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					Global Recession and the
Future of Debt Relief

    James Hayes-Bohanan, Ph.D.
          Assistant Professor of Geography
             Bridgewater State College
Earth Sciences & Geography Club Lecture Series
               February 6, 2002
Overview

      International Lending
      How a “crisis” arose
      Impacts of the crisis
      Evolution of remedies
Credit




            Uses
            Risks
Big Projects




   Expanding the Post-War Rebuilding Effort
     Aswan High Dam

   Constant water source       Archaeological sites
   Flood control               Nubian people displaced
   Multiple growing            Evaporation losses
    seasons                     Downstream sediment
   Expansion of arable          losses
    land                        Downstream phytoplankton
   Triple farm income          Loss for brick makers
   Industrial development      Need for fertilizer
Petrodollars
    Energy crisis of 1970s
    OPEC Cartel and Arab Oil Embargo
    Shift in production/reserve ratios
    Increased cash flow
    Problem for bankers
Growth of LDC Debt
(000,000 USD)

 1970                100,000

 1980                600,000

 1990            1,600,000

 2000            2,100,000
Debt Comparisons – ca. 2001
(000,000 USD)
LDC Debt            2,100,000
LDC GNP             5,800,000
HIPC 41 Debt             213
HIPC 41 GNP              202
US Debt             6,000,000
US GNP              8,000,000
Overlending
     Incentives for private lenders, such
      as CitiBank
     Floating Interest Rates
     Weak projects - weak oversight
     Dictatorships
     Foundations for Crisis

   Late 1970s recession
   Floating Interest Rates
   Economic vulnerability
       Single Exports
       Prebisch Thesis
Crisis Triggered
 Mexico
 Moratorium
 August 1982
               Brazil followed
               Slow growth – the lost decade
               Inflation and hyperinflation
               Capital flight
               Contagion effect
        Baker Plan - 1985
        Treasury Secretary James Baker

   Loans to cover interest payments were made
    with conditions:
       Privatization of state enterprises
       End to subsidies
       Opening the economies to foreign investment
   12 of 15 large debtors complied
   Soon comprised 20 percent of all World Bank
    (WB) debt

                  www.ThirdWorldTraveler.com
Brady Plan - 1989
Treasury Secretary Nicholas Brady

   Sought to attract investment by reforming
    economies
   Encouraged cooperating private banks to
    reduce their claims against LDCs
   Used new IMF (International Monetary
    Fund)/WB funding to collateralize debts in the
    form of new bonds - in other words,
    multilateralized the debt

           www.darbyoverseas.com
SAPs
   Baker and Brady Plans
   Structural Adjustment
   Liberalization
       Devalue currency
       Open markets
       Reduce government intervention
       Privatize assets
Secondary Markets
   Reduced claims
   Writing down debt
   Dimes or pennies on dollars
        HALFWAY MARKER
Bono Bangs the Drum for Debt Relief
   Newsweek, February 06, 2002
Debt-Equity Swaps
   Assets could be used to offset debt
   Because of discounting, the face value
    of debt forgiveness would exceed the
    value of the forfeited asset
   The lender or other redeemer of the
    debt would acquire a tangible asset at a
    discounted price
Debt-for-Nature Swaps
   Building on debt-equity concept
   Governments could cede development rights of
    environmentally valuable land in return for debt
    forgiveness
   The amount of debt forgiven would exceed the
    market value of the land
   Part of the difference would be used for monitoring
    expenses
   Environmental groups could protect land at low cost
   Did not work
    HIPC Strategy
    (Heavily Indebted Poor Countries)

   Began in 1996 IMF - redirects excessive
    debt payments to domestic programs
   The 1999 IMF and G-7 review promised
    faster, deeper, and broader relief
   … for countries “that demonstrate a
    commitment to reform and poverty
    alleviation.”
   Expanded from 29 to 36 to 41
   Relief must be applied to transparent
    programs to alleviate poverty
    Early Critiques of HIPC
   Sustainable debt loads defined on IMF terms
   Debt service targets, at 20-25 percent of
    exports, are twice what Germany paid in WWII
    reparations
   Debt relief merely removes UNDISCOUNTED
    debt from the books
   Gives IMF/WB even greater policy influence
    HIPC Developments
   IMF/WB have relaxed some of their targets,
    such as a reduction in NPV/exports to 150,
    down from 200 or 250
   Only 40 percent of relief can be counted as
    additional resources
   In February 2001, Isac Diwan of the World
    Bank Institute admits that “the HIPC initiative
    is more helpful to multilateral organisations
    than it is to poor countries.”
Debt Relief Status
   As of December 2000, 17 countries have
    been granted US$11 billion in relief,
    spread over 25 years
   In Uganda, Mozambique and Guyana ,
    significant resources have been redirected
    toward solving problems in education,
    health, agriculture, and infrastructure
   G-7 have pledged to return ALL bilateral
    payments from HIPC countries
2001 Recession
   Underway during summer 2001
   Loss of confidence as of September
   A new kind of war economy (according
    to James Kenneth Galbraith)
Pakistan Case – optimism?
   $36 billion in debt
   October 2001: Fresh IMF loan of $2 billion
    (with U.S. backing)
   Expecting $500 million in direct aid for
    refugee expenses
   Three to five years of “substantial cash-flow
    relief” from Paris Club members (who hold
    one-third of the debt)
   Promise to adhere to previously-agreed
    economic and political reforms
Tanzania Case – realism?
   On November 27, 2001, Tanzania became the fourth
    country to reach its HIPC completion point
   Debt burden cut 54%, to
    $2.026 billion, with annual payments cut 47%, from
    $193 million to $116 million
   Agreement reached in March, when WB calculated
    that Tanzania’s debt would be sustainable by 2007
   Because of commodity crisis, exports would need to
    increase 20 percent for the targets in the agreement
    to be met
   January 22, 2001: Additional relief from Club of Paris
                    Selected Commodity Trends
                   140




                   120




                   100
100 = 1998 Price




                                                     1998
                   80
                                                     1999
                                                     2000

                   60
                                                     2001



                   40




                   20




                    0

                         Copper   Coffee    Cotton


Source: World Bank Pink Sheets, 2000 and 2002
IMF Call for Extra Aid
Because of the “adverse impact of the global
  slowdown on low income countries and
  heavily indebted poor countries … advanced
  economies must be prepared to meet their
  special responsibility in providing increased
  development assistance and debt relief to
  tackle the increased challenge of poverty
  reduction.”
  (November 2001)
IMF Call for Extra Aid
   Double aid budgets to $100 billion per
    year
   Reach agreed-to targets of halving
    global poverty by 2015
   Spend 0.7% of GDP on aid
  OECD Foreign Aid




Only Denmark, the Netherlands, Norway, and Sweden are
Meeting the OECD commitment of 0.7% of GDP
    Critique
    (NGO Community)

    Ethel Hazelhurst: “To start a corner shop you need
     two roads,” but HIPC defines development spending
     narrowly, as
    WTO process has discriminated against the
     commodities that the HIPCs produce
    HIPC definition of “sustainable” debt burden
    WB/IMF underestimate commodity price swings
    WB/IMF overestimates of GDP growth in HIPCs
    HIPC is just another rescheduling – because of the
     discount value of debt, creditors could and should
     actually absorb the debt
Critique
(William Easterly)



   Debt relief is not new – 1967
   “Illegitimacy” argument creates perverse
    incentives
   New credit matches the growth in debt
   Governments – not creditors – are to blame
    for bad spending policies
A Consensus?

				
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