken by USDA and DOD in rescheduling their non-
concessional credits.
2. Private Creditors
In some arrangements, commercial banks have rescheduled
amortization payments falling due within a specified period --
usually not more than a year. In other arrangements, banks have
reorganized the entire stock of outstanding debt owed by the
debtor country. This second practice makes sense when the
maturity structure of the stock is heavily skewed toward the
near term. With two exceptions, the debt relief offered by banks
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has been limited to principal, and the debtor country has been
expected to remain current on all interest due. The first exception
is Nicaragua where the banks agreed (in 1980) to capitalize interest
due above a 7 percent "cap". The second exception is Sudan where
the banks agreed (in 1981) to capitalize roughly $100 million
out of about $200 million in overdue interest payments.
Rescheduled bank debt has been repayable in a maximum of
ten years including five years of grace (Zaire, 1979). However,
the repayment terms in the case of Turkey were later renegotiated
to extend the repayment period to twelve years. With respect to
interest charged on rescheduled bank debt, the banks have generally
charged a high spread over LIBOR that is sometimes greater than
the spread on the original loans.
E. The "Crisis" Countries
Capsule descriptions of the most troublesome debt
situations are provided below, beginning with the most intract-
able cases. Descriptions of the situations in Costa Rica and
Tanzania are also provided, even though they have not yet reached
the crisis stage, because they are rapidly approaching this
stage. (Poland and Turkey are omitted because they are not LDCs.)
1. Zaire
Economic mismanagement is at the root of Zaire's
difficulties. Debt relief has been provided by official
creditors every year since 1976. A two-year ("one-plus-one")
agreement was negotiated last July which will probably have to
be renegotiated before the end of 1982. Commercial banks
rescheduled most of their exposure in Zaire in 1979.
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2. Sudan.
The Sudan mounted an over-ambitious development
program in the mid-1970's based on expected massive external
aid flows which failed to materialize. A two-year debt relief
arrangement with official creditors negotiated in 1979 has
expired, and a new one will be negotiated as soon as Sudan
concludes a new standby arrangement with the IMF -- tentatively
scheduled for the first week in February, 1982. Official
creditors will probably be asked to reschedule previously-
rescheduled debt. Sudan signed a debt relief arrangement with
commercial banks on December 30, 1981, which will go into
effect at the end of March, 1982, if Sudan's arrangement with
the IMF has been approved and the GOS is able to make a down-
payment of about $106 million.
3. Senegal
Drought in two successive years had a disastrous
impact on Senegal's export earnings from groundnuts. Debt-relief
extended by official creditors in October 1981 should enable
Senegal to get back on its feet assuming good weather and
bountiful harvests in the years ahead. Debt-relief negotiations
are in progress between the GOS and its commercial bank creditors.
4. Liberia
Liberia has been experiencing severe cash flow
problems since a coup in April 1980 -- complicated by the fact
that the currency of Liberia is the U.S. dollar. Financial
collapse has barely been averted by substantial budgetary
support from the U.S., IMF credit, and debt relief from official
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creditors, beginning in mid-1980 and extending through mid-1983.
Negotiations with commercial banks for debt relief have recently
begun.
5. Bolivia
Chronic mismanagement of the state enterprises along
with expansionary budget policies and inadequate revenue mechanisms
are largely responsible for Bolivia's external debt crisis. The
military government which assumed power in July 1980 has compounded
the economic and financial difficulties. Interim agreement was
reached in April 1981 on a renegotiation of debt with commercial
creditors. A third 90-day waiver was granted on the $460 million
of rescheduled external commercial debt on January 15, 1982,
despite the lack of a Fund program. It is unclear when agreement
on a Fund program will be concluded.
6. Jamaica
More than half a decade of heavy reliance on foreign
financial resources has left Jamaica with a sizeable foreign
public debt which stood at $1.2 billion at the end of 1980. The
debt service ratio in 1980 was 18 percent before refinancing
operations and was reduced to 12 percent after a commercial debt
rescheduling. A three-year $580 million EFF was approved in
April 1981. The GOJ has occasionally mentioned the possibility
of seeking debt relief from official creditors, but its debt-
service obligations to those creditors are relatively small.
7. Costa Rica.
Persistent economic mismanagement, primarily overly
expansionary fiscal policies and inappropriate exchange rate
policies, has lead to an unsustainable balance of payments
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situation. The government of Costa Rica is currently over $125
million in arrears to private creditors. The GOCR was out of
compliance with its three-year $330 million EFF, approved in
June 1981, after the first quarterly period. Negotiations
which began in November on a new standby program have been pro-
gressing slowly. It seems likely that there will be no new
IMF program until the Spring.
8. Tanzania
In relative terms, Tanzania has by far the worst
arrearage situation in the world. Restructuring of its debt
has been delayed by the government's inability or unwillingness
to adopt the economic reforms necessary to qualify for B/P
support from the IMF.
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III. U.S. Exposure
A. Government
1. Level and Composition
U.S. Government exposure in the LDCs at the end of
1980 amounted to approximately $39.6 billion in outstanding
principal indebtedness from post-World War II USG credits plus
$13.1 billion of USG contingent liabilities from its foreign
insurance and guarantee programs (see Table 8). $1.5 billion
was owed by private-sector obligors and the balance by foreign
governments. Virtually all of the indebtedness from credits,
or $39.0 billion, was owed on account of long-term credits (those
with maturities of more than 1 year). Of the remainder, $180
million resulted from short-term credits (maturities of 90 days
to 1 year) and $414 million from accounts receivable (maturities
of less than 90 days).
Most of the long-term foreign debt owed to the U.S. Government
pertains to development assistance, military aid, and export
credit programs undertaken during the past 30 years. Almost $15
billion of the indebtedness was contracted for under the Foreign
Assistance Act (and predecessor legislation); about $7.5 billion
under Public Law 480 programs; about $7.6 billion under the Arms
Export Control Act; $8.4 billion under the Export-Import Bank
Act; and $0.5 billion under the the Commodity Credit Corporation
Charter Act.
With regard to the long-term debt, the largest country
debtors to the U.S. Government in the developing country category
were: Israel ($6.4 billion); Egypt ($3.7 billion); India ($3.3
billion); Korea (3.0 billion); Pakistan ($2.6 billion); Brazil
($2.3 billion); Indonesia ($2.2 billion); Taiwan ($1.5 billion);
and Mexico ($0.9 billion).
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Table 8
U.S. Government Exposure in LDCs
on Direct Long-term Credits
and Guarantee Programs
as of 31 December 1980
($ millions)
Outstanding
Long-term
Principal
Indebtedness
on USG Foreign
Credits
Export Import Bank
$ 8,450
USG
Contingent
Liabilities
on Foreign
Insurance and
Guarantees
AID
Foreign Assistance
and Related Acts (incl. OPIC)
DOD
Foreign Military Sales
7,574
USDA
8,057
649
PL-480 Dollar Loans
6 , 8 47
0
PL-480 Foreign Currency Loans
662
0
CCC Export Credits and Guarantees
548
6 49
TREASURY
77
Lend-Lease, Surplus
Property and Other
War Accounts
Other Credits
TOTAL $ 38,962
* not repayable in US Dollars
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Treasury/IDN
19 November 1981
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The $13 billion of USG contingent liabilities on its foreign
insurance and guarantees of private credits at the end of 1980
were largely under Export Import Bank programs ($7 billion) and
OPIC investments support programs ($5 billion). (OPIC insurance
on equity investments in LDCs are not included.) The major LDCs
involved were: Korea ($1.6 billion), Israel ($1.1 billion),
Mexico ($1.0 billion), Brazil ($.7 billion), Taiwan ($.7 billion),
Philippines ($.6 billion, Venezuela ($.6 billion) and Argentina
($.5 billion.)
Total arrearages on all post World War I debt owed to the
U. S. Government amounted to about $1 billion at the end of
1980.* (Table 9 classifies arrearages by the type of collection
problem encountered.) Almost two-thirds of these arrearages were
owed by the LDCs; about $522 million were delinquent principal
and interest payments on long-term credits, and another $119
million were delinquent payments on short-term credits and accounts
receivable. While these arrearages constitute a very minor
portion of total foreign debt service payments owed to, and
being collected by USG agencies, they understate the loss of
receipts to the US by omitting certain debt-service payments
that have been rescheduled.
2. Estimates of Short-falls and Budget Impact
Table 10 lists estimated shortfalls in scheduled
receipts during FY 1981 in connection with debt-rescheduling
operations or arrears. The shortfalls totaled $412 million,
dominated by the amount for Turkey ($280 million).
* In calendar year 1980, the United States collected from the
LDCs estimated repayments of about $3.9 billion of principal and
interest.due on long-term credits.
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Table 9
WIURAGCS Of 10 05 Molt DAYS ON fOI[IC-+ LOASS AMD CR[DITI
or U.S. rCVERNKENT ACD4~IM
(In 6 Millions)
Dec. 31, 1910
$opt. 30, 1910
2.
RITRAORDIMAMY POLITICAL URLARAC[S
A. n Ara, of whichi
rna ((Inapeclfied) ~/ 91.3
$1.1
S.
Cuba 77.6
77.2
3.
Cs?choolewakia ?.2
8.2
4.
Iran 382.0
3)0.3
S.
Kampuchea 24.0
21.7
6.
Viet raa, Se public of 11.3
19.2
S. Short-Ara and Account. bceivablt
r c
1. China (Olnapecified) 1/ 30.2
20.2
3. Cuba 3.0
3.0
3. Iran 3.3
1.9
4. iaapuchea and Viet Des,
Kepublic of .2
.2
S. Unresolved Soren Nor
Logistical support 199.7
199.7
TOTAL POLITICAL $29.2
772.7
(Percent of Overall total) (831)
(811)
II.
MAJOR LRRIARAGtB - Public long-term,
69 r e +
1. turkey 2/ 25.9
33.4
3. Saito 17 31.3
37.)
TOTAL MAJOR ARRCARAGts 60.2
10.7
III .
rcen o Overall Total) (61)
OTB t1< AR.Rf.1RA G u
(II)
A. Pubiic,
T:Tnq-Teri 46.1
42.7
2. Short-Ara and Accounts
3b ceivable, of chichi 44.3
65.6
financing Military Sales,
Logistical Support, M.A.A.G. 16.6
Postal Service 16.9
3e.S
21.9
Ot.her 10.6
29.2
I. Private
1.Long-Tara 37.0
16.3
2.
Short-Are and Accounts
Rtctivable
2.9
1.6
TOTAL OTHER APRCARACLS
11"
I7F '1
ill) ~~llt)
(1001) (1001)
? Potosi lacludts world war I debt. It.,. may not add to totals due
to rounding.
1/ 112 fare to obligations incurred by China prior to 1919 whose status
is curren'ly under review. Was not include 650.1 million of
principal Ind assets left on the Asian continent which were financed
by Deport-Import bank and on which asport-Import bas deferred action.-
Includes amounts due AID, PLr16o, treasury and IIIMIAMB under
? bilateral rescheduling ogreeaent signed October 24, 1980.
Once implementing agreements have been concluded these
amounts will mo longer be reported as being in arrears.
z/ Includes ?aounto due on AID programs and to other O.S.C. agencies
under a bilateral rescheduling agreement signed on July 28, 1910
between the O.S.G. and faire. Once implementing agreements
have been concluded by the agencies concerned, these aaounta
will m0 longer be reported as being in arrears.
Daezeei 0.s. waasury Department. March 30, 1981
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TABLE 10
DEBT RELIEF ANTICIPATED
and SHORTFALLS IN RECEIPTS
in FY 1981*
($ million)
A. Rescheduling Cases
Turkey
$280
Zaire
65
Pakistan
53
Liberia
4
Sudan
4
Uganda
3
Senegal
2
Togo
1
Central African Republic
0.5
$412.5
B.
Arrearage Cases
Iran
Khmer Republic
Vietnam
Nicaragua
2
~
$84
Total (A & B)
$496.5
* Includes claims paid on guaranteed credits. Amounts are gross
amounts falling due during FY 1981 that were rescheduled. Rescheduled
arrears and interest received on rescheduled amounts are not shown.
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(This list omits Poland which was scheduled to pay USG agencies
about $527 million in FY 1981.)
Scheduled payments of interest and principal from LDCs to
USG creditor agencies on direct credits during FY 1982 amount to
about $6 billion. In Table 11 we have divided all countries
with scheduled payments to the USG into three categories based
on the likelihood of interruption in payments to the US. For
the first two categories, estimated FY 1982 repayments to private
lenders guaranteed by U.S. agencies (i.e. contingent liabilities)
are also shown.
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Table 11
U.S. GOVERNMENT EXPOSURE IN LDCs ON ITS DIRECT CREDIT
AND GUARANTEE PROGRAMS - By Country and Risk Category
($ millions)
Outstanding
FY 1982
USG
FY 1982
Long-term
Debt
Contingent
Debt
Principal
Service
Liabilities,
Service
Indebtedness
on
on Foreign
on
on USG Foreign
Direct
Insurance and
Contingent
Credits
Credits
Guarantees
Liabilities
(12/31/80)
(12/31/80)
Category A: Countries with debt relief arrangements concluded or under negotiation.
Zaire
660
58
202
48
Iran
400
52
97
9
Bolivia
335
23
34
5
Nicaragua
190
12
32
3
Jamaica
137
22
407
39
Liberia
110
6
29
4
Costa Rica
104
10
107
21
Sudan
102
7
101
18
Guinea
94
6
156
14
Sierra Leone
29
2
69
6
Senegal
21
5
11
2
Uganda
12
1
1
0
Madagascar
6
0
25
7
Central African Rep.
3
1
*
0
Togo
2
0
4
1
TOTALS (15 countries)
2,205
205
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(Table 11 continuation)
Category B: Countries with "weak" B/P situations and indebtedness above $50
million.
Israel
6382
829
1050
361
Egypt
3748
300
275
52
India
3340
171
152
12
Pakistan
2650
115
46
4
Brazil
2297
297
726
170
Mexico
922
121
1012
274
Bangladesh
840
19
6
0
Chile
729
76
277
22
Philippines
720
52
637
169
Morocco
616
80
39
9
Peru
463
65
273
109
Thailand
418
48
177
83
Jordan
404
128
22
4
Dominican Republic
330
18
378
61
Sri Lanka
285
10
14
5
Khmer Republic
209
0
0
0
Ghana
205
21
99
8
Syria
192
10
5
0
Panama
190
17
203
25
Zambia
172
11
105
19
Kenya
151
18
84
10
Honduras
135
10
101
21
Guatemala
130
8
79
12
Ethiopia
130
7
2
3
Afghanistan
128
4
*
0
El Salvador
108
6
52
4
Tanzania
104
3
10
1
Vietnam
100
2
13
0
Lebanon
95
29
15
1
Ivory Coast
86
24
94
17
Haiti
78
4
13
1
Uruguay
77
7
20
6
Guyana
70
5
36
9
Total (33 countries) 26 ,50 4 2,515
6,015
1,472
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LSS 111LL Vl L S #J.flL V/1J
(Table 11 continuation)
Category C: Countries with "strong" balance of payments positions' and
indebtedness to the USG above $50 million.
Korea
2997
1644
Indonesia
2240
351
Taiwan
1522
651
Colombia
866
158
Algeria
701
267
Tunisia
418
47
Argentina
292
5 36
Singapore
245
39
Venezuela
182
576
Ecuador
151
210
Trinidad and Tobago
132
176
Nigeria
79
77
Malaysia
65
92
Cameroon
62
27
Paraguay
55
22
Hong Kong
40
16
Total (16 countries) 10 ,0 47
4,889
Category D: Countries with USG obligations below $50 million
as of December 31, 1980
(34 countries)
206
845
TOTAL A, B, C, D
38,962
13,024
(98 non-OPEC &
non-OECD countries)
* less than $500,000
Treasury/IDN
2 December 1981
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B. Private Lenders
1. General
This section describes exposure of U.S. banks in
non-oil developing countries, which totalled $111 billion as of
the end of 1980. U.S. non-banks have relatively few claims on
LDCs; after exclusion of financial claims on the Bahamas and
British West Indies, where U.S. firms have financing and "captive
insurer" subsidiaries, the total is under $7 billion. These
non-bank claims are primarily trade receivables; they exclude
direct investments, which are outside the scope of this study
as they represent equity rather than debt claims.
The following description of U.S. bank exposure in non-oil
LDCs is drawn from the semi-annual Country Exposure Lending Survey
compiled from reports filed with the Comptroller of the Currency,
the Federal Reserve and the Federal Deposit Insurance Corporation.*
The Survey covers large U.S. chartered banks having significant
foreign banking operations (about 150 out of 14,000 commercial
banks) and consolidates claims of the head office in the United
States and those booked at overseas offices. It is limited to
"cross border, non-local currency" claims, thus excluding any
lending by an overseas office located in a LDC to residents of
that country which is denominated in that country's currency.
Such local currency loans are not considered to be subject to
"country risk" because the borrower does not have to generate
foreign exchange to repay them; they are in any event relatively
insignificant in LDCs. Claims of U.S. offices of foreign chartered
banks are not included.
* These agencies have jurisdiction over national banks, state-
chartered member banks, and insured non-member banks, respec-
tively.
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A bank's exposure, or risk, in a country differs from the
volume of outstanding claims on that country and is defined in
various ways depending on the purpose. Outstanding claims repre-
sent the borrower's existing (disbursed) debt to the bank; changes
in the level of claims represent actual credit flows. Exposure
is the amount a bank could potentially lose if Country X defaulted
on its obligations. It includes all outstanding claims, less
those guaranteed by the residents of other countries (including
U.S. residents), plus the amount of the bank's loans to other
countries that are guaranteed by residents of Country X.
Alternatively, it is often defined, as in this study, to also
include the amount of commitments to lend to that country, adjusted
to reflect the country of guarantor.
2. Exposure by Class of Bank
Two-thirds of aggregate exposure in non-oil LDCs
is accounted for by the nine largest reporting banks. (See Table
12.) The next fifteen largest and the remaining (129 as of
end-1980) banks each account for one-sixth of the total. Commit-
ments are relatively more significant for the nine largest banks
but overall account for just one-fifth of aggregate exposure.
The Latin America/Carribbean region, which accounts for over
half of aggregate exposure, is particularly attractive for the
medium and smaller banks.
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Table 12
Total Exposure in Non-oil LDCs -- By Size of Bank
($ billions)
Increase
Outstanding
1978
1979
1980
12/31/80
Nine Largest
7.7
10.2
11.9
74.6
Next Fifteen
1.5
2..1
3.8
19.0
Remaining
1.3
2.6
3.6
17.8
All Reporters
10.5
14.9
19.4
111.4
This exposure needs to be judged against the balance sheets-
of the lending banks. As shown in Table 13 below, lending to LDCs
by the larger banks is substantially higher relative to their capi-
tal and accounts for a greater proportion of their total assets.
(Large banks are generally more leveraged than small banks.) The
table also shows the rise in relative exposure since 1977.
Table 13
Exposure in Non-oil LDCs Relative to Capital and Assets
By Size of Bank*
end of year ratio
Exposure in LDCs Capital
1977
1978
1979
1980
All Reporters
1.6
1.7
1.8
2.0
Nine Largest
Reporters
2.4
2.6
2.9
3.1
Next Fifteen
1.4
1.5
1.5
1.7
Remaining
0.7
0.7
0.8
0.8
Exposure in LDCs Total Assets
All Reporters
0.09
0.09
0.10
0.10
Nine Largest Reporters
0.12
0.12
0.13
0.14
Next Fifteen
0.08
0.08
0.08
0.09
Remaining
0.05
0.05
0.05
0.05
To
tal
All
Assets': Capital
Reporters
17.5
18.1
18.9
18.7
Nine
Largest Reporters
20.2
21.1
22.2
22.1
Next
Fifteen
17.5
18.4
18.6
18.2
Remaining
14.1
14.2
15.0
15.2
* Capital is defined as equity capital plus subordinated
debentures and loan loss reserves.
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3. Exposure to Major Borrowers
U.S. banks' lending to LDCs is heavily skewed
toward a group of relatively advanced countries which depend
largely for external finance on credit from private sources.
(See Table 14.) Traditional ties with Latin America, stemming
largely from geographical proximity, are reflected in greater
exposure of U.S. banks in this area compared to the lending
pattern of non-U.S. banks.
Table 14
Exposure of U.S. Banks to Non-oil LDC5:
end-1980
in $ billions
ratio to
banks' capital
$ 111.4
1.95
Latin America & Caribbean
$ 60.9
1.07
Asia
30.5
0.54
Africa
5.0
0.09
Offshore Banking Centers*
15.0
0.26
as percent of
all LDCs
of which:
Mexico
19.4
17.4%
Brazil
17.7
15.9
Korea
9.9
8.9
Argentina
8.7
7.8
Taiwan
6.3
5.7
Philippines
5.7
5.1
Hong Kong
4.7
4.2
Chile
4.5
4.0
Colombia
3.7
3.3
Thailand
2.3
2.1
Israel
2.3
2.0
Peru
2.2
2.0
TOTAL
87.4
78.5
* _ Bahamas, Bermuda, British West Indies, Hong Kong,
Lebanon, Liberia, Macao, Netherlands Antilles,
Panama and Singapore.
[Note: A large portion of outstanding and contingent claims
on offshore banking centers entail funds lent to foreign
banks that are on-lent to other areas; these are excluded
from the definition of "exposure" used in this section.]
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4.
Maturity of Lending and Nature of Borrowers
The tenor of loans to LDCs shortened considerably
in 1979 and 1980, and at the end of the period over sixty
percent of outstanding claims (by country of residence) had a
maturity of one year or less. (See Table 15.) This trend
reflected a surge in LDC borrowing needs and the reluctance of
banks to commit themselves for term credits when concerns over
the prospects for "recycling" had increased. Borrowers, for
their part, were reluctant to borrow long-term funds, given
the level of interest rates and fees. Funds were obtainable
only at a much higher cost (in terms of a spread over LIBOR*).
(This trend was reflected as well in the decline in LDC issues
of bonds during 1979 and 1980, including those in the form of
floating rate notes.)
U.S. Bank Claims on Non-oil LDCs:
By Remaining Maturity
Increase
Outstanding
1978
1979
1980_
_ 1273-1/80
$ billions
% of
total
1 year and under
2.9
7.7
11.7
46.4 (61.5%)
Over 1 to 5 years
0.6
0.9
-0.2
20.6 (27.3%)
Over 5 years
1.8
1.0
2.0
8.5 (11.3%)
TOTAL, Excluding Banking Centers
5.3
9.6
_
13.6
75.4 (100.0%)
Claims on Non-banks in Banking
1.6
0.8
1.3
9.0
Centers
TOTAL
6.9
10.4
14.9
84.4
* London Interbank Offer Rate
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Three groups of foreign debtors -- banks, public sector
and non-bank private borrowers -- now share fairly evenly in
the total claims of U.S. banks. (See Table 16.) Lending to
the private non-bank sector rose quite sharply in 1980, primarily
reflecting transactions vis-a-vis Mexico. However, lending to
banks, also includes funds provided primarily for on-lending to
the public and private non-bank sectors.
Table 16
U.S. Bank Claims* on-Non-oil LDCs: by Nature of Borrower
($ billions)
Increase Outstanding
1978 1979 1980 12/31/80
(% of
total)
On Banks $4.8 $4.3 $4.3 $26.4 (35.0%)
On Public Borrowers 0.4 2.5 3.2 22.5 (29.9%)
On Other Private 0.0 2.8 6.1 26.5 (35.1%)
TOTAL, Excluding Offshore
Banking Centers
* By country of residence
not country of guarantor
$5.3 $9.6 $13.6 $75.4 (100.0%)
5. U.S.G. Guarantees of Commercial Bank Claims
U.S. banks' exposure is shown in Table 14 above
after adjustment to reflect guarantees by third parties, including
guarantees by the U.S. Government. Rough estimates indicate
that about 20% of the total guarantees of bank claims (outstanding
claims and commitments) are accounted for by the USG. Eximbank
programs are by far the largest both in terms of amount and num-
ber of countries having such guaranteed loans. Guarantees to LDCs
under CCC programs existed as of end 1980 only for the Dominican
Republic, Korea, Peru and Sudan. OPIC and AID Housing Guarantee pro-
grams are not handled through commercial banks for the most part;
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the only significant U.S. banks claim under these relate to
Zambia ($29.4 million under OPIC).
It is not possible to determine the amount of guarantees
of claims on an individual country that have been provided by all
U.S. residents (private as well as USG). Federal Reserve staff
believe, however, that the volume of guarantees provided by
private U.S. entities is relatively small.
Table 17
Guarantees of U.S. Bank Claims on Non-oil LDCs
(Excluding Off-shore Banking Centers)
position as of end-1980
$ billions
Total U.S. Bank Claims and
commitments by Country of Residence
96.3
of which: guaranteed by third parties
6.8
of which: estimated guarantees
extended by USG 1/
2.4
EXIM
(2.0)
CCC
(0.4)
OPIC
( * )
FAA
( * )
* less than $500 million
6. Exposure Risks
The pattern of external financing of LDCs shifted
in the preceding decade as some of these countries' economies
matured and the volume of aggregate payments deficits outgrew
the capacity of official sources to finance them. This trend
created new opportunities for private banks. U.S. banks have
been in the forefront, and realized substantial profits as few
losses have occurred. (U.S. banks' losses in international
1/ Estimates differ from reported total contingent liabilities
of the USG since the latter include guarantees of credits extended by
entities other than banks and may not coincide with actual
transactions of banks.
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lending have been concentrated in developed countries, reflecting
commercial risk rather than sovereign or "country" risk.) An
increase in risk, represented by the growing volume of claims
on LDCs in banks' balance sheets, is the logical counterpart
of these enhanced opportunities, but the principles of banking
require that risks be kept within prudent bounds.
Bankers and bank supervisors have considerable experience in
assessing the commercial viability of a project financed by a
loan, but the risk that a country will be unable or unwilling to
make available foreign exchange to repay a loan is much more
difficult to assess. In principle, this risk -- to which must be
added commercial risk if the loan is to a private entity in the
LDC -- is assumed to be a fairly small one since countries
cannot "go out of business", and instances of outright debt
repudiation have been rare. But temporary difficulties which
impede the scheduled servicing of a country's external debt
are not rare and have a real cost: the bank's liquidity is
reduced and it may have to make provisions for a loss which,
even if ultimately avoided, can affect current income.
Prudent practices dictate the avoidance of excessive
country risk.
Diversification of lending risks is the central means of
minimizing them. This principle is reflected in the statutory
limit (for national banks) on lending to any one customer or
borrowing entity equal to ten percent of a bank's unimpaired
capital plus surplus.* Although this limit applies to lending
* The Comptroller of the Currency has interpreted this limit
as applying to the aggregate of loans to a foreign government
and its entities to the extent that an entity does not have
independent means to repay a borrowing or does not apply the
proceeds to a purpose independent of the central government's
functions.
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to foreign governments, there is no such limit on overall lending
to any country.
In 1978 the bank regulatory agencies agreed on a uniform
system for assessing country risk and bringing to the attention of
banks' management concentrations of country risk that are large
relative to the strength of the country. Banks are, however, free
to lend amounts in excess of the exposure levels which give
rise to comment by bank examiners, and routinely do so. The
purpose of the system is not to impose rigid limits but rather
to ensure that banks monitor country risk and have internal
procedures to incorporate their assessment in lending decisions.
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IV. U.S. Policies and Procedures
A. Statutory Responsibilities and Congressional Interest
Neither the Constitution nor any federal law assigns to
any Executive Branch Department explicit authority to reschedule
foreign debt owed to the USG. However, the Treasury Department
has broad responsibilities to ensure that the collection and
disbursement of public funds is accomplished in a financially
prudent manner, and the State Department has broad responsibilities
to manage the foreign relations of the U.S.
Most loans from the USG to foreigners are made by agencies
established by the Congress to manage foreign lending programs.
These agencies are the Agency for International Development
(AID), the Commodity Credit Corporation (CCC), the Defense
Security Assistance Agency (DSAA), the Export-Import Bank, and
the Overseas Private Investment Corporation (OPIC).* Generally
speaking, the laws governing the lending operations of these
agencies provide explicit authority to adjust the terms
of loans after they have been made. In 1970, the Attorney
General issued an opinion on a debt-rescheduling arrangement
with Indonesia that clarified the limits of this authority.
According to this opinion, the Executive Branch has considerable
flexibility in renegotiating terms, especially when the borrowing
country is in a situation of default or imminent default.
Apart from its broad responsibilities, there are a number
of specific statutory responsibilities assigned to the Executive
Branch or to individual agencies. A few of these are described
below:
*In addition to direct loans, some of these agencies also
guarantee loans extended by commercial banks.
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A provision of the Foreign Disaster Assistance Act of 1974
requires the Secretary of State to keep Congress informed
of any debt rescheduling negotiations, and to transmit the
text of any U.S. bilateral debt relief agreement to Congress
thirty days before it becomes effective. (The "Wolff
Amendment".) State drafts the letters to Congress pursuant
to this provision (as well as drafting the bilateral agree-
ments) and clears them with the agencies concerned.
-- A provision of the International Development and Food Assistance
Act of 1978 requires the Chairman of the Development Coordina-
tion Committee (presently the head of IDCA) to make an annual
report to Congress which addresses, among other subjects,
the debt-servicing capacity of countries receiving foreign aid
from the U.S., and any debt relief provided by the USG. Treasury
has drafted the portions of the report that deal with these
subjects. In addition, Treasury provides quarterly reports
to Congress pursuant to this provision on: (a) active foreign
credits; (b) amounts due and unpaid 90 days or more; (c) signi-
ficant arrearages; and (d) contingent foreign liabilities.
-- Since 1976, appropriations legislation for foreign aid has
contained a provision cutting off aid to any country that is
in default on a foreign aid loan from the USG for more than
one year. (The "Brooke" Amendment.) Treasury obtains
quarterly information on arrearages from creditor agencies
and provides information on the status of arrearages at
weekly meetings of the National Advisory Council Staff
Committee.
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-- A provision of the Foreign Assistance Act of 1961, as
amended, prohibits "writing off" any liabilities arising
from FAA loans. (The "Dirksen Amendment".) This was supple-
mented by a provision of the International Development and
Food Assistance Act of 1975 that no FAA debt "may be settled
in an amount less than the full amount" unless approved in
a concurrent resolution of the Congress.
-- The Foreign Assistance Act of 1974 required that all future
amortization and interest payments on FAA loans be deposited
in the Treasury instead of being used by the lending agency
for relending. This had the effect of sharpening the
distinction between debt relief and aid, and of giving
Treasury and State greater responsiblity for debt-relief
negotiations.
-- In 1978, an amendment to the Bretton Woods Agreement Act
requires the U.S. Executive Director in the IMF to seek to
assure that IMF resources are not used to undercut the U.S.
policy of obtaining "comparable treatment" of private and
public creditors in debt relief arrangements. (The
"Cavanaugh" Amendment.)
Congressic-ial interest in U.S. debt policy continues to be
substantial. However, hearings on debt and debt policy have
not been held since February 1979 when Assistant Secretary
Bergsten (Treasury) and Assistant Secretary Katz (State)
testified before the Subcommittee on Taxation and Debt Management
of the Senate Finance Committee. The Subcommittee was chaired by
Senator Harry Byrd of Virginia.
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B. Delinquent Foreign Debts
Since 1970, the U.S. Government has adopted relatively
rigorous procedures for identifying and eliminating delinquent
payments. To begin with, each creditor agency is responsible
for notifying any borrower that fails to make a payment by the
due date. When this notification fails to eliminate the delin-
quency, the problem is brought to the attention of the State
Department. A cable is sent to the U.S. Embassy in the debtor
country requesting the Ambassador to bring the problem to the
attention of the host government and ascertain the nature of
the problem. Further steps are considered in light of the
Embassy's report. In some cases, disbursement of new credits
is suspended pending correction of the delinquency. In others,
new credits continue flowing because important U.S. interests
would be affected adversely if new credits were cut off.
There is a formal reporting system that supports these
procedures. The Treasury Department publishes a set of four
quarterly reports:
(1) Status of Active Foreign Credits of the U.S. Government;
(2) Amounts Due and Unpaid 90 Days or More;
(3) Significant Arrearages by Official Foreign obligors; and
(4) Contingent Foreign Liabilities.
These reports are widely distributed to the Departments and
Agencies concerned, to Committees and Members of the Congress,
and to libraries and other interested institutions.
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The interagency body that addresses policy issues relating
to arrears is the National Advisory Council (NAC) on International
Monetary and Financial Policies, chaired by the Secretary of the
Treasury. The members of the NAC are Treasury, State, Commerce,
USTR, IDCA, Eximbank, and the Federal Reserve Board. There are
weekly meetings of the NAC, at the staff level, at which specific
credits are reviewed prior to being extended by the agencies
concerned. Currently, the NAC Staff Committee reviews most
Eximbank and Agriculture Department credits. Although the NAC
is empowered by the relevant Executive Order (E.O. No. 11269
dated 14 February 1966) to address any significant policy
issues relating to credits extended by other agencies, credits
extended by A.I.D. and the Defense Department are reviewed in
other interagency bodies. For example, A.I.D. loans are reviewed
in the Bilateral Aid Subcommittee of the Development Coordination
Committee (DCC). Each weekly meeting of the NAC Staff Committee
begins with a report on the arrearage status of the countries
receiving the credits to be reviewed in that week's meeting.
In 1971, the NAC adopted a statement of policy on arrearages.
The heart of this statement is the following two sentences: "As
a general policy, the Council recommends that loans to countries
whose government are in arrears 90 days or more on debts which
they or their agencies owe to the U.S. Government or its agencies
should be deferred and, where appropriate, disapproved.
Exceptions to this general rule must be explicitly approved."
A policy statement on standard procedures for collecting
arrearages was adopted in 1976. Also in 1976, the NAC established
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a Working Group on Arrearages, chaired by Treasury, to submit
reports on arrearages to the NAC Staff Committee and to make
recommendations on courses of action to resolve arrearage
problems. (The relevant NAC Actions are continued in Appendix C)
At the present time, the Working Group on Arrearages is inactive,
and the procedures for collecting arrearages are being followed
loosely because the agencies place a low priority on this
activity. The general policy on deferring new loans to countries
in arrears is usually not followed, since exceptions are routinely
approved by the NAC and WGMA agencies.
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C. Debt Relief
In 1978, the National Advisory Council adopted a
statement of U.S. policy on multilateral debt re-organization.
(Appendix D.) The three key elements of the policy are that:
(a) debt relief will be granted only on a case-by-case basis in
situations of default or imminent default (it will not be
granted as a form of development assistance);
(b) to qualify for debt relief, the debtor country must imple-
ment an economic program designed to re-establish its
creditworthiness; and
(c) the terms of debt relief will be arrived at through multi-
lateral negotiations.
The NAC policy statement was precipitated by Congressional
considerations of legislation authorizing U.S. participation in
the Supplementary Financing Facility of the IMF. Congressman
Cavanaugh had introduced amendments designed to preclude any
"bail-out" of commercial banks by the U.S. Government (or the
IMF). The policy statement was part of a successful effort to
obtain an "acceptable" Cavanaugh amendment. It should be empha-
sized, however, that the NAC policy statement did not represent
a new policy but simply a formal statement of policy that had
been evolving over about twenty years. Prior to 1978, the
only significant exceptions to the stated policy were: (a)
a series of debt-relief operations (1968-74) involving India in
the absence of a default situation; (b) bilateral arrangements
with Yugoslavia (1971), Egypt (1971), and Poland (1973); and (c)
the January 1981 operation with Pakistan in the absence of a
default situation.
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The current interagency approach to debt-rescheduling nego-
tiations has its origins in an elaborate policy exercise that
began in 1974. Executive Branch interest in debt-relief
was heightened by the oil-price shock of 1973-74, and by debt-
relief operations involving India, Pakistan and Zaire. The State
Department took the initiative and sought a cabinet-level
decision that would provide greater flexibility in the use of
debt relief and confer upon State the leading role in implementing
debt policy. Treasury resisted, and in January 1974 Secretary
Schultz asked President Nixon to assign Treasury clear responsi-
bility for debt rescheduling issues. President Nixon kicked
the issue back to the Cabinet.
Later in the year, Secretary Simon worked out an arrange-
ment with Secretary Kissinger. The State Department would
represent the USG in debt-rescheduling negotiations. (The Treasury
Department and the major creditor agencies are often included in
the delegation to the negotiations.) The Treasury Department
would take the lead in formulating the negotiating position,
and obtaining interagency clearances through the National
Advisory Council.
This quid pro quo arrangement has endured over the last
seven years. In practice, State and Treasury have worked
closely and harmoniously at both the staff and policy levels.
The Office of Developing Nations Finance drafts a position
paper setting forth the maximum package of terms acceptable to
the U.S. An economic analysis which shows that the preconditions
for debt relief have been met is part of the paper. This draft
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is sent to the Office of Monetary Affairs in the Economic Bureau
at State, and the two offices work toward a cleared State-
Treasury position, resolving issues at higher levels as necessary.
While the paper is in preparation, Treasury also consults the
principal lending agencies for their views. The cleared paper
is circulated to the NAC agencies for a discussion and a vote.
Other agencies rarely object to the cleared position.
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L11.11_i1 U ur r i .itu U0z
V. Areas of Policy Concern
- - ----- - ------
1. Lending to Uncreditworthy Countries
A policy issue that has arisen repeatedly in recent
years has been the extension of loans by USG agencies to
countries which were already unable to meet their existing
debt-service obligations to the USG. For example, the Eximbank
extended loans to Turkey after the U.S. had participated in a
multilateral debt relief operation. Three-year CCC guaranteed
credits were extended to Poland at a time when there was consider-
able evidence that Poland would have recourse to debt-relief
within a year or two. Direct military credits have been extended
to Sudan following debt relief operations, and these have the
additional disadvantage of not contributing to the productive
capacity of the economy. Guaranteed military credits at non-
concessional interest rates have also been extended to Zaire,
even though it is highly probable that the guarantees will be
called and some of the payments due will be rescheduled.
In virtually every case of this kind, assistance has been
extended on financially inappropriate terms because the U.S.
had strong political interests in assisting the country, and
there were legislative constraints to extending assistance on
grant or highly concessional terms.
2. Approaches to Countries with "Prolonged" Debt Crises
The procedures that have evolved over the past two
decades for official debt-relief operations are notably successful
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in cases like that of Peru in 1978, where the crisis developed
rapidly and there was a government in control that could imple-
ment the economic reforms necessary to stabilize the economy in
a short (1-3 year) period of time. The procedures are distinctly
less effective when the debt crisis builds up over a period of
years and the government pursues stabilization in a desultory
fashion. The problem in a nutshell is that debt relief cannot
resolve a debt crisis; it takes appropriate economic policies.
In fact, in the absence of the right policies, debt relief
tends to exacerbate the debt problem by relieving pressure for
economic reforms while adding to the country's debt-servicing
burden.
We faced this dilemma squarely in the 1980 debt-relief
operation with Turkey, and the 1981 operation with Zaire. We
will face it again in early 1982 with Sudan. In 1980, the
creditor countries initially made a generous offer of debt
relief to Turkey: 90 percent of principal and interest payments
during the next year would be rescheduled -- excluding payments
required under the 1978 and 1979 rescheduling arrangements.
The Turks refused the offer on the grounds that they would
have to default on some payments to official creditors unless
they received more relief. A presidential decision to make a
more generous offer was requested by State. It was supported
by Treasury, but opposed by OMB. The President authorized the
rescheduling of 1978 and 1979 previously-rescheduled debt, and
a new creditor-country offer was made that the Turks accepted.
Rescheduling previously-rescheduled debt is an undesirable pre-
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cedent, especially because it discourages other countries from
honoring their initial debt-relief agreements.
In July 1981, a U.S. delegation went to Paris to negotiate
a debt-relief arrangement with Zaire and had instructions to
oppose rescheduling of previously-rescheduled debt for 1981,
with the expectation that a subsequent arrangement for 1982 would
have to include previously-rescheduled debt (PRD). The GOZ made
a strong case for receiving some relief on PRD immediately and
other creditors supported this action. The U.S. was isolated
and eventually agreed to the inclusion of PRD in 1981, but not
in 1982. Now, however, there appears to be a strong likelihood
that this two-year agreement will have to be renegotiated to
include some relief on PRD in 1982.
Rescheduling negotiations with the Sudan are tentatively
scheduled for February 17-18. Sudan has a debt situation almost
as bad as Zaire's, and will probably make a strong case for
rescheduling some PRD relating to the 1979 operation.
In each of these three cases, there is evidence that the
initial debt relief arrangements, by their nature, helped to
prolong the country's debt crisis. The common defect seems to
be that the repayment terms on the debt relief were set before
the country's B/P situation had stabilized, and it was really
not possible to predict when stability would be restored.
A recent Treasury staff study explored alternatives to the
conventional approach that might prove to be more effective in
dealing with "prolonged" debt crises. One alternative that
appears to have some merit is to "defer" or "roll-up" debt-
service payments one year at a time, and to delay negotiating
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the final repayment schedule for these amounts until the crisis
has passed. In each successive year, creditors would also
seek to reduce the proportion of rescheduled payments that
would be deferred.
While this alternative has some attractions from a financial
point of view, it does present some possible legal or contractual
complications. Moreover, it does not come to grips with the poli-
tical dimension that makes these prolonged cases so complicated.
Specifically, in each of these three cases (Turkey, Zaire and
Sudan), the ability of the government to implement effective
stabilization measures is hampered by political weakness. At
the same time, the western creditors have strong strategic
interests in each country which make them reluctant press hard
enough to make effective stabilization a precondition for
assistance.
3. Preferred Status for USG Agencies
From time to time, there have been attempts by
U.S.G. agencies to claim preferred status as creditors, or to
exclude specific credits from debt-relief arrangements. For
example, Eximbank credits to the Southern Peru Copper Company
were excluded from the 1978 rescheduling arrangement with Peru.
The NAC agencies agreed to this exclusion basically because it
appeared to be in the interest of Peru together with its creditors
to exclude them.
In other cases, Eximbank has conditioned its financing upon
the establishment of "off-shore escrow accounts" designed to
prevent any interruption in debt-service payments from the bor-
rower even if it experiences critical debt-servicing difficulties.
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The NAC agencies have refused to agree ex ante that loans having
special security arrangements of this type would be excluded
from future rescheduling operations. Rather a NAC Action was
adopted (Action 78-515, 6 November 1978) that provides for NAC
consideration of the issue when a negotiating position for a
specific rescheduling operation is being reviewed.
OPIC has also claimed preferred status in some recent
cases, notably in the 1978 rescheduling operation with Turkey.
In this case, the issue is complicated by a formal arrangement
between OPIC and the Department of State that makes available to
OPIC dollars that would otherwise be used by State to buy
local currencies -- when an OPIC borrower is unable to obtain
dollars from its central bank to meet its obligations to OPIC.
4. Interest Charges on Rescheduled Debt
Until 1981, the practice of the U.S.G. was to
charge interest on rescheduled debt on the same basis used to
determine interest on the original loans. This meant that
interest charged on rescheduled concessional loans (AID and
PL480) was fixed at 2-4 percent per annum, while interest on
rescheduled non-concessional loans was fixed at the current
lending rate of the agency (Eximbank, CCC, or DOD).
In 1981, largely in connection with the Poland rescheduling
operation, the agencies that extend non-concessional loans
changed their practice. First, they set the interest charged
on rescheduled loans at their marginal cost of funds, which
tended to be significantly higher than their normal lending
rates, because of the subsidy element in their lending operations.
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Second, they made the rates variable at six-month or annual
intervals.
These changes have given rise to several policy concerns.
To begin with, the changes are viewed by the debtor countries
as being onerous, and the negotation of bilateral implementing
agreements has been considerably delayed in some cases over
this issue. Along the same lines, it can be argued that the
higher rates associated with this practice serve to make it
harder for the debtor country to overcome its debt-servicing
difficulties. In short, the practice on interest rates conflicts
with the basic objective of granting debt relief. This aspect
could be especially important if all creditor countries were to
adopt the same practice.
So far, the method of setting interest rates for debt
relief on concessional loans has not changed. However, USDA
has expressed interest in charging the marginal cost of funds
to the CCC on such relief.
5. Debt Relief as a Substitute for Aid
For several years in the late 1960s, the U.S.
extended debt relief to India even though India was not experien-
cing debt-servicing difficulties. In this case, debt relief
was a substitute for aid, which had the advantage from the
U.S. point of view of not requiring congressional appropria-
tions, and from the Indian point of view of being totally untied
and "fast-disbursing" B/P financing. In order to avoid Congres-
sional criticism for extending "backdoor assistance", the
Executive Branch adopted in the early 1970s a firm policy
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against the use of debt relief for aid. This kept the U.S. out
of several more negotiations with India in which other OECD
creditors provided debt relief.
The policy against debt relief in non-default situations
has been tested several times. So far, only one exception has
been made. In 1981, the U.S. participated in an extraordinary
debt relief operation with Pakistan. In mid-1980, there had
been a Presidential decision to participate in such an operation
as an exception to U.S. policy on the condition that Pakistan
enter into an upper credit tranche arrangement with the IMF
designed to support broad policy reforms. The exception was
granted at a time of great concern over the Soviet invasion of
Afghanistan, and when certain Congressional prohibitions relating
to nuclear facilities and an earlier rejection of military assis-
tance impeded an offer of direct U.S. assistance to Pakistan.
Considerable care was taken to minimize the damage this operation
could create as a precedent for providing debt relief to other
countries in non-default situation (i.e., by negotiating in the
aid 'onsortium instead of the Paris Club, and by limiting the
relief to aid loans). Nevertheless, if this kind of an operation
is repeated in the near future, the damage could be considerable
in view of the pressure in this direction exerted by the UNCTAD
Secretariat and the G-77 (see Section V. C. 4.).
6. Debt Relief from Non-traditional Creditors
Until the mid-1970s, lending to LDCs by governments
of non-OECD countries was relatively insignificant. Since
then, however, several LDCs have emerged as major creditors to
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countries experiencing critical debt-servicing difficulties.
Notable among these cases are Saudi Arabia and Kuwait as
creditors to Sudan, Brazil as a creditor to Poland, and Tanzania
and Zambia as creditors to Uganda. In the 1978 Paris Club
operation for Peru, the traditional OECD creditors deliberated
the pro and cons of inviting non-traditional creditors to Paris
Club negotiations. They decided to adopt as a practice extending
invitations to all major creditors. Since then, Saudi Arabia
and Kuwait have sent observers to several Paris Club negotiations
but no non-traditional creditors have participated fully in
such negotiations.
Related to the issue of participation in the negotiations
is the issue of adherence to the most-favored nation principle
embodied in all Paris Club agreements. There is some evidence
that non-traditional creditors have been treated as preferred
creditors. However, further study would be necessary to
determine if preferred treatment is a significant problem.
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B. Private Capital Flows
1. Relationship of Official and Private Debt Relief
While official and private lenders have substantially
different interests to protect when responding to countries
seeking debt relief, they have one overriding interest in common:
facilitating the economic recovery of the borrower. As a result,
there is usually a fairly close but informal exchange of views
on the nature and extent of the borrower's debt problem between
private and official creditors.
In some cases, countries seek debt relief from private (bank)
creditors or official creditors, but not both. For example, in
the cases of Bolivia and Jamaica, only banks extended debt relief.
On the other hand, only official creditors extended debt relief
to Madagascar and Uganda. In most cases, however, both official
and private lenders have extended debt relief through separate
and essentialy uncoordinated negotiations. Several concerns have
arisen in these cases. First, some debtor countries have argued
that the separate negotiations make it difficult to reconcile the
competing claims of their creditors while at the same time
attempting to strengthen their balance of payments situation.
Second, official creditors have been concerned that their relief
was being used to "bail out" private creditors. Third, private
creditors have been concerned over perceived pressure from the
official creditors to extend "more generous" debt-relief terms to
the debtor country.
At the heart of these concerns lies the concept of "comparable
treatment". This is the notion that a debtor country seeking
debt relief should not confer upon any category of creditor (with
the exception of multilateral official institutions) a preferred
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status -- by giving one category a prior claim on its scarce
foreign exchange resources. In short, all creditors should be
treated equitably. The term "comparable treatment" is now found
both in the standard language of Paris Club debt-relief agreements
and in a formal statement of U.S. policy.
U.S. policy on comparable treatment was formalized in 1978
when the NAC adopted a statement of policy on debt reorganization.
The event precipitating the statement was Congressional action
authorizing U.S. participation in the IMF's Supplementary Financing
Facility. Specifically, Congressman Cavanaugh charged that
the Executive Branch was prone to use debt relief to "bail out"
commercial banks that had made imprudent loans to developing
countries. The Administration responded that existing policies
were designed to avoid actions of this nature, and transmitted
to the Congress the text of the NAC Action.
The earliest case when comparable treatment arose as a serious
issue occurred in connection with a series of Paris Club negotia-
tions with Zaire in 1976-79. Commercial bank exposure in Zaire was
around $500 million, and yet the banks (led by Citibank) argued
vehemently that they should not be required to extend debt relief
to Zaire. By 1979, the official creditors took a firm position
that they would not provide further debt relief to Zaire without
"comparable" action by the banks. In late 1979, a debt-relief
agreement with the banks was concluded, and a new Paris Club
meeting was held shortly thereafter.
By contrast, a high degree of comparable treatment was
achieved in the 1978 debt relief negotiations with Peru. The
commercial banks set the pace by concluding a refinancing
agreement covering 90 percent of the principal payments falling
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due in 1979 and 1980. These amounts were to be repaid in
seven years including a three-year grace period. Subsequently,
official creditors concluded a debt relief agreement with Peru
on virtually the same terms.
More recently, the U.S. had some concerns about comparable
treatment in the official debt relief negotiations with Turkey
in 1980. Treasury prepared a limited quantitative analysis
of the debt-relief arrangement proposed for official creditors
to determine what amount of refinancing or new lending by
commercial banks would be necessary to achieve comparability.
Assuming the ratio of exposure before and after debt relief
should be the same for both categories of creditor, the analy-
sis concluded that an increase in bank exposure of around $350
million, over existing exposure of $6.5 billion, would be
necessary. However, other equally valid approaches would have
yielded different conclusions. The lesson drawn from this
experience was that there is no single quantitative test of
the comparability of private and official debt relief arrang-
ments.
Comparable treatment is presently an issue in the cases of
Poland, Sudan and Liberia.
2. Lending to Uncreditworthy Countries
From a prudential viewpoint, U.S. banks should not and for the most part do not -- lend to uncreditworthy countries.
There are, however, instances of management error. It would be a
violation of prudent banking practices and of stockholder interests
if a bank extended credit which it had reason to believe could
not be serviced as scheduled. Although the U.S. Government has a
role in regulating banks, it is U.S.G. policy not to intervene
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in the lending decisions of private banks in order to achieve
foreign policy goals, nor to attempt to influence commercial
judgements.
The bank regulatory agencies do, however, seek to ensure
that banks undertake country risk appraisal and are aware of
significant concentrations of exposure. In 1979, these agencies
adopted a uniform system to measure exposure by country of risk,
to assess management systems to monitor exposure and to bring to
the attention of bank management any cases of significant
concentrations of exposure relative to capital. A threshold of
25 percent kof capital applies for lending to the strongest
countries, and lesser concentrations trigger notification for two
other categories of countries. These thresholds do not constitute
limits; many banks maintain larger concentrations for particular
countries.
Determination of "creditworthiness" by the banks is a complex
process often involving heroic assumptions about the future
course of a country's political structure and economic policies.
When problems arise, banks try to formulate a strategy maximizing
their total repayments, in which they must balance the attractions
of reducing exposure as rapidly as possible against their interest
in maintaining a good client relationship and in protecting their
competitive position vis-a-vis other banks. Thus, it would
often be in the interest of a bank to accept a restructuring of
its claims on a country -- or even to increase its exposure --
in order to give the country time to adopt and implement appro-
priate policies.
If a borrower fails to service its debt in a timely manner,
banks must place loans on a current rather than accrual basis,
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meaning that interest cannot be taken into income as it is earned
but only if and when actually paid. In the absence of indications
that there is a likely prospect that a debtor country will be
able to repay its debt, banks have to treat their claims on the
borrower or on residents of that country as being unsound. Internal
procedures, review by independent auditors and examination by
supervisory authorities would impell the establishment of reserves
against possible losses. Reserves can be either general or
applied against specific loans. In either case, income is reduced.
While the bank's equity capital and surplus position is affected
by the loss of income (unless dividends are reduced), its overall
capital position is not necessarily affected by the lodging of
loan loss provisions since these are frequently included in the
definition of capital. If and when the affected loans are ulti-
mately repaid, there would be a corresponding increase in income
and equity capital.
3. Recycling
Higher oil prices, and a tendency to give investment
and consumption priority over external equilibrium, have resulted
in a substantial increase in LDC current account deficits.
LDCs have also sought to build up reserve holdings where conditions
permitted. Consequently, LDC demand for external financing rose
sharply from 1974 through the present albeit with some respite
in the middle of this period. Development assistance flows
could not keep pace with demand, and it was inevitable -- and
desirable -- that private sources provide the bulk of the
increased flows. The low level (through 1980) of recourse to
the International Monetary Fund, which provides mainly short-term
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balance of payments financing, also attests to th.? relative ease
with which "recycling" has been carried out. (At the same time,
such financing is obtained without the conditionality attached to
IMF credit.)
Table 18 provides an overview of the channels through which
LDCs have been financed. Private flows account for two thirds
of total requirements, and bank lending makes up most of this.
The share of U.S. banks in total outstanding bank claims on LDCs
is around 40 percent.
From a systemic point of view, there is a concern that
recycling in the 1979-81 period has been too easy. The abundance
of external funds available at relatively low real rates of
interest may have encouraged a large number of.countries to delay
economic adjustments. As a consequence, the adjustments necessary
at this stage are more far-reaching and difficult ones. This
also increases the probability that individual countries will
experience critical debt servicing difficulties. A corallary
concern is that there will be too little recycling to LDCs in the
1982-83 period if OPEC surpluses are small and demand for imports
in the industrial countries remains soft.
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NET EXTERNAL FINANCING BY NON-OPEC DEVELOPING COUNTRIES IN DEFICIT
(S billions)
1978 1979 1980 19E1
(Prof.)
FINANCING REQUIREMENTS $36 $44 $55 $63
--Aggregate Current Account Deficits 26 38 54 63
including official transfers of: (-13) (-16) (-18) (-20)
--Increase in Reserves
10 6 1 0
*********************!************************************************
SOURCES OF FINANCING
40
51
57
66
Recorded Private Flows, Total
28
37
40
45
--Net Borrowing from Banks
20
28
32
35
-Increase in indebtedness to banks 1/ (23)
(32)
(37)
(39)
-Less: increase in claims on banks '/ ( 3)
( 4)
( 5)
( 4)
McFc .a~:du--: Gtcea Medium-.term
Su-:d.icated C'edt
te
N9)
29
2
7
.
(
)
(
E)
13
)
--Issue of Bonds, net of redemption
2
2
1
2
--Net Direct Investment
6
7
7
8
Official Flows other than IMF
11
12
14
16
--Bilateral Loans and Credits
6
6
7
8
-'-Multilateral Loans and Credits
5
6
7
8
IMF Flows
1
2
3
5
--SDR Allocations
0
1
1
1
--Trust Fund Loans
1
1
1
0
--Net IMF Credit
0
0
1
4
-Gross'Drawings
(1)
(1)
(3)
(6)
-Less: Repurchases
(1)
(1)
(2)
(2)
******************t*****e********t*****************t*t*****!*****e**f*
-RESIDUAL (Unrecorded net outflows'and 4 7. 2 3
"~- estimating errors)
1/ including officially guaranteed credits extended through
banking system, the exact extent of which cannot be specified fro:-
available data but which may comprise around ten percent of the total.
2/ excluding estimated holdings of reserves in banks.
Treasury: OASIA/IDN-IMB-IMF,
10/27/81
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C. The Roles of the International Institutions
1. Participation of MDBs in Offical Debt Relief Operations
By tradition, international organizations, including
the MDBs, have been exempted from participation in multilateral
rescheduling operations with official creditors. Thus, they
have been granted the status of "preferred" creditors. With
regard to the MDBs, this has been viewed as being in the mutual
interest of creditors and debtors because: (a) non-participation
has enhanced the creditworthiness of the MDBs and contributed
to their ability to borrow in private capital markets on very
favorable terms and, hence, to lend to LDCs on relatively favorable
terms; and (b) non-participation has made it easier for donor
countries to obtain domestic political support for capital increases
and replenishments for the MDBs*; and (c) non-participation has
allowed the MDBs to continue their lending programs in countries
with critical debt-servicing difficulties.
To date, non-participation has not presented problems in any
particular operation. However, this appears due in part to the
fact that multilateral exposure has been small relative to
bilateral exposure. Recently, MDB lending has grown much more
rapidly than bilateral lending, grace periods on earlier loans are
ending, and interest rates (although still subsidized) have risen
somewhat in line with the MDBs own borrowing costs. There are now
a number of countries in which multilateral exposure exceeds
bilateral exposure (see Table 19). Should one of these countries
experience critical debt-servicing difficulties, it may not be
* In the case of the U.S., this is a particularly important
Congressional consideration with regard to U.S. subscriptions
to callable capital which are currently based on program limita-
tions rather than appropriations.
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Table 19
Outstanding Long-Term LDC Public Debt (including undisbur_sed)
---------- -------------
Where Debt to MDBs is Greater than Debt
----
to Bilateral C--------r------------------
editors, end-1980
(in m llions of U.S. dollars)
Multi-
lateral
Bi-
lateral
Finan.
Markets
Suppliers Total
Africa South of Sahara
Benin
198
132
111
21
719
Botswana
156
79
32
2
270
Burundi
183
100
5
4
292
Central Afr. Rep.
97
74
2
39
211
Chad
119
91
4
17
231
Comoros
53
42
-
-
95
Ethiopia
551
473
15
22
1,062
Gambia
109
85
15
9
218
Ivory Coast
921
795
3,270
587
5,573
Kenya
1,408
986
562
103
3,059
Lesotho
153
12
29
-
194
Malawi
351
213
151
89
805
Niger
302
266
175
83
826
Nigeria
1,291
658
5,179
19
7,148
Rwanda
197
75
-
-
272
Swaziland
114
92
24
-
231
Tanzania
1,050
1,024
137
15
2,228
Upper Volta
272
221
14
1
508
East Asia & Pacific
Fiji
133
110
44
6
293
Malaysia
1,466
1,158
1,987
86
4,696
Papua New Guina
273
58
292
2
625
Philippines
3,814
2,094
4,416
478
10,532
Solomon Is.
13
1
-
-
13
Thailand
2,732
2,150
2,210
185
7,277
Western Samoa
48
12
8
-
68
Latin Amercian
Argentina
2,260
947
7,191
1,845
12,249
Barbados
108
29
17
-
155
Brazil
6,634
5,388
35,354
4,755
52,301
Colombia
2,891
1,261
2,063
483
6,703
Costa Rica
940
397
1,016
58
2,415
Ecuador
960
393
2,054
300
3,706
El Salvador
603
311
22
-
936
Guatemala
605
259
-
1
864
Haiti
261
96
8
-
365
Honduras
1,018
398
171
21
1,609
Mexico
5,237
2,155
31,247
355
38,994
Panama
640
325
1,727
36
2,727
Paraguay
556
338
228
110
1,232
Uruguay
425
222
840
38
1,524
Other
Bangladesh
2,616
2,552
61
169
5,398
Cypress
179
73
249
20
521
Lebanon
160
111
146
-
416
Nepal
487
54
-
-
542
Yugoslavia
2,339
2,257
1,249
18
5,864
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possible or equitable for the debtor country to continue to meet
its scheduled obligations to the MDBs while accumulating arrears
to -- or receiving debt relief from -- other countries. In
this case, the MDBs would have to choose between extending new
refinancing credits or rescheduling their loans. It may be
desirable to initiate interagency discussion of this potential
problem in order to be prepared to take the most appropriate
action if such a situation arises. The situation could present
itself in the case of Sudan in the near future, or Tanzania and
Bangladesh somewhat farther down the road.
A related and perhaps more pressing issue involves cofinancing
by private banks with the MDBs. Both commercial banks and the MDBs
have expressed desires to do more cofinancing. On the commercial
bank side, they are motivated in part by the possibility of
obtaining the preferred status the MDBs now enjoy in debt-relief
operations. So far, the MDBs have not agreed to include in their
cofinancing arrangements automatic cross-default provisions, and
the borrowing countries would perceive such provisions as being
contrary to their interests. There are also arguments from the
perspective of governments for opposing such provisions.
2. The IMF Link with Paris Club Operations
U.S. policy requires that a debtor country have in
place the economic policies necessary to correct the imbalances
that led to the need for debt relief. Normally, this require-
ment is met when the IMF Executive Board has approved an upper
credit tranche arrangement with the country. This link is fairly
well known and generally does not cause a problem. However, in
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several recent cases, there has been pressure to negotiate a
debt relief arrangement before IMF approval of a standby arrange-
ment. In the case of Nicaragua, the U.S. agreed in the summer of
1979 to participate in Paris Club negotiations with the understan-
ding that any agreement which emerged would not go into effect
until an arrangement with the IMF had been concluded. This
exception was granted on foreign policy grounds in the expectation
that special treatment for Nicaragua would be rewarded by a more
western-oriented approach by the new government of Nicaragua.
In the event, the GRN was unwilling to conclude an arrangement with
the IMF and the U.S. would not agree to discuss specific resched-
uling terms at the Paris Club meeting. (Subsequently, other
creditors extended debt relief to Nicaragua on a bilateral basis.)
More recently, there was some discussion of negotiating a
debt relief arrangement with Zaire at the beginning of 1981,
before the GOZ had negotiated a new arrangement with the IMF.
Even more recently, the Government of Costa Rica has raised
the possibility of holding a Paris'Club meeting before it con-
cludes an arrangement with the IMF, and the French suggested Paris
Club negotiations w'.th Sudan before the IMF Board approved its
new standby arrangement.
An IMF link has also been used in cases where there has been
pressure on creditors to extend debt relief for more than one
year. In these cases, a second or third year of debt relief has
been agreed to by official creditors on the condition that the
creditor country was eligible to draw under an upper credit
tranche arrangement with the IMF. This kind of link is difficult
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to enforce, however. In 1980, for example, at the time the second
year of Sudan's "one-plus-one" debt-relief arrangement was to go
into effect, it was ineligible to draw from the IMF. The creditors
did not take any steps to suspend the second year of relief, and
any attempt to do so probably would have been counterproductive.
3. IMF/IBRD Technical Assistance
The 1980 study of LDC debt by the IMF identified
weaknesses in debt management as an important contributing factor
in debt crises. Given the pressures that currently exist, it
would appear to be in the interest of creditor countries as a
group to take steps to strengthen the debt management abilities
of LDCs with weak B/P situations. This could be done effectively
through the IBRD and the IMF. Both organizations have staff
members competent to advise member governments in the area of
debt management. In the Bank, however, there seems to be a
substantial shortage of staff relative to the demand from LDC
members for assistance. It is possible that the U.S. Executive
Directors in these institutions could take steps to ensure that
their institutions are active in all countries-that need such
assistance, and work more intensively in those countries that
are facing serious or critical debt-servicing difficulties.
4. G-77 Pressure for Generalized Debt Relief and
Institutional Reform
Serious negotiations on debt at the North/South
level did not begin until 1976, at the UNCTAD IV Conference in
Nairobi. These negotiations were provoked by concern over LDC
debt problems associated with the "oil shock" of 1973/74. Since
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then, the negotiations have evolved along two tracks: (a) gen-
eralized debt relief, and (b) institutional arrangements for debt-
relief operations.
a. Generalized Debt Relief
At UNCTAD IV, the G-77 called for across-the-
board debt relief, preferably the cancellation of all aid loans.
In March 1978, at a special Ministerial-level meeting of the
UNCTAD Trade and Development board, the U.S. and other Group B
countries gave way to LDC pressure in a limited fashion. They
agreed to a resolution that committed them to "seek to adopt"
retroactive terms adjustment (RTA) measures for the "poorer"
developing countries. The conceptual underpinning of RTA was the
relatively new policy of donor countries to provide aid to the
"least developed" countries only in the forms of grants. Prior
to this policy, many soft loans had been extended to these coun-
tries, which resulted in a flow of debt-service payments from
these countries back to the donors -- an apparent inconsistency
with the new policy of giving grant aid. RTA was a means of
resolving the inconsistency by converting these old loans to
grants.
In making this concession, the Group B countries insisted on
three qualifications: (i) RTA was not debt relief -- because the
benefitting countries in general did not have a debt problem --
but a means of "improving the net flow" of aid; (ii) RTA would be
extended only to "poorer" LDCs, not to all of them, and (iii) each
donor country would extend RTA on a case-by-case basis "within
the context of its own aid policy".
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-77-
The 1978 resolution did not terminate the negotiations
because the G-77 now charges that the donor countries have not
fully implemented the resolution. The U.S. in particular is
singled out for its failure to deliver any RTA. The Carter
Administration in 1979 obtained congressional authorization to
extend RTA to 14 countries in FY 1980 -- amounting to $16 million.
This was to be accomplished by agreements allowing each individual
country to discharge its debt, one year at a time, by depositing
local currency in a special account to be used to finance
development activities of particular interest to the U.S. The
Congress, however, did not complete the necessary appropriations
action, and to date the U.S. has not extended any RTA. By
contrast, all other major OECD donors have enacted RTA measures.
Some of these have been quite generous. For example, some donors
completely wrote off outstanding debt to all of the countries in
the U.N. category of "least-developed" LDCs. Also, the U.K.
extended RTA to India and Pakistan -- which are not LLDCs.
Renewed pressure from the G-77 for generalized debt relief
is a distinct possibillity in the context of Global Negotiations.
b. Institutional Arrangements for Debt-Relief Operations
Apart from immediate debt relief for all LDCs, the
G-77 has been pressing for institutional arrangements that would
make it easier for countries in a situation of imminent default
to obtain debt relief on generous terms. The G-77 argues that
the present ad hoc creditor club approach is biased against
debtor countries, and in particular fails to take into account
the long-term development needs of these countries. The solution,
from their point of view, is to establish a new institution (the
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International Debt Commission is one version) that would replace
the "Paris Club" and would arrange appropriate debt-relief operations
for countries having debt servicing difficulties. To the Group B
countries, this smacks of debt-relief on demand, and they have
steadfastly resisted the notion.
The first round of intensive negotiations on this subject
took place during the Conference on International Economic
Cooperation (CIEC) in 1976-77. The U.S. and the European Community
tabled a proposal at this Conference that contained the conceptual
framework for a resolution on institutional arrangements that was
adopted by the UNCTAD Trade and Development Board four years later.
(See Appendix B). In essence, the US/EC proposal distinguished
between two types of problems: (a) a debt crisis; and (b) a
structural development problem in which external debt is one
element. It was proposed that problems of the first (crisis)
type be addressed in creditor clubs (like the Paris Club), and
problems of the second (structural) type be addressed in aid
consortia. For four years, there were continuous negotiations
over this framework, which was referred to as "features to guide
international action on LDC debt problems" (or "debt features"
for short).
The "debt features" text adopted by the UNCTAD TDB in
September 1980 is consistent with the views of the U.S. and other
creditor countries. Unfortunately, the language of the resolution
is sufficiently vague to allow the G-77 to argue that the resolution
is also consistent with the eventual establishment of an Inter-
national Debt Commission. As with the RTA issue, negotiations
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-79-
on institutional issues are likely to continue.
The most dangerous element at the moment is a vigorous
effort by the UNCTAD Secretariat to insert itself in the process
of resolving debt problems. The UNCTAD Secretariat has visions
of playing a role as important as that of the IMF and the IBRD:
sending missions to debtor countries, preparing reports, and
participating in negotiations. Anything approaching such a role
is unacceptable to the OECD countries because the UNCTAD Secretariat
is so heavily biased toward writing off LDC debt.
An important victory on this issue was scored by the creditor
countries earlier this year. The UNCTAD Secretariat had proposed
that the UNDP fund an inter-regional project, managed by UNCTAD,
for the purpose of providing advisors to countries preparing for
rescheduling negotiations. It was apparent from the design of
the project that the UNCTAD Secretariat viewed this as a vehicle
for increasing its involvement in debt relief operations and for
increasing pressure on the creditor countries for more generous
relief. At the UNDP Governing Board meeting in June 1981, the
U.S. led a campaign joined by other Group B members that succeeded
in putting this project back on the shelf.
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APPENDIX A
From: IMF,"Survey of Multilateral Debt Renegotiations
Undertaken within the Framework of Creditor
Clubs, 1975-80", SM/80/274, 30 December 1980, pp. 3-5.
Typically, debt service problems evolved
over a period of several years and reflected the combined effects of pro-
longed and interrelated external and internal disequilibria attributable
to various factors, rather than developments in a single year or the effects
of a specific event. In general, therefore, debt service difficulties
during the period under review could not be explained by developments imme-
diately preceding the actual debt rescheduling exercises; on the contrary,
in some instances there was a substantial improvement in the current account
and even in the overall balance of payments. In these instances it was
often the depleted level of reserves, the limited potential for new borrow-
ing, or the accumulation of payments arrears which dictated an adjustment
in the external accounts,' most frequently through a sharp reduction in
import volume.
Although the underlying economic and balance of payments situation
preceding. the multilateral debt renegotiations differed considerably as
between countries, it is nevertheless possible to identify a number of
common factors that contributed to the emergence of debt service difficul-
ties. It is important also to note that many of the contributory develop-
ments described below (high import demand pressures, declining exports,
adverse movements of the ,,terms of trade, inflation, buildup of short-term
debt, etc.) were present during the same period in many other countries
without leading to the emergence of debt service difficulties:, hence, it
was the particular combination of external and internal circumstances and
their relative severity which created debt servicing difficulties and a
need for rescheduling.
The single most important factor consistently present, albeit to a
varying degree, in all but one of the nine countries (India) 1/ under con-
sideration, was the influence of domestic fiscal and monetary imbalances
on the balance of payments. Aside from inflation, these domestic demand
pressures were reflected primarily in rapid growth of import demand. It
is generally true, however, that the sharp world price increases for oil
was also a major determinant of increased import expendi.:ures :luring the
1970s, although again the severity varied between countries. However, in
all the cases leading up to debt rescheduling, there were substantial
1 India's debt situation and renegotiation were exceptional in many
respects as there were no prospects of imminent default. India is,
therefore, the only case where creditor countries used debt relief purely
as an alternative technique for providing development assistance.
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increases in import volume during some of the critical years preceding the
emergence of debt servicing problems; these import demand pressures nearly
always could be attributed to domestic factors and particularly to expan-
sionary budgetary and financial policies. The causes of budgetary
imbalances varied among countries, but often reflected a rapid rise in
expenditures related to development plans or in response to social and
political pressure; in some instances government expenditures of a non-
recurrent nature played a major role. Moreover, external factors such as
export variability was of importance as budgetary expenditures were often
adjusted rapidly upward in response to increased revenue from export taxa-
tion, but countries found it often difficult to reduce budgetary outlay
to sustainable levels after the decline of world market prices from
abnormally high peaks. However, in one case rapid import growth preceding
debt reschedulings took place despite tight domestic demand management
policies and reflected the need for large-scale food imports in light of
repeated crop failures as well as highly adverse movements in import prices.
In the majority-of countries debt service difficulties were exacer-
bated by declining, stagnating, or strongly fluctuating exports; however,
in some cases debt service problems emerged despite good export perfor-
mance and even in instances where countries profited from rising world
prices of oil. While adverse export price movements played an-important
role in some countries, declining export volume was also a major problem.
In several cases this can again be traced to the domestic factors of
budgetary and-financial imbalances, which resulted in high rates of
inflation and inadequate production incentives. There was often a loss
of competitiveness as the authorities found it difficult to adjust
adequately the exchange rate in response to domestic inflation or worsen-
ing world market prices for exports.
Aside from developments in the trade account, debt service difficul-
ties were compounded in some circumstances by adverse movements of the
services accounts. In particular, official workers' remittances and
tourist receipts fluctuated in several countries and sometimes these
flows, as well as certain exports, were transacted through the more favor-
able parallel market, thus affecting official foreign exchange availa-
bility and debt service capability. In some countries rising social
unrest affected negatively workers' remittances and tourist receipts.
While during the period under review many developing countries expe-
rienced adverse developments in their current account, it i3 a common fea-
ture of most of the countries in which foreign debt servicirg problems
emerged that they typically attempted to finance their current account
deficit through external credits of which a significant, though varying
share, was of relatively short maturity and carrying commercial rates of
interest. Sometimes debt servicing difficulties emerged primarily as a
result of inappropriate debt management; this was particularly the case
where short-term debt was contracted at high rates of interest to finance
long-term structural imbalances. Typically, however, many factors-were
involved such as stagnating or declining exports, volatile workers' remit-
tances, rapid inflationary domestic growth propelled by the expansionary
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public sector, and the financing of the resource gap through unsustainable
borrowing on unfavorable terms. In most instances accrued debt service
payments rose sharply although actual debt service payments often declined
as external payments arrears on debt servicing accumulated. There was also
a significant buildup of short-term debt in the form of import payments
arrears in most cases.
While a decline in official long-term assistance was a major factor
in aggravating the balance of payments difficulties in a few cases, coun-
tries which had relied on substantial private foreign investments and
credits were strongly affected by sharp declines and outflows of private
long- and short-term capital which often reflected a loss of investors'
confidence due to the underlying difficult economic and political situation.
In other cases, with the buildup of large foreign debt obligations, private
lenders and investors were generally eager to reduce their exposure and
this was sometimes compounded by nationalization efforts, which in turn
brought on additional debt servicing obligations.
-^ - Finally, in those cases where there were a series of multilateral
renegotiations, the balance of payments situation often changed consider-
ably between debt reschedulings. In some instances the balance of payments
deteriorated further despite substantial debt relief; in other cases stabi-
lization programs and increased aid, in addition to debt relief, substan-
tially improved the balance of payments situation.
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APPENDIX B tsscrA D
544th meeting
27 September 1900
222 (XXI) Debt and development problems of developing country
The Trade and Development Board
1. Welcomes the announcement by the States members of the Development
Assistance Committee regarding measures taken in pursuance of section A of
Trade and Development Board resolution 165 (S-IX) of 11 March 1978 and their
affirmation to implement fully section A of that resolution;
2. Takes note of the nature, scope and coverage of measures announced so far
by different developed donor countries in relation to the provisions and decisions
of resolution 165 (S-IX) and the resultant variation in their implementation;
3. late: that the finance Ministers of the Group of 77, at their meeting in
Belgrade on 29 September 1979, reiterated the position expressed in the
Arueha Programme for Collective Self-Reliance and Framework for Negotiations that
developed countries which grant relief measures to only.a limited group of poorer
developing countries should not be considered as having implemented fully
resolution 165 (S-IX);
4. Notes also the appreciation expressed by the Group of 77 of the action
taken by some developed donor countries which have interpreted and applied the
retroactive adjustment of terms in'a manner which met fully the expectations of
developing countries in respect of implementation of section A of
resolution 165 (S-IX);
5. Takes note of the statement by States members of the Development
Assistance Committee that they are fully implementing section A of
resolution 165 (S-IX), taking into account paragraph 5 of that resolution;
6. , Urges all developed 46nor countries which have not done so to take the
necessary steps to implement fully and immediately section A of resolution 165 (S-IX)
regarding adjustment of terms on past official development assistance debt;
7. Agrees that developed donor countries should seek to continue to adopt
retroactive adjustment of terms or equivalent measures in accordance with section A
of resolution 165 (S-IX) so that the improvement in current terms can-be applied
to outstanding official development assistance debt;
8. Invites the Secretary-General of UNCTAD to keep this matter under close
and continuous review and assessment and to report to the Trade and Development Board
at its twenty-second session on the coverage and the degree of retroactive
adjustment of terms and equivalent measures talcen by developed countries in
pursuance of section A of resolution 165 (S-IX);
9. Further invites all developed countries to make available to UNCTAD data
necessary for this review.
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10. Endorses the agreed detailed features contained in the annex to this
resolution which elaborate the basic concepts contained in section B of
resolution 165 (S-IX), and agrees that States members of UNCTLD be guided by these
agreed features in future operations relating to debt problems of interested
developing countries;
11. Agrees further that whenever a developing country believes it faces
difficulties involving debt it may initiate consideration of a debt operation in
the context of appropriate multilateral forums agreed upon by debtor and creditors.
This operation will be guided by and consistent with the agreed features;
12. Decides that such a country should be able to avail itself of the expertise
of appropriate international institutions which could provide, in consultation
with it, an objective and comprehensive analysis of its economic situation, taking
Into account its social and economic objectives and development prospects.. To
this end, the Board invites the President of the World Bank and the Managing Director'
of the International Monetary Fund, in consultation with the Secretary-General of
DNCTAD, to consider as soon as possible effective procedures for responding in a
co-ordinated manner to requests for analysis from developing countries and requests
the Secretary-General of UNCTAD to report on the consultations to the Trade and
Development Board at its twenty-second session;
13. -Agrees also that, only at request of the debtor country concerned,
appropriate international institutions would provide the multilateral forum with
,the above-mentioned and other relevant analyses in order to aid the forum in
`arriving at satisfactory and equitable results;
14. Welcomes in the context of Trade and Development Board resolution 132 (XV)
pf 15 August 1975 the invitation by the Chairman of the Paris Club to the
Secretary-General of UNCTAD to participate in the meetings of that creditor group
on the same basis and terms as the representatives of other international
organizations participating and agrees in this context that the Secretary-General
of UNCTAD would have a particular interest in-the agree'd're~at11Tes;
15. Agrees to review at its twenty-sixth session the arrangements agreed to in
this section of the present resolution, and towards this end requests the
Secretary-General of UNCTAD, and invites the heads of concerned multilateral
institutions and forums to provide all relevant information and documentation.
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Detailed features for future operations relating to the debt -problems
of interested developing countries
1. PREAMBLE
1. In pursuance of Trade and Development Board resolution 165 (S-IX), and taking
into account the work of the Intergovernmental Group of Experts on Debt and
Development Problems of Developing Countries, the following features for future
operations relating to the debt problems of interested developing countries are
agreed upon.
2. It was further agreed that finding a means through which debt-servicing
difficulties can be avoided was one of the most important tasks facing the
international community. The avoidance of debt-servicing difficulties under
conditions that are consistent with an orderly development process in developing
countries is in the interest of both the creditor and the debtor countries.
3. Nevertheless, it was recognized that problems can arise and it vas important
to have agreed arrangements for timely action.
II. OBJET S
4. International action, which may vary according to the nature of the problem
of the debtor country:
- should be expeditious and timely;
should enhance the development prospects of the debtor country, bearing
in mind its socio-economic priorities and the internationally agreed
objectives for the development of developing countries;
should aim at restoring the debtor country' a capacity to service its debt over
both the short and the long run; and should reinforce the developing
country's own efforts to strengthen its underlying balance-of-payments
situation;
- should protect the interests of debtors and creditors equitably in the
context of international economic co-operation.
III. OPERATIONAL FRAMF,UORI:
Initiation
5. International consideration,of the debt problem of a developing country
would be initiated only at the specific request of the debtor country concerned.
lecor,ingly, the country concerned may request such consideration at an early
stage when, in its judgement, the problem involving indebtedness exists or is
likely to emerge.
Analysis
6. The nature of the problem may vary from acute balance-of-payments difficulties
requiring immediate action to longer-term situations relating to structural,
financial and transfer-of-resources problems requiring appropriate longer-term
measures.
I/ Report of the Intergovernmental Group of Experts on Debt and Development
Problems of Developing Countries, Official Records of the Trade and Development Board
Tenth Special Session, Annexes, Agenda item 3, document TD/B/730-
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7. In all cases the following elements would be considered in determining
appropriate international action:
(a) Examination of the domestic economic situation of the country, including
an analysis of its use of both domestic and external resources for safeguarding its
development process;
(b) Impact of external factors on the developmental and financial problems
of'the debtor country;
(c) Estimates of short- and long-term developmental capital requirements
and projected availabilities;
(d) Projection of debt-servicing requirements and review of measures
adopted by the country concerned to avoid debt-servicing difficulties;
(e) The structure and prospects of all items of the balance-of-payments,
exchange rate and monetary policies would be given particular consideration.
8. In the case of acute balance-of-payments difficulties, the analysis would
give special attention to the debtor country's short-term economic and financial
policies, prospects and requirements. In the case of longer-run problems, the
analysis would give special attention to the financing of long-term investment
and associated resource transfers.
Action
9. In the light of the analysis described above, a comprehensive programme of
action will be agreed upon aimed at meeting tha objectives described in section II.
The action programme, which will include both domestic and international measures,
will vary from case to case depending on the nature of the problem at hand and the
development prospects of the debtor country.
10. International measures to be implemented by bilateral and multilateral
sources would vary from debt reorganization to the provision of additional
financial resources on appropriate terms and conditions.
11. In the case of acute balance-of-payments difficulties in which debt servicing
payments play a major role and which require immediate action, the debtor country
would undertake an economic programme designed to strengthen its underlying
balance-of-payments situation, having regard to its development prospects. This
programme would be supported by interested parties. This support would, where
necessary, include the reorganization of debts owed to or guaranteed by creditor
governments. -;
12. In the case of longer-run problems which require appropriate longer-term
measures, the debtor country concer.ied will undertake viable domestic policies,
supported by donor countries and appropriate international institutions, which
would endeavour to increase the quantity of aid in appropriate forms and improve
its quality.
13. In cases where both types of problems are present, actions involving both
types of measures may be required and would have to be taken in a manner which
ensures that they are consistent and mutually reinforcing.
14. In the multilateral forum, agreed upon by the debtor and creditors, the
Chairman would conduct the debt operation in a fair and impartial manner in
accordance with the agreed objectives so as to lead to equitable results in the
context of international economic co-operation.
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APPENDIX C
FOR NATIONAL ADVISORY COUNCIL National Advisory Council
USE ONLY Action 71-506 (Corrected)
September 15, 1971
Subject : Arrearages on Debts to the U.S. Government
Action:
I. The National Advisory Council believes that the existence of significant
debt arrearages to the U.S. Government or its agencies is an important con-
sideration in passing judgment on specific loan proposals. As a general
policy, the Council recommends that loans to countries whose governments are
in arrears 90 days or more on debts which they or their agencies owe to the
U.S. Government or its agencies should be deferred and, where appropriate,
disapproved. Exceptions to this general rule must be explicitly approved.
H. In order to assure that detailed information on foreign debt arrearages
is available and fully taken into consideration, the following steps are
agreed:
1. In connection with Council consideration of loans or other
financial transactions:
(a) Treasury will make available a listing of (i) the debts in
arrears to the U.S. Government from the proposed borrower,
and (ii) the length of time in arrears and the reasons for
the arrearages;
(b) all other U.S. agencies which make or participate in foreign
loan transactions shall make available to the Council informa-
tion available to them relating to the status of loans more
than 90 days in arrears to the United States Government by
such borrower and make recommendations to the Council on the
creditworthiness of the borrower based'on such information.
2. The Council will review semiannually all arrearages on debts owed to
the U.S. Government and its agencies. This review will include the amounts
in arrears, changes over the period, reasons for the delinquencies and actions
taken to collect each. An annual report on this subject will be submitted to
the President and the Cot.gress.
The foregoing is the text of an action of the National
Advisory Council on International Monetary and Financial
Policies approved on September 15, 1971.
Frederick L. Sprin gborn
Acting Secretary
References:
NAC Document 71-453
Staff Committee Minutes 71-44
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FOR NA6 UJL uaLI _ Action 76-347
National Advisory Council
On International Monetary and Financial Policies
May 18, 1976
Subject: Standard U.S. Government Procedure for Collecting Foreign Debt
Arrearages
Action:
The National Advisory Council approves the following Standard Procedure
for collecting arrearages on foreign indebtedness to the United States Govern-
ment and its agencies:
(a) Primary responsibility for collecting all foreign debt arrearages
rests with the U.S. creditor agency. The creditor agency shall pursue actively
all feasible means of collecting arrearages including, if it is necessary,
recourse to the Department of State or other agencies of the United States
Government.
(b) If, after the expiration of 90 days, the creditor agency has not been
able to collect a "major" foreign debt arrearage, that creditor agency shall
submit a written report on the status of the major foreign debt arrearage to
the NAC Working Group on Foreign Debt Arrearages. The report will provide
details of the debt arrearage, including a description of the original credit
and the nature of the arrearage, the amounts involved, the date of oldest
arrearage, whether deliveries have been made, credit and other identification
numbers and related information. The report should also detail the creditor
agency's efforts to collect the debt arrearage, the country's responses and
the creditor agency's views as to other viable alternative courses of action
which might be pursued by the U.S. Government to ensure prompt settlement of
the arrearage. If the creditor agency does not feel that the assistance or
further assistance of the Department of State is required at the end of this
90-day period for technical reasons arising from problems in billing, missent
payments or other administrative problems, the report should contain such a
justification.
(c) Upon receipt of the report on the status of the major foreign debt
arrearage, the NAC Working Group on Foreign Debt Arrearages will determine
whether or not to recommend that assistance in collecting the arrearage be
provided by the Department of State through diplomatic channels, or by other
agencies of the United States Government.
(d) If the arrearage remains uncollected after the expiration of an
additional 30 days the NAC Working Group on Foreign Debt Arrearages shall report
any recommendations for further specific corrective measures to the NAC no
later than 130 days after the initial due date of the payments in arrears.
(Continued)
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NAC USE ONLY
Action 76-347
May 18, 1976
(Continued)
(e) The NAC, in reviewing these long-standing arrearage cases, shall
considerations on NAC Action 71-506
take into account
approving further
and d such other hsteps for arrearage collection efforts.
The Standard Procedure for collecting foreign debt arrearages is complemen-
tary to, and does not substitute for, Treasury Fiscal Requirement Manual, Part II,
Chapter 4500, Transmittal Letter No. 171 of January 27, 1976. All agencies of
the U.S. Government shall ensure that internal agency regulations and procedures
for reporting and collecting arrearages on foreign indebtedness are made con-
sistent with Treasury reporting requirements and the Standard Procedure developed
in the NAC framework.
For purposes of initiating this Standard Procedure, a "major" foreign debt
arrearage is defined as any country-program arrearage which involves the sum
of $250,000 or more. A principal objective of the procedure, however, in the
longer run, is to reduce this "major" criterion from the initial $250,000
figure to $100,000.
The foregoing is the text of an action of the National Advisory
Council on International Monetary and Financial Policies approved
on May 18, 1976.
P~ d'(04r,"_
References:
NAC Document 76-303
Staff Committee Minutes 76-21
Robert S. Watson
Secretary
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USE ONLY Action 76-415
National Advisory Council May 18, 1976
On International Monetary and Financial Poicies
Working Group on Foreign Debt Arrearages
The National Advisory Council approves the establishment of a permanent
Working Group on Foreign Debt Arrearages, chaired by the Treasury Department,
charged with the following responsibilities:
(1) Operation of a U.S. Government-wide Standard Procedure for the
collection of major arrearages on foreign indebtedness owed to the United
States Government and its agencies. This Standard Procedure is approved in
NAC Action 76-347.
(2) Submission of reports to each meeting of the NAC Staff
Committee on the current status of significant debt arrearages which the Work-
ing Group has determined constitute serious collection problems with countries
involved in Staff Committee consideration of proposed loans and credits of
the international financial institutions and the lending agencies of the U.S.
Government;
(3) Recommending to the NAC, as appropriate, specific courses of
action to resolve foreign debt arrearage problems including recommendations
as to actions to be taken in the context of the approved debt policy prescrip-
tions set forth in NAC Action 71-506.
(4)4' Such other responsibilities relating to arrearages on foreign
indebtedness to the U.S. Government and its agencies as may be assigned to it
by the National Advisory Council.
The foregoing is the text of an action of the National Advisory
Council on International Monetary and Financial Policies approved
on May 18, 1976.
Robert S. Watson
Secretary
References:
NAC Document 76-303
Staff Committee Minutes 76-21
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APPENDIX D
Natrria Advisory CunciI
On International Monetary and Financial Po5cies
Subject: Proposed Policy Statement on Debt Reorganization
Action:
Action 7b-5
January 6, 1978
The National Advisory Council advises the Secretary of the Treasury
that it approves the following proposed policy statement on multilateral
debt reorganizations:
1. Debt-service payments on internaticfnal debt should
be reorganized on a case-by-case basis only in extra-
ordinary circumstances where reorganization is necessary
to ensure' repayment. Debt relief should not be given as
a form of development assistance.
2.' Debt-service payments on loans extended or guaranteed
by the U.S. Government will normally only be reorganized
in the framework of a multilateral creditor-club agreement.
3. Ii.'hen a reorganization takes place that involves
government credits or government-guaranteed credits,
the U.S. will participate only if:
(a) the reorganization agreement incorporates
the principle of non-discrimination among creditor
countries, including those that are not party to the
agreement;
(b) the debtor country agrees to make all reasonable
efforts to reorganize unguaranteed private credits
falling due in the period of the reorganization on
terms comparable to those covering government or
government-guaranteed credits;
(c) the debtor country agrees to implement an
economic program designed to respond to the
underlying conditions and to overcome the defi-
ciencies which led to the need for reorganizing
debt-service payments.
4. The amounts of principal and interest to be
reorganized should be agreed upon only after a
thorough analysis of the economic situation and
the balance-of-payments prospects of the debtor
country.
(Continued)
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FOR NAC USE ONLY Action 78-5
- 2 - January 6. 197
(Continued)
5. The payments that are reorganized normally should
be limited to payments in arrears and payments falling
due not more than one year following the reorganizing
negotiations.
The foregoing is the text of an action of the National
Advisory Council on International Monetary and Financial
Policies approved on January 6, 1978.
Robert S. Watson
Secretary
References:
NAC Document 76-1
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