Both the sheer size of the foreign debt and its growth rate have been the subject of numerous conferences, summits, and other get-togethers of the lending countries as well as of the recipient countries. The threats of newly elected leaders of developing countries to default on their loans or to pay only a small portion, usually a fixed percentage of their export earnings, have been met at first by equally threatening rumors of freezing a country's assets in the United States and other lending countries. Eventually, the parties have usually worked out plans allowing the debtor nation to make "rollover" principal payments while borrowing enough to make the interest payments. But most schemes for rolling-over or rescheduling massive debts have merely turned the debtor countries into "optimal bankrupts" (see Table 8.1).
The most ambitious attempt made by the lending countries to deal with the growing debt problem was the Baker Plan, named after U.S. Secretary of the Treasury James Baker III. The Baker Plan, devised in 1986, dealt with the group of seventeen leading borrowers who, combined, accounted for almost 50% of the total foreign debt owed by all developing countries in 1985 (see Figure 8.6). The plan called for the commercial banks to increase their lending to these heavily indebted countries by a total of $20 billion over three years, and for the multilateral institutions, led by the World Bank, to chip in with a further increase of $9 billion provided the countries followed sensible economic policies. But the banks refused to extend more credit, and the plan never got off the ground.
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Some of these borrowing countries are practicing the art of optimal bankruptcy. The optimal bankrupt lives well by borrowing. First the country borrows as much as it can from low-cost lenders; when that source is exhausted, the country borrows as much as possible from high-cost lenders. The borrower uses funds from new loans to pay the interest and amortization charges on outstanding loans. The only reason the country desires to service the debt at all is to protect its credit rating-its ability to borrow more. So it will continue to make payments on outstanding loans only if the flow of new loans is rising. If the country's export earnings decline sharply or if the new loan seems too small, the borrower will threaten to default. At that point, the lenders will usually offer a debt renegotiation to save themselves the embarrassment of being caught with worthless loans; the borrower may demand new funds before agreeing to the renegotiation. Of course, the optimal bankrupt knows that creditors are reluctant to throw good money after bad. But the borrower also knows the injury it might do them by defaulting. The larger the possible damage, the larger the amount of new credits the borrower can probably secure. But the larger the volume of new credits the lenders extend today, the more severe will be the borrower's debt-service problems in the future. Some lenders might seek to avoid the embarrassment of a default by placing all future aid on a grant basis. But in that case, many of the developing countries would borrow as much as they could on subsidized export credits and loans extended for political objectives; the debt would still rise and the process would be repeated. The only constraint on the amount they do borrow is the amount they can borrow. The irony is that attempts to make U.S. financial assistance more businesslike have made it less businesslike. And the efforts to gain an advantage for U.S. exports and the balance of payments have been largely self-defeating, since other countries have adopted similar measures. If both lender and borrowers act under the presumption that a loan is on hard terms, less can be demanded of the borrower. Stricter conditions may be attached to the use of grants. But it is naive to believe that changing the terms of aid could now make any great difference. The fact is that politicians in the aid-receiving countries do not have the same interests as the development planners in the donor countries and the international agencies; nor do they have the same constituencies. And so, even if the borrowers should promise-and keep their commitments-to use the external assistance wisely and frugally, domestic and other non-tied resources would still have to be used to accomplish their political interests. Why, then, do the lenders continue to be manipulated by the borrowers? The answer is that, on margin, continuing the game seems attractive: the cost of new loans always appears lower than the losses that would occur if the borrowers defaulted, for the point of no return has already been passed. |
| SOURCE: Ali ber, The International Money Game, pp. 276-77. |
Both the lenders and the borrowers are in a real predicament. The developing countries must borrow to increase their investment, which will produce the exports required to generate the foreign currency they need to repay the loans they have to make in order to import the capital goods necessary for the investment. The private banks, which account for an average of 80.8% of the debt outstanding, know that if this growth in exports does not materialize they stand little chance of ever receiving their money back. So they must lend more to make sure that they do not lose what they have already loaned, thereby aggravating the problem.
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