World Bank Document

agreement has been reached with Ecuador. A similar Year to year reschedulings, whether of official or comagreement
in principle was reached with Venezuela in mercial bank debt, are expensive in the use they make of
late 1984, and an agreement with Brazil is in the the time of senior officials in both developing countries
advanced stages of negotiation. These multiyear agree- and creditor institutions. They also tend to focus attenments
have been implemented for countries that have tion on financial problems to the detriment of policy
made substantial progress in adjusting their balance of reforms. Multiyear arrangements, on a case by case
payments and have credible commitments to future pol- basis, in support of policy reforms are a preferred
icy directions.
approach.
Box 2.5 Recent proposals for dealing with debt-servicing difficulties
Numerous solutions have been offered for the debt cri- process of relending interest by capitalizing interest paysis.
The proposals reflect a range of views about the na- ments. A few proposals advocate new instrumentsture
of debt-servicing difficulties and appropriate such as replacing fixed claims on a country with shares in
responses to them. They include ad hoc financing the country's foreign exchange earnings, or with equity
arrangements; case by case debt reschedulings; interest in state-run enterprises.
capitalization schemes; formal insurance; stabilization * Continuing uncertainty. Any scheme that attempts to
funds; innovative instruments, including equity shares settle the debt problem at a stroke must either reduce the
in public enterprises in borrowing countries as swaps expected burdens on countries so much that a second
with outstanding debt; and comprehensive restruc- rescue will not be needed or make some allowance for
turings, including write-downs or external claims. The future contingencies, such as world recession or higher
objective of these solutions is to permit the resumption interest rates. It must also offer inducements for banks to
of growth and restoration of creditworthiness of devel- keep lending in the future.
oping countries and the restoration of "spontaneous" Several proposals contain measures to deal with uncerlending
by commercial banks. It is not the purpose here tainty, ranging from stabilization funds for fluctuations
to discuss the individual proposals. The proposed solu- in oil prices and interest rates to establishing a formal
tions can best be evaluated by considering four elements insurance scheme to avoid another crisis. It is less clear
that go to the heart of the relationship between debtors how these proposals ensure future lending by banks;
and creditors.
which route is taken has important implications for the
* The distinction between the collective interests of creditors distribution of the burdens and for future access to interand
their individual interests. If the creditors of debtor national capital markets.
countries cannot be paid full debt service, it is in their * Maintaining the solvency of the banking system. Major
collective interest to defer payment-perhaps even to banks hold claims on developing countries equal to sevforgive
part of the payment-rather than provoke a mor- eral times their capital. Any scheme that implies a large
atorium or repudiation by debtors. Individual creditors, write-down of debt must therefore provide for the conhowever,
have an incentive to hold out for repayment, in tinued operation of these banks. Most proposals attempt
effect by being bought out by other parties. Any debt to minimize write-downs, so that banks remain solvent.
reform scheme must provide an answer to this "free Others include the use of official capital to buy part of
rider" problem. Some of the proposals advocate a once- developing-country debt.
and-for-all restructuring of developing countries' debt The current approach, which combines restructuring
into long-term low-interest loans. Most proposals argue of debt service payments with adjustment policies by
that debts should be taken over by a new international debtor countries, has an answer for each of these four
agency and raise questions about the availability of addi- issues. Abstracting from important details, it deals with
tional official capital for this purpose.
the free rider problem through ad hoc pressure and sua-
. Limits to debt service. Debtor countries have now sion on banks; it relies on conventional reschedulings to
shown their ability to run big trade surpluses to service reduce the interest burden by relending; it copes with
their debt. For some countries, at their present levels of uncertainty by keeping the banks involved, and theredevelopment,
it may be difficult to keep running trade fore it preserves the ability to demand additional loans
surpluses large enough to pay all interest, particularly if from existing creditors; and it copes with the solvency
interest rates rise. So a feasible debt reform plan must problem by avoiding write-downs. So far this approach
not only reschedule all principal, in some cases it may has worked better than many had expected. However,
also have to reduce the current interest burden. wider use of mnultiyear debt restructurings on a case by
In order to reschedule principal, most proposals sug- case basis as a part of an overall financial package supgest
that bank loans should be converted into some other porting stabilization and adjustment, particularly in sublong-term
asset, particularly long-term bonds. To reduce Saharan Africa, will help to alleviate debt-servicing diffithe
burden of interest payments, some proposals argue culties.
for relending interest; others suggest an automatic
29