Report No. 84-162 E
FINANCE AND ADJUSTMENT : THE INTERNATIONAL DEBT CRISIS, 1982-84
Analyst in International Trade and Finance
September 17, 1984
8045 For. Gen.
T h e (:ongressionaI Reseal-ch S e n ice \\.arks c.ac.ll~si\el\f o ~
the (kngress. conducting rcsearc-h.;rrl;il\.ring Irgislatiorl. and
providing inthrmation at the recluest of' c.ommittees. \It'inbers, and their staffs.
T h e S e n i c e makes such r-esear.ch a\-ailatde. \\.irIlol~tpartisan bias. in wan\. fornls in(-luciingstudies. reports, conlpilag s . recluest. (:K.s
tions. digests. a n d backg1-ountl t ~ r i e f i ~ ~I.po11
assists cornnlittees in anal>./irlg legisl;iti\e pr-oposals and
issues, and in assessing t h e possible et'tkc.ts ot these pr~oposals
and their alternati\.e~.I'he Service's senior spec ialists ;inti
subject anal>.stsa r e also available for per-son;il c.onsi~lt;ition\
in their r-especti\-efields ot'espertise.
CRS- i i i
This paper provides an overview of the international debt problem
which has significantly disturbed the international economic environment of
It describes the characteristics of the less developed country
(LDC) debt and discusses the role of major participants in the debt crisis.
The study shows how the role of the participants has evolved during the crisis.
Lastly, some of the issues arising from the debt crisis are discussed.
I1 . CHARACTERISTICS OF INTERNATIONAL DEBT ............................. 3
A . Size .......................................................... 3
B . Concentration ................................................. 3
C . Composition ...................................................
D . Pricing .......................................................
E . Structure .....................................................
F . Summary .......................................................
I11. ACTORS ............................................................
A . The U.S. Government ........................................... 9
B . The International Monetary Fund (IMF) ......................... 11
C . The Bank for International Settlements ........................ 13
D . The Borrowers ................................................. 14
E . Lenders and Supervisors ....................................... 19
1 . "A Rolling Loan Gathers No Loss" or the Recognition of
Losses ................................................... 24
2 . The Allocation of Costs .................................... 27
LESSONS ............................................................ 35
CONCLUSION ........................................................ 39
TRADE. COUNTERTRADE. AND PROTECTIONISM
FINANCE AND ADJUSTIIENT:
THE INTERNATIONAL DEBT CRISIS, 1982-84
Following t h e o i l p r i c e r i s e s of 1973-1974,
t h e subsequent world-wide
r e c e s s i o n , and t h e d r o p i n commodity p r i c e s , t h e d e b t l e v e l s o f many d e v e l o p i n g
countries rose rapidly.
F u r t h e r OPEC ( O r g a n i z a t i o n of Petroleum E x p o r t i n g
C o u n t r i e s ) o i l p r i c e r i s e s i n 1979-1980, a major t i g h t e n i n g i n U.S.
p o l i c y s t a r t i n g i n October 1979, a n o t h e r worldwide r e c e s s i o n accompanied by
h i s t o r i c a l h i g h s i n r e a l i n t e r e s t r a t e s , and a n o t h e r d e c l i n e i n commodity p r i c e s
f u r t h e r i n c r e a s e d LDC d e b t l e v e l s .
By l a t e 1982, when B r a z i l and Mexico, t h e
two l a r g e s t borrowers, n e a r l y d e f a u l t e d on t h e i r e x t e r n a l d e b t , t h e problem had
become a major i n t e r n a t i o n a l c r i s i s .
o f t h e d e b t problem
T h i s paper c o n s i d e r s s e v e r a l c h a r a c t e r i s t i c s
i t s s i z e , c o n c e n t r a t i o n , c o m p o s i t i o n , s t r u c t u r e , and
p r i c i n g , t h e r o l e of t h e v a r i o u s p a r t i c i p a n t s , and t h e impact on world t r a d e and
f i n a n c i a l markets.
F i n a l l y , t h e r e i s a b r i e f d i s c u s s i o n of p o l i c y i s s u e s involved.
CHARACTERISTICS OF INTEKNATIONAL DEBT
The O r g a n i z a t i o n f o r Economic Cooperation and Development (OECD) has
e s t i m a t e d t h a t t o t a l d i s b u r s e d medium- and long-term d e b t o f t h e less developi n g c o u n t r i e s was $606 b i l l i o n a t t h e end of 1983, having r i s e n d r a m a t i c a l l y
from $86.0 a t t h e end of 1971. 1/
A r e c e n t World Bank e s t i m a t e which i n c l u d e s
s h o r t - t e r m d e b t p l a c e s t o t a l Third World d e b t a t $810 b i l l i o n a t t h e end of
1983. 2 1 31 Gross hard c u r r e n c y d e b t o f E a s t e r n Europe and t h e S o v i e t Union
was e s t i m a t e d by t h e C e n t r a l I n t e l l i g e n c e Agency (CIA) t o be $28.7 b i l l i o n
a t t h e end of 1982. 4/
The i n t e r n a t i o n a l d e b t i s n o t o n l y huge, but a l s o h i g h l y c o n c e n t r a t e d .
T a b l e I , produced from OECD d a t a , emphasizes t h e s h a r p c o n c e n t r a t i o n of t h e
LDC d e b t ; i t i s o r g a n i z e d by s i z e of d e b t s e r v i c e .
The OECD b e l i e v e s t h a t s i z e
o f d e b t s e r v i c e i s a more meaningful way t o a s s e s s d e b t c o n c e n t r a t i o n because
a l a r g e d e b t on s o f t terms g e n e r a t e s o n l y a s m a l l d e b t s e r v i c e .
p. 5 4 7
E x t e r n a l Debt of Developing C o u n t r i e s , 1983 Survey.
World Debt T a b l e s , 1983.
T a b l e 9,
p. x i i .
3/ The number of c o u n t r i e s i n c l u d e d i n t h e OECD Survey and t h e World
Bank Debt T a b l e s a l s o d i f f e r s . The OECD e s t i m a t e c o v e r s 157 c o u n t r i e s ;
i n t h e World Bank e s t i m a t e 133.
Handbook of Economic S t a t i s t i c s , 1983, p. 46 and p - 71.
T o t a l 20 C o u n t r i e s 301.2
( % of Grand
T o t a l LDCs)
T o t a l LDCs
I n t e r e s t Paid
Next-ranking c o u n t r i e s
a/ Borrowers a r e r a n k e d by a v e r a g e d e b t - s e r v i c e p a y a e n t s i n 1981-82.
i n c l u d e b r a e l ( n o t i n c l u d i n g o f f i c i a l m i l i t a r y d e b t ) , Morocco, T h a i l a n d , Taiwan, I v o r y C o a s t .
b/ OPEC Member.
- Net o i l e x p o r t e r .
d / O u t s t a n d i n g i n t e r n a t i o n a l bank l o a n s f r o m DAC c o u n t r i e s and i n t e r n a t i o n a l c a p i t a l
markets (oFher t h a n o f f i c i a l l y guaranteed e x p o r t c r e d i t 8).
Source: OECD. E x t e r n a l Debt o f D e v e l o p i n g C o u n t r i e s , 1 9 8 3 Survey. p. 54, 5 5 , 7 6 , 7 7 , and 83.
(82 6 )
Debt S e r v i c e P a i d
o f w h i c h owed
t o b a n k s , d / 1982
Saudi Arabia b/
P e r u /;
Year-end D i s b u r s e d Debt:
I r a n b/
~ u g o s ha i
~ r ~ eina
V e n e z u e l a b/
TABLE 1. D i s b u r s e d Long-Term D e b t , Debt S e r v i c e , and I n t e r e s t P a i d ,
A l l LDCs and 2 0 L a r q e s t Borrowers a/
Y e a r End 1980-1982:
($ b i l l i o n )
found t h a t t h e 20 l a r g e s t d e b t o r s a c c o u n t e d f o r 76 p e r c e n t o f t h e d e b t s e r v i c e
p a i d by LDCs. 51
I n d e e d , B r a z i l and Mexico t o g e t h e r a c c o u n t e d f o r 25 p e r c e n t
of t h e debt s e r v i c e . 6/
Thus, i n t e r n a t i o n a l d e b t i s h i g h l y c o n c e n t r a t e d , i n -
c r e a s i n g t h e r i s k t o h o l d e r s o f t h e d e b t and v i o l a t i n g g e n e r a l l y a c c e p t e d
p r i n c i p l e s of p o r t f o l i o d i v e r s i f i c a t i o n .
P u b l i c o r P r i v a t e fund s o u r c e s
As shown i n t a b l e 11, o f t h e t o t a l d e b t d i s b u r s e d a t year-end
p e r c e n t was o f f i c i a l development a s s i s t a n c e ; 8 p e r c e n t , n o n - c o n c e s s i o n a r y
m u l t i l a t e r a l a s s i s t a n c e ; 23 p e r c e n t , e x p o r t c r e d i t s ; and 4 8 p e r c e n t , p r i v a t e
market c r e d i t s .
During t h e 1970s t h e r e had been a s h i f t from i n t e r - g o v e r n m e n t a l
t r a n s f e r s t o i n c r e a s e d p r o v i s i o n o f f u n d s by t h e p r i v a t e markets..
be a t t r i b u t e d t o t h e s u c c e s s w i t h which p r i v a t e m a r k e t s r e c y c l e d t h e OPEC
s u r p l u s and t o t h e u n w i l l i n g n e s s o f t h e OECD governments
t o provide financing.
S i n c e p r i v a t e f i n a n c i n g i s more c o s t 1y t h a n government
loans, t h i s s h i f t increased t h e l e v e l of debt service.
Much of t h e borrowing from p r i v a t e s o u r c e s h a s been done by t h e more
advanced d e v e l o p i n g c o u n t r i e s a t f l o a t i n g r a t e s , t h a t i s , a t a s p r e a d o v e r t h e
E x t e r n a l Debt o f Developing C o u n t r i e s :
1983 S u r v e y , p. 42.
Sources of Long-Tern Lending to LDC
(percent of total)
External Debt of Developinq Countries:
Official Development Assistance
p . 69.
London Interbank Offered Rate (LIBOR) or the U.S. prime rate. 71 The use
of floating rate debt increases the vulnerability of large borrowers to the
impact of rising interest rates which increase debt service costs.
Brazil, South Korea, and Mexico, as leading borrowers, had the highest
floating rate debt, accounting together for 81 percent of the floating rate
In addition to pricing international loans with variable interest
rates, loans are also most frequently denominated in U.S. dollars.
of an appreciating dollar, this also increases LDC debt service.
71 The London Interbank Offerred Rate is the rate at which high quality
hanks-in London are prepared to lend to each other in the interbank market.
The interest rate on Eurocurrency loans is usually expressed as a "spread"
External Debt, p. 67.
There has also been a major shift in the term structure of LDC debt:
the debt has become increasingly short-term.
This is, in itself, an
indication that LDC debt is viewed as increasingly risky.
As a country's
economic situation deteriorates, %anks become increasingly unwilling to lend
at longer maturities.
Large amounts of short-term debt open the borrowing
countries up to increasing difficulties in rolling over existing debt.
Countries having large short-term debt include Argentina, Brazil, South Korea,
The size, concentration, composition, pricing, and structure all
combine to make the international debt issue one of paramount concern.
Nothing, however, dramatized the problem more clearly than the late 1982
international financial crisis caused by the near default of the system's
two largest borrowers--Mexico and Brazil.
Emergency intervention by the
International Monetary Fund (IMF), the Bank for International Settlements
(BIS), the U.S. Treasury, the Federal Reserve and other central banks,
accompanied by the forced lending of the private international banks
served to contain the effects of the 1982 crisis.
The next section of
this paper looks at the institutions, the role they have played in the
international debt crisis, and how they may themselves have been changed
by the crisis.
Government h a s been a major s o u r c e of f i n a n c e f o r t h e d e v e l o p i n g
As o f September 3 0 , 1983, t h e U.S.
Government had made $52.4 b i l l i o n
i n long-term l o a n s t o d e v e l o p i n g c o u n t r i e s , i n c l u d i n g OPEC n a t i o n s . 1 0 /
l o a n s were a a d e under a v a r i e t y o f l e g i s l a t i o n , i n c l u d i n g t h e F o r e i g n A s s i s t a n c e
Act of 1961, t h e A g r i c u l t u r a l Trade Development and A s s i s t a n c e Act o f 1954
and t h e Export-Import
Bank Act of 1945.
Most o f t h e s e d e b t s
a r e owed by government o b l i g o r s .
I n a d d i t i o n t o t h e d e b t owed t o t h e U.S.
Government by d e v e l o p i n g c o u n t r i e s ,
$2.2 b i l l i o n was owed by E a s t e r n Europe and t h e S o v i e t Union. 11/
The b u l k o f
t h e s e l o a n s a r e a c c o u n t e d f o r by Commodity C r e d i t C o r p o r a t i o n (CCC) l o a n s t o
Poland, World War I1 l e n d - l e a s e t o t h e S o v i e t Union, and U.S.
Bank (Eximbank) l o a n s .
C u r r e n t l y , however, i n E a s t e r n Europe o n l y Hungary,
Romania, and Y u g o s l a v i a a r e e l i g i b l e f o r l o a n s from t h e U.S.
9 / For a f u l l e r t r e a t m e n t o f d e b t owed t o t h e U.S.
F o r e i g n I n d e b t n e s s t o t h e U. S. Government : An Overview.
C o n g r e s s i o n a l R e s e a r c h S e r v i c e , March 29, 1984, 34 p .
s e e Wertman, P a t r i c i a A.
L i b r a r y of Congress,
10/ U.S. T r e a s u r y . O f f i c e o f t h e A s s i s t a n t S e c r e t a r y f o r I n t e r n a t i o n a l
S t a t u s of A c t i v e F o r e i g n C r e d i t s o f t h e United S t a t e s Government,
September 3U, 1983.
Government has extended energency assistance during the debt crisis,
notably to Mexico and Brazil.
It has done this bilaterally through the Exchanqe
Stabilization Fund and other government agencies and multilaterally through such
agencies as the Bank for International Settlements.
The U.S. also participates in debt rescheduling.
on deht rescheduling is clear and specific.
U.S. Government policy
All deht rescheduling Is to be
done on a case-by-case basis within the context of a creditor club, that is,
the fornal group of creditors who negotiate with the debtor countries.
club is known as the Paris Club and is part of the Organization for Economic
Rescheduling is on the basis of nondis-
Cooperation and Development (OECD).
crimination among creditor countries.
Private unguaranteed credits are to be
on terms comparable to qovernment and government-guaranteed credits.
country is to inplement an economic prograa to correct its economic difficulties,
usually in cooperation with the Tnternational Monetary Fun3 (IMF).
reschedule payments in arrears and falling due not more than one year following
the rescheduling negotiations.
Finally, deht relief is not to be given as a
form of development assistance. 121
As the debt crisis has accelerated, the number of reschedulings has increased rapidly.
Between 1956 and the end of 1982 the Paris Club had held at
least 6 0 debt reschedulings for 2 0 countries. L3/
T.n 1983 debts of 15 countries
The impact of rescheduling varfed.
According to an IMF
12/ 1J.S. NatConal Advisory Council on Znternational Monetarv and Financial
~olicies. Annual Report for Fiscal Year 1982. July 14, 1983, p. 65-66.
13/ IMF. Debt Rescheduling:
September 1983, p . 28.
Finance and Development,
o f f i c i a l d e b t r e l i e f amounted t o l e s s t h a n 30 p e r c e n t o f t o t a l
d e b t s e r v i c e payments due when o n l y c u r r e n t m a t u r i t i e s were r e s c h e d u l e d , t h a t i s ,
payments f a l l i n g due d u r i n g t h e c o n s o l i d a t i o n p e r i o d .
When a r r e a r s were i n c l u d e d
d e b t r e l i e f was r a i s e d t o 100-200 p e r c e n t o f a c t u a l d e b t s e r v i c e i n about one
f i f t h of t h e c a s e s surveyed and more t h a n 200 p e r c e n t i n a f u r t h e r one f o u r t h .
Where o f f i c i a l i n d e b t e d n e s s t o o f f i c i a l c r e d i t o r s r e p r e s e n t e d a small p o r t i o n o f
some c o u n t r i e s t o t a l d e b t , r e l i e f was c o r r e s p o n d i n g l y s m a l l .
The I n t e r n a t i o n a l Monetary Fund (IMF)
The IMF has played one o f t h e most i m p o r t a n t r o l e s i n t h e d e b t c r i s i s .
The 146-member i n t e r n a t i o n a l monetary o r g a n i z a t i o n was founded i n 1945 t o
foster international financial stability.
The Fund p r o v i d e s s h o r t - and
l o a n s a t below market r a t e s ( c u r r e n t l y 6.6 p e r c e n t ) t o member
c o u n t r i e s e x p e r i e n c i n g balance-of-payments
w i t h them economic p o l i c y conditions--1MF
about fundamental economic a d j u s t m e n t .
These l o a n s c a r r y
t o bring
The amount o f r e q u i r e d adjustment
and t h e amount o f f i n a n c i n g a r e f i n e l y t u n e d .
LMF c o n d i t i o n a l i t y i s r e s t r i c t i v e
and may i n c l u d e s u c h t a r g e t s a s t h e l e v e l o f government s p e n d i n g , growth o f
money s u p p l y , exchange r a t e s , and t h e t r a d e b a l a n c e .
F a i l u r e t o meet t h e s e
t a r g e t s c a n r e s u l t i n d e l a y e d disbursement of IMF l o a n s o r t h e i r r e n e g o t i a t i o n .
A v a i l a b i l i t y of p r i v a t e funds i s a l s o a f f e c t e d by compliance w i t h IMF programs.
C o n d i t i o n a l i t y i s a unique a t t r i b u t e o f IMF l o a n s .
For t h i s r e a s o n P a r i s
Club c r e d i t o r s and commercial banks i n s i s t t h a t t r o u b l e d borrowers have an IMF
IMF c o n d i t i o n a l i t y i s , however, t h e c e n t e r o f much d e b a t e .
1 4 / T h i s paragraph f o l l o w s Brau, E. and R.C. W i l l i a m s . Recent M u l t i l a t e r a l
Debt E s t r u c t u r i n g s w i t h O f f i c i a l and Bank C r e d i t o r s .
Washington, D. C., I n t e r n a t i o n a l Monetary Fund, December 1983, p . 21.
While the principle of conditionalitv is, by and large, not
contested, there are strong rnisgivinss about the design and application of conditionality. In particular country cases these misgivings
related to the specifics of the performance criteria. Frequently,
Fund credits are negotiated in the midst of an economic crisis, with
reserves plummeting, foreign debts accumulating, accelerating inflation and serious dislocations to domestic production. While t h i ~
increases the value of access to the Fund, as a 1-ender of last resort,
it also gives Stand-by negotiations an unwanted flavour, with the
meaber government feeling it is rushing into actions it would rather
avoid and believing that it is in a weak negotiating position vis-avis the Fund. The Fund, for its part, sees itself as forced into
imposing harsher conditions than would have been necessary had the
member requested assistance at an earlier stage. The policy conditions laid down may be resented, both because of the loss of sovereignty implied and because of a belief that the Fund's objectives do
not necessarily coincide with those of the national government.
The Fund, on the other hand, often sees itself made a scapegoat
for unpopular measures made inescapable by poor economic management. -
The basic issue is whether the policy conditions are too "tight" or too "loose,"
that is, whether they involve too much or too little economic discipline.
conditionality consists of various austerity measures which usually result in a
recession in the recipient country, although economic growth may reappear in the
later stages of a program.
Particular concern has been expressed that the pro-
longed austerity which may be required by the current crisis is politically and
Indeed, the imposition of TMF conditionality has
sometimes been the occasion for riots, most recently in the Dominican Republic.
At another level the efficacy of IMF programs has been questioned.
the IMF listed some of the countries in which its program had been beneficial:
Mexico, India, Pakistan, Kenya, Somalia, Mauritius, Turkey, Hungary, Romania,
15/ Sutton, Mary. In Killick, Tony, ed. The IMF and Stabilization:
~ e v e l g i nCountry
Experiences. New York, St. Martin's Press (1984).
p. 4 .
and Yugoslavia. 16/ There is also a debate whether IMF prescriptions, when
applied multilaterally, are not cumulatively destructive of the goals which the
IMF is trying to achieve.
Nevertheless, under current circumstances private
funds would Se unlikely to be forthcoming without conditional IMF loans, and
these private loans comprise the major share of lending to Third World countries.
Lastly, it should be noted that the deep involvement of the TMF in the debt crisis
represents an important shift in the 1MF1s role as a provider primarily of shortterm funds to industrial nations to being a provider of medium-term funds to
developing countries (lending to industrial countries in the future should not
This shift is a result of major disequilibria in the world
economy, as well as economic mismanagement by individual countries.
further instability in the international econo-ny may imply a continued high
demand for IMF financing and further quota increases.
Although the IMF does not reschedule debt, it acts as a catalyst in negotiations between borrowers and lenders, fostering cooperation between governments,
central hanks, the Bank for International Settlements, and the commercial banks.
In this role the IMF stepped out aggressively during the Mexican and Brazilian
debt problems of late 1982. The TMF not only told the banks to lend but, in
order to insure that the countries got the funds necessary to assure success of
the adjustment program, told them how nuch to lend.
The TMF which once was con-
cerned that commercial banks not threaten IMF conditionality by lending too much
is now concerned that too little will be lent.
IMF assessment of how much funds
the banks will provide, that is, of a country's capital account prospects and its
implications for the current account, are key to the level of IMF funding.
16/ IMF. Fund Managing Director Describes Case Studies, IMF Survey,
~ e b r u G y6, 1984, p. 33, 42-47.
Finally, the IMFfs ability to provide resources to the LDCs was greatly
enhanced by the expansion, in late 1983, o f its quotas by 47.4 percent to
SDR 90 million (about $98.5 million).
The quotas are the IMFfs basic lending
The IMF General Arrangements to Borrow (GAB), which were initially
intended to finance balance of payments difficulties encountered by members
of the Group of Ten, were also expanded to permit access by all IMF members
in the event of a major international financial crisis.
The Bank For International Settlements (BIS)
Located in Basel, the Bank for International Settlements (BIS),
bank for central bankers, played an important role in the 1982-83 debt crisis.
The BIS provided short-term bridging loans to five countries: Mexico, Argentina,
Brazil, Hungary, and Yugoslavia.
The loans were intended as financing until
loans from the IMF could be obtained.
Provision of credit for developing
countries represents a departure from the normal role of the RIS, and the BIS
has curtailed its loans to troubled LDCs.
Thus, future involvement by the BIS
in international debt problems appears unlikely, although it may depend on the
extent of the crisis.
Throughout most of the 1970s the major borrowers had deteriorating balance-
Payments deficits accompanied by foreign borrowing and a
large external debt are normal for a developing country, as it was for the U . S .
in its infancy.
However, the unprecedented rise in oil prices followed by inter-
national recession and declining commodity prices led to dramatic payments
Argentina never drew on its standby credit.
deterioration and a run-up of LDC debt.
about the debt level.
As early as 1975 concern was expressed
Further oil price rises exacerbated the problem.
run-up of real interest rates following a shift in U.S. monetary policy in October
1979, rising dollar exchanse rates, and a shift to short-term and floating rate
debt also increased the LDC debt burden.
A major recession in the industrial
world and rising protectionism made it difficult for developing countries to earn
the foreign exchange needed to pay their debts.
For many countries, their ability
to adjust to these external shocks was frustrated by poor demand management and
unrealistic exchange rate policies.
Poor debt management meant that many countries
simply failed to realize the scope of their debt problem until their debt crisis
was upon them.
Domestic economic policies are also a major determinant of the existence
and extent of a debt problem.
The Latin American countries chose to follow
the path of import substitution.
That path led to quotas, overvalued exchange
rates, and increased foreign borrowing.
At the same time exports were handi-
By comparison, most of Asia successfully chose export-led
Exchange rates and other prices were not fixed and the market
mechanism usually allocated resources.
The results of these policies are
summarized by the Economist: 18/
18/ The Policy Difference.
~ e ~ t e m b e24,
r 1983, p. 39.
In World Economic Survey, The Economist,
Clearly, while import substitution policies initially Led to faster
growth, an export-led growth stategy had higher average qrowth and was more
resistant to economic recession.
Conventionally a debt crisis must be met by some combination of financing
and economic adjustment.
adjustment is required.
The greater the availability of finance, the less
The degree of adjustaent is also determined by the
severity of the economic and financial crisis.
linked to weak economic policies. -
Severe debt problems are closely
Thus, economic adjustment means policy
In practice, the focus is on denand management and pricing policies,
including exchange rate and interest rate policies.
Oversized fiscal deficits
must be cut back by cutting government spending and subsidies and by raising
Cuts in public sector borrowing, credit expansion, and money supply
are intended to control inflation.
Overvalued exchange rates, typically a
major cause of debt problems, are corrected by devaluation, with the hope that
resources will be directed to the export sector.
This mix of deflation,
disinflation, and devaluation aakes the upper tranche adjustment programs
economically painful and politically difficult.
For these reasons, for
example, Argentina has so far failed to negotiate an IMF program.
economic adjustment is inevitable and the alternative of adjusting without
a program could well be more difficult. Moreover, in the later stage of an
IMF program economic growth may emerge.
IMF programs are tailor-made for each country.
Programs are the product
of negotiations between debtor countries and the IMF and are embodied in a
confidential "letter of intent" to the Managing Director of the IMF.
191 IMF, Survey,
February 6, 1984, p . 42.
the same time, IMF rules require equal treatment of members, hence, the
similarities of the programs.
Economic policy change are expressed In
These targets are largely fiscal and monetary,
occasionally qualitative (such as balance of payments restrictions),
but never supply side.
Although inflation is frequently a major problem,
the inflation rate itself is rarely a target.
access to IMF funds.
Performance targets are the
Countries often find the targets difficult to meet,
principal measures of adherence to adjustment programs, thus governing
fall out of compliance, then renegotiate or cancel the proqram.
The success of IMF programs in individual countries appears to be
mixed, whether compared to key economic variables of the immediate past
or to the performance criteria. -
A look at the Third World's two largest
debtors illustrates some of the difficulties of measuring success.
return for a $3.9 billion credit Mexico reportedly agreed to one condition
in its letter of intent
cent of GNP.
the reduction of its budget deficit to 8.5 per-
(Additional details were apparently contained in an unreleased
Mexico has successfully compiled with its IMP per-
formance targets, yet Mexico remains in the severest economic crisis of
The achievement of large trade and current account surplus
during the last two years was offset by recession, high unemployment, and
In the wake of Mexico's difficulties, Brazil, the Third World's largest
debtor, was forced to negotiate a $4.9 billion extended arrangement with
20/ See discussion and footnotes in Killick and Sutton in Killick, Tony,
ed. Adjustment and Financing in the Developing World: The Role of the International Monetary Fund. International Monetary Fund, Washington, D.C., 1982.
p. 3 4 - 3 5 .
Conditions included cutbacks in government subsidies, state com-
panies, and debt.
In a test of its will to deal with its economic problems,
Brazil failed to cutback wage indexation, a major cause of inflation.
As a result Brazil fell out of compliance with its IMF programs.
IMF did not resume lending until after passage of a new wage measure, Decree
Law 2065, in Noveaber 1983.
Despite mofication of the wage indexation law,
in the first quarter of 1984 inflation was at an annual rate of 230 percent.
Brazil's IMF accord does not contain an inflation target, but other targets
imply an inflation rate of about 100 percent.
The present rapid inflation has
jeopardized Brazil's adherence to targets which are in its program and caused
Brazil to be out of compliance with its fifth and latest IMF accord.
while, Brazil's trade surplus has soared; unemployment in industrial areas
is stabilizing; and the government, disagreeing with private economists, is
forecasting economic growth for the first time in four years.
results following imposition of an IMF program in Brazil also appear to be
Tn addition to the conventional approaches of finance and economic adjustment,
a political approach to the debt problem has been suggested recently, namely the
formation of a "debtors' cartel" to extract more favorable terms from lenders.
This idea has been discussed by the nonaligned nations, but it is in Latin American
where the idea has gained the aost acceptance.
In Latin America, with more than
half of the outstanding LDC external debt, the idea of a debtors' cartel was first
discussed in Ecuador at a March 1983 qeeting of the Inter-American Development
Bank. In September 1983 a report produced by the U.N.
Commission for Latin America
and the Latin American Economic System was discussed at the OAS meeting in Caracas.
According to the Wall Street Journal this report recommended institutionalizing
the restructuring of debt, greater refinancing, longer postponement of principal
payments, additional new financing, lower fees and interest rates on refinancings,
and increased loans from government and multilateral organizations. 21/
the proposal wanted more money on easier terms.
At meetings held in Quito from
in January 9-14, 1984, and Cartagena on June 19-20, 1984, these proposals were
The failure of a debtors cartel to develop has been in part because of the
disparate interests of the major borrowers, such as Brazil and Mexico, and the
As one banker put it "the cocktail theory of a debtors'
cartel is not the real world.
There are too many different trade patterns
among debtors, different political systems and different staqes of negotiations
with the IMF." 22/
For the moment, at least, the debtors will go the more
traditional route of rescheduling, financing, and adjustment.
rescue of Argentina by four Latin debtors reinforces this view.
ficance of the cartel idea may well be the extent to which it merges with
earlier LDC demands for increased long-term aid and a new economic order.
Beyond pressing for more funds and softer terms, the option of outright default
is only likely to be taken when a country perceives it has less to lose and
more to gain from such an action, such as Cuba in 1962.
no countries have so far chosen to default.
In this debt crisis
Cessation of trade, cutoff of
loans, attachment of assets, and general economic isolation
-- are an extremely high
price to pay for getting out from under
foreign debt, especially when rescheduling is an alternative.
21/ Rout, Lawrence. Bankers Worry Monday's OAS Meeting May Boost Support
for Debt Moratorium. Wall Street Journal, September 2, 1983, p . 16.
22/ Brazil to Join Caracas Debt Strategy Talks, Financial Times,
A U ~ 10,
U ~1983, p. 1, 4.
Recent loan packages negotiated by Mexico, Brazil, and Peru have softened
It is problematic, however, whether this is the market's recognition
of economic improvement in these countries or a recognition that, over the
long pull, debtor countries probably cannot sustain a continuation of previously
high borrowing costs.
E, Lenders and Supervisors
At the end of December 1983 the banks reporting to the BIS had assets in
23/ Domestic U.S. banks accounted for apthe non-OPEC LDCs of $256.2 billion. proximately $127.6 billion of this lending, nearly SO percent in Latin America. 241
With such large holdings it is not surprising that the international debt
crisis of 1982-1983 has had as dramatic an impact on international lenders
and international financial markets as it has had on other actors in the international financial system. Important changes have occurred in the international
money and capital markets.
Fundamentally, there has been a greater emphasis on
This has resulted in some market tiering.
The $1-trillion interbank market consists of short-tera deposits banks
keep with each other.
Banks unable to obtain funds in the interbank market
may face a liqudity crisis threatenins the entire system.
This is not just
a hypothetical possibility. When Ranco do Brazil, the settlements bank
for Brazil, was having difficulty meeting its obligation in mid-December
1982, five Mew Pork banks lent it $175 million rather than allow the market
to come to a halt.
This is important not only because the interbank market
231 BIS. International Banking Developments.
~ ~ r i l T 9 8 4 .Table 5 .
241 Federal Reserve Board of Governors.
v. 7 0 T ~ ~ r i1984.
Fourth Quarter, 1983.
Federal Reserve Bulletin,
CRS- 2 2
was nearly brought to an abrupt stop, hut also because an acutely clear
message was delivered; loans between banks carried a risk.
Banks began to
reexanine their interbank lines and the market began to shrink dramatically.
Maintainence of interbank lines became a crucial factor in major debt rescheduling~,such as Mexico and Brazil.
Regional banks, in particular, were
reluctant to maintain interbank lines, creating a major problem.
shrinkage, however, may have left the market smaller and healthier. 25/
Perhaps the financial turmoil of 1982-1983 had its deepest impact on the
Eurodollar syndicated loan market.
In 1983, the volume of lending in the
Eurodollar loan market dropped by one-third to $ 6 4 . 3 billion, the sharpest
decline ever recorded by the OECD.
This shrinkage largely reflected concern
over credit risk, but it also reflected the increasing use of International
Ranking Facilities (IBFs) in the U . S . and increased use of floating rate notes.
Toward the end of 1983 market concern for quality meant that most loans went
to OECD countries, and, since more banks were chasing fewer borrowers margins
were also shrinking.
New loans to developing countries were almost exclusively "forced lending,"
that is, banks are being forced to maintain or increase lending in support of
IMF adjustment programs. International credit is to a large extent being allocated.
Syndicated loans have, in practice, become nearly an open-ended commitment to
Rescheduling makes it difficult for a bank to withdraw from a loan
25/ See for example, Atkinson, Caroline and James L. Rowe Jr., Smaller
~ a n k r s l a s hLoans, Complicating Brazil Resue, Washington Post , February 23,
1983, F1, F2; Bennett, Robert A., I.M.F. Plans Plans Pressure on Banks to
Help Brazil, New York Times, December 15, 1982, p. Dl, D3; and Hall, William,
Banks Urged to Keep Open Credit Lines, Financial Times, February 19, 1983,
p. 1, 14.
Moreover, bankers are likely to find their actions constrained in
this fashion for years to come.
This has made Eurodollar loans to LDCS relatively
A secondary market in Eurodollar credit that includes both sub-participation,
in which larger banks sell parts of loans to smaller banks, and a discount market
in reschedule4 sovereign debt also developed in 1983.
The market is small (about
$2 billion), in comparison to the major international financial markets, but
It introduces on element of flexibility, allowing banks to partially
restructure their balance sheets, increasing their liquidity, and enabling them
to lend to more highly rated borrowers.
It also helps to solve the problem of
mismatched maturities and enhances the primary syndicated loan market.
however, adversely affect the rescheduling process, as, for example, when Bankers
Trust sold some of its Brazilian exposure while simultaneously participating in
Brazil's advisory committee. The regulatory climate has also changed substantially as a result of the
On April 7, 1983, the Federal regulatory authorities issued a
Joint Memorandum which improved supervision and tightened regulation of the
international lending of U.S. banks.
The Joint Memorandum included clear
guidelines for bank examiners commenting on large international exposure,
public disclosure of large concentrations of country debt, amortization of
spreads and fees earned in debt rescheduling, and the requirement to maintain
reserves for "troubled" international credits.
Shortly thereafter Federal
26/ Montagnon, Peter. Debt Crisis Brings New Creativity to Banking.
~ i n a n x a lTimes, December 15, 1983. p. 21.
27/ Hector, Gary. The Banks' Latest Game:
~ e c e m K r12, 1983. p. 112.
regulators imposed a requirement on the 17 largest banks to maintain capital
equal to 5 percent of their assets by 1954.
The requirenent merely locked
in existing capital levels in nost cases.
The Joint Memorandum was issued in a climate of congressional charges of
hank irresponsibility in LDC lending and was perhaps intended to preempt
more stringent congressional action.
Congressional desire for tighter con-
trol of international lending by U.S. banks was eventually embodied in
title IX of PL 98-181, the "International Lending Supervision Act," which
was enacted on November 30, 1983.
This law requires Federal authorities to
evaluate foreign country exposure and transfer risk and to establish procedures
taking these into account in evaluating capital adequacy.
of capital adequacy are to be established.
Special reserves may also be
required when a bank's assets have been impaired by "a protracted inability
of public or private borrowers in a foreign country to make payments on
their external indebtedness."
Fees are to be amortized and disclosure
requirements are tightened up.
Increased international cooperation on the issue of bank supervision may
also be aiding international financial stability.
Following the 1974 collapse
of a large German hank, 1 . D . Herstatt, a committee of major central banks
(the Committee on Banking Regulation and Supervisory Practices or the Cooke
Committee after Peter Cooke of the Rank of England, its Chairman) was established
to examine problems of international banking regulation.
This committee, the
main organ of international banking cooperation, prepared the first Rase1
The Concordat was endorsed by the governors of the major central
banks in December 1975, but was never published.
It established lines of
authority for the supervision of branches, subsidiaries, and joint ventures
of international banks.
Branches were to be primarily the responsibility
of parent supervisory authorities; subsidiaries and joint ventures, of host
It stopped short, however, of addressing the central problem
of how lender-of-last resort responsibilites are to be shared.
In part this
is because lender-of-last resort responsibilities must necessarily be left
vague so as not to encourage bank imprudence.
in August 1982.
This is known as the "moral
The limitations of the 1975 Rasel Concordat were revealed
The bankrupcy of Italy's Banco Ambrosiano threatened a
Luxembourg subsidiary, but neither the Italian nor the Luxembourg authorities
would take responsibility for the Luxembourg subsidiary, which was allowed
The failure of either authority to take responsibility called
into question the validity of the 1975 Base1 Concordat.
Concordat was issued in May 1983.
A revised Rasel
It clarifies lines of supervisory authority
by emphasizing supervision of a bank's business on a consolidated basis by
parent country authorities.
Although the failure of Banco Amhrosiano was
unrelated to the debt crisis, it served to strengthen international cooperation in a critical area at a critical time.
Participation in the debt crisis has not been limited to the commercial
Investment banks also play a role.
Approximately 10 investment banks
are involved in giving advice to developing countries on financial matters,
including debt rescheduling.
The most important of the investment banks
which are giving countries advice is the combined financial service of
the Troika, consisting of the firms of Lazard Freres et Cie in Paris, S. G.
Warburg h Co. in London, and Lehman Brothers Kuhn Loeb in New York.
signed its first contract in February 1975 with Indonesia, at the onset of
Pertiminia's difficulties, thereby initiating a new phase in bankers' role as
advisors to sovereigns.
By March 1983, Institutional Investor was estimating
the fee income from advising governments was $50-$60 million, fully half of
which was accounted for by the Troika. -
The investment banks' role as
advisors to financially troubled countries has sometimes generated opposition
from commercial banks involved in debt negotiations who tend to view the
investment bank as polarizing the negotiations.
This was particularly the
case in the two-year rescheduling of Costa Rican debt, thee longest negotiations
Nevertheless, clients appear to be willing to continue the relation-
ship, although some have pressed for lower fees.
Counseling on debt and reserve
management, borrowing and trade strategies appear so far to be a positive contribution to improving the financial expertise of the developing countries.
"A Rolling Loan Gathers No Loss" 29/ or the Recognition of Losses
For some time there has been a debate whether the debt crisis is a liqudity
crisis or a solvency crisis, i.e. whether the LDCs cannot pay now or cannot pay
This debate tends to fog the issue, polarizing it into one of alternatives,
thereby possibly obscuring policy options. 30/ One banker bridged this chasm
by terming the LDC debt crisis a "long-term liquidity crisis." 31/
is likely to be a matter of time and degree.
Nevertheless, the perceived
ability to pay determines the relative amounts of finance and adjustment.
25/ Koenig, Peter. Country Advice:
~nvestor,v. 17, March 1983, p. 369.
Tales of the Troika.
29/ Pardee, Scott. Prospects for LDC Debt and the Dollar. Federal
~ e s e r Bank
of Kansas City. Economic Review, January 1984, p. 6.
30/ See Bell, Geofrey and Graham Ruttidge. How To Account for Problem
~oans, The article details a range of models of countries experiencing
varying degrees of debt difficulties.
31/ de Vries, Rimmer at the Cato Institute Conference, "World Debt and
the ~ G e t a r yOrder." January 20-21, 1984. Proceedings soon to be published.
t h e c r i s i s i s c o n s i d e r e d t o be a m a t t e r of l i q u i d i t y , t h e n more f i n a n c i n g i s
r e q u i r e d ; i f a m a t t e r of s o l v e n c y , more a d j u s t m e n t w i l l h e n e c e s s a r y .
If t h e s e
a r e u n s u c c e s s f u l , t h e n t h e hanks f a c e t h e n e c e s s i t y of w r i t i n g o f f some of t h e i r
To w r i t e - o f f
a l o a n i s t o r e f l e c t t h e Loss on t h e b a n k ' s b a l a n c e
sheet, resulting, a t b e s t , i n a decrease i n p r o f i t s .
Banks' LDC a s s e t s have d e t e r i o r a t e d w i t h a widening gap between t h e
nominal v a l u e and t h e market v a l u e ( a s , i n d e e d , t h e e x i s t e n c e of a d i s c o u n t
market i n d i c a t e s ) .
Under some c i r c u m s t a n c e s LDC l o a n s may be w r i t t e n o f f
a g a i n s t t h e banks' l o a n l o s s r e s e r v e s , a p a i n f u l e x p e r i e n c e .
i n 1983 U.S.
r e g u l a t o r s moved t o s t r e n g t h e n t h e f i n a n c i s l system by r e q u i r i n g
t h e 17 l a r g e s t U.S.
banks t o i n c r e a s e t h e i r c a p i t a l t o 5 p e r c e n t of assets.
By t h e end of 1983 a l l had complied. ( P r i m a r y c a p i t a l i n c l u d e s e q u i t y , d e b t
s e c u r i t i e s c o n v e r t i b l e i n t o common s t o c k , and r e s e r v e s f o r l o s s e s . )
t h e m s e l v e s have a l s o t a k e n measures.
The b a n k s
S i n c e bank s h a r e s were weak, U.S.
s o l d $2.5 b i l l i o n i n p r e f e r r e d s t o c k . 32/
Provisions t o loan l o s s reserves
by t h e t o p 10 banks were up by $2.9 b i l l i o n o r by 1 3 . 5 p e r c e n t i n 1983. 331
I n c r e a s e d l o a n l o s s r e s e r v e s p u t banks " i n a s t r o n g e r p o s i t i o n t o a b s o r b f u t u r e
problems, p a r t i c u l a r l y i n l i g h t o f c o n t i n u e d u n c e r t a i n t y i n v a r i o u s c r e d i t
m a r k e t s " a s Rank o f America P r e s i d e n t Sam Armacost p u t i t . 34/
On t h e o t h e r
hand, nonperforming l o a n s i n c r e a s e d by $ 1 4 . 1 b i l l i o n d u r i n g 1983. 35/
32/ L a s c e l l e s , David. Why t h e Banks Have B u i l t Up T h e i r R e s e r v e s .
~ i n a n c i a lTimes, A p r i l 2, 1984, p. 1 6 .
34/ I b i d . Bank of America i n c r e a s e d i t s l o a n p r o v i s i o n s from 0 . 8 7 p e r c e n t
t o 1.25 p e r c e n t i n t h e f a c e of c o n s t a n t e a r n i n g s .
35/ B a l l , William. F l a t P a t c h e s i n a Champagne Year.
~ a n u 2z4 ,~ 1984, p. 1 3 .
F i n a n i c a l Times,
CRS- 2 7
In addition to general reserves, under the terms of the International
Lending Supervision Act of 1983 (Title T V of the IYF legislation, P.L. 98-181)
special reserves against specific losses may be requfred.
The requirement to
establish special reserves amounts to declaring a default and is likely to be
used sparingly in order to avoid undermining any efforts that a country might
be making to straighten out its arrears.
Putting aside any additions to loan loss reserves--general or special-adversely affects a bank's profits picture.
Since a loan loss reserve is often
replenished at the time of a write off, the effect is to take the loss out of
As one banker stated:
"the courage with which people establish loan
loss reserves is inversely proportional to the size of the loan." of their more limited exposure, regional hanks are in a better position to
recognize losses. This also helps to explain their reluctance to continue in
various loan consortia; they simply have less to lose.
The issue just discussed is the recognition of losses, but losses can be
avoided or hidden.
Financing may be extended to keep a borrower afloat or to
Financing can also be used to avoid losses.
avoid losses is to "front-end load."
A major way to
This procedure permits the rapid drawdown
of new loans, usually for the purpose of paying arrears on earlier loans.
major advantage of front-end loading is that it prevents earlier loans from
becoming non-performing and it increases bank profits.
are offset by equally substantial disadvantages.
to an incentive to run up arrears.
The front-end load amounts
Quick disbursement makes it easier for
the borrower to break commitments or, conversely, it diminishes the leverage
36/ Hector, Gary.
The True Face of Bank Earnings.
Fortune, April 16,
of lenders over the borrower.
By papering-over losses it impedes the develop-
ment of long-term solutions to the debt problem.
loading makes the debt crisis worse.
In addition, front-end
Total debt and total debt service are
increased and added to existing debt aggregates. Moreover, the so-called
"new" financing results in no new productive capacity able to produce export
earnings to defray the debt in the future.
structural; it feeds upon itself.
Thus, the debt problem has become
To preserve the present apparent viability
of the international system an illusion has been created which may actually
increase system vulnerability.
Lastly, front-end loading is unlikely to
reduce the risk of voluntary default.
2. The Allocation of Costs
Between 1973 and 1982 the non-oil producing LDCs had a cumulative cur37/
rent account deficit of $541.9 billion. -
(This number would expand if oil
producers with current account deficits were included.)
The deficits were
largely financed by net external borrowing amounting to $425.6 billion.
$179.5 billion or 42.4 percent of net borrowing came from private financial
institutions, not including short-term credit.
Long-term borrowing from
official sources amounted to $132.5 billion or 31.3% of the total net longterm borrowing.
Reserves were drawn down by $66.5 billion.
financial institutions played the dominant role in financing the LDC deficits
occurring in the post-1973 era.
The relative shares of the sources of LDC
finance affects at least the initial distribution of the real costs associated
with the deterioration of loans to LDC's.
TJltimately, however, these costs
37/ For a yearly breakdown and additional details on the financing
of thrcurrent account deficits, see IMF. Annual Report 1983, p. 33.
will be allocated either by political decisions of the borrowing and lending
countries, arbitrarily or consensually, or by the private international
financial markets based on the existing distribution of outstanding financing.
Numerous proposals have been put forrard which would have both recognized
the losses and allocated them, often to U.S. taxpayers.
Most of these pro-
posals called for discounting LDC debt an3 for a protracted payback. None of these proposals attracted much political support in the 17.S.
modest proposals call for the banks to cap interest, lower "spreads",
extend longer or variable maturities, lengthen grace periods, lower fees,
and provide greater equity financing.
In this case costs of the LDC loans
would remain with the banks.
If the debt problem is chronic, the Congress and other major legislative
bodies may face decisions regarding the costs of the LDC debt crisis, their
allocation, and, perhaps, their socialization.
38/ The two most well-known of the proposals are put foward by Kenen,
Outline For a Proposal for an Interntional Debt Corporation.
Princeton University, May 3, 1983 and Rohatyn, Felix G . A Plan for Stretching
Out Global Deht. Business Week, February 28, 1983. p. 15-18.
TRADE, COUNTERTRADE, AND PROTECTIONISM
E x p o r t s p r o v i d e t h e hard c u r r e n c y e a r n i n g s which a l l o w d e v e l o p i n g c o u n t r i e s
t o pay t h e i r d e b t s e r v i c e .
They a l s o r e p r e s e n t a s i g n i f i c a n t p o r t i o n of GDP.
A f t e r a d r o p i n e x p o r t e a r n i n g s i n 1982, t h e r e was a s l i g h t i n c r e a s e i n e x p o r t
e a r n i n g s d u r i n g 1983 ( s e e t a b l e 4 ) , a t t r i b u t a b l e t o economic r e c o v e r y .
A t the
same t i m e , a marked d e c l i n e i n i m p o r t s r e s u l t e d i n a n improvement i n t h e t r a d e
F u r t h e r c u t s of LDC i m p o r t s , however, may b e d i f f i c u l t t o a c h i e v e .
t h e f i r s t p l a c e , some LDCs r e q u i r e s u b s t a n t i a l food i m p o r t s .
o f components f o r manufactured goods i n t e n d e d f o r e x p o r t a r e a l s o a n i m p o r t a n t
p a r t of t h e t r a d e p i c t u r e ; they can n o t be c u t without jeopardizing f u t u r e
TABLE 4 .
I n t e r n a t i o n a l T r a d e o f t h e Non-Oil
( b i l l i o n s of U .S. $ )
E x p o r t i n g LDCs
D o l l a r Value
Annual P e r c e n t a g e Change
+ l .8
D o l l a r Value
Annual P e r c e n t a g e Change
D o l l a r Value
Annual P e r c e n t a g e Change
IMF, I n t e r n a t i o n a l F i n a n c i a l S t a t i s t i c s , August 1984.
A r e l a t e d p o i n t i s t h a t t h e non-oil
c o u n t r i e s have f a c e d a d v e r s e and worsening t e r m of t r a d e e v e r y y e a r s i n c e
I n p o r t p r i c e s have r i s e n f a s t e r t h a n e x p o r t p r i c e s .
It simply t a k e s
more e x p o r t s a l e s t o p u r c h a s e t h e same amount of i m p o r t s .
h a s p l a y e d an i m p o r t a n t r o l e i n t h e LDC t r a d e .
I m p o r t s from
t h e U . S . amounted t o $ 6 3 . 3 b i l l i o n o r 15.9 p e r c e n t of t o t a l non-OPEC LDC imports.
The non-OPEC LDC t r a d e d e f i c i t w i t h t h e U . S . was $3.0 b i l l i o n .
I f OPEC
n a t i o n s a r e i n c l u d e d , LDC e x p o r t s t o t h e U . S . would r i s e by $26.4 b i l l i o n and
i m p o r t s by $23.2 b i l l i o n .
C a l c u l a t i o n s from IMF f i g u r e s a l s o i n d i c a t e t h a t
t h e U . S . h a s a p r o p o r t i o n a t e l - y l a r g e r s h a r e of LDC t r a d e t h a n o t h e r i n d u s t r i a l
c o u n t r i e s . 39/
LDC t r a d e i s a l s o h e a v i l y d e p e n d e n t on t h e U.S.
I n 1982, $60.3
b i l l i o n o r 19.5 p e r c e n t of a l l non-OPEC LDC e x p o r t s went t o t h e U.S.
shown i n t a b l e 5, t h e t r a d e o f s e v e r a l major b o r r o w e r s as i s even more depend e n t t h a n t h e a v e r a g e LDC on t h e U . S . market.
TABLE 5. E x p o r t s t o t h e U.S. a s a P e r c e n t a g e o f T o t a l E x p o r t s ,
S e l e c t e d C o u n t r i e s , 1982
S o u t h Korea
IMF D i r e c t i o n s o f T r a d e Yearbook, 1983.
C a l c u l a t e d from IMF, D i r e c t i o n s of T r a d e , Yearbook, 1983.
LDC trade is frequently concentrated by product, causing market disruption
in some industries, such as steel.
The need to increase exports because of
debt service problems has exacerbated the problem.
The recent recovery has
apparently not given much respite to some import-beleaguered sectors.
the GATT estimates that 30 to 40 percent of the non-oil producing LDCs' exports are under some kind of restraint in the markets of the creditor countries. 40/ Protectionism may save jobs in the short-run but it does so at
the cost of preventing the LDCs from servicing their debt and increasing their
imports from each other and the industrial nations.
While imports from the LDCs may displace U.S. jobs in some industries,
exports to the LDCs also expand U.S. job opportunities.
Between 1981 and 1983
exports to the 11 major debtor countries shown in table 5 dropped by
$15.2 billion, representing a significant loss of jobs. 41/ Only South Korea
consistently increased its imports from the U.S.
This may, in part, reflect
Korean attempts to deflect U.S. protectionism and deal with 1J.S. demands
for a more open Korean market.
a drop in both U.S.
In any case, the debt crisis has resulted in
exports and jobs in the export sector.
40/ General Agreement
Geneva, 1983, p. 14.
on Tariffs and Trade.
International Trade 1982/
41/ Reportedly, the Commerce Department estimates that 25,000 jobs are
generated by each $1 billion of exports. Farnsworth, Clyde H. Third World
Debt Means Fewer Jobs for People. New York Times, December 11, 1983, p. E3.
This would imply an estimated job loss of 383,000.
CRS- 3 4
TABLE 6. U.S. Exports to Selected Major LDC Borrowers
(billions of dollars)
4 1 .Q
U.S. Department of Commerce, FT 990, various years.
As discussed above, the LDC debt crisis has intensified protectionist pressures in the import-competing industries and unemployment in the export sector.
It has, thus, made the management of trade policy nore difficult.
it has the potential to adversely distort resource allocation in the IT.S.,
with an unfavorable impact on the U . S . international competitive position.
This would be particularly likely if the debt crisis is prolonged.
Finally, one of the by-products of the LDC debt crisis is the growth in
countertrade, or barter, trading in which export sales are paid for in kind.
Traditionally, countertrading has most often occurred hetween Eastern Europe and
the industrialized West.
With the onset of the debt crisis, however, it has
increasingly involved Third World countries.
As a result, countertrade has
been growing, with estimates that it now accounts for 20-40 percent of world
Its chief advantage is in enabling an overborrowed country to
trade when they might otherwise not be able to trade.
This may be particularly
important as increasing amounts of new credit go to the repayment of interest.
However, countertrade has serious drawbacks.
It is costly.
often involves goods which are inferior or obsolete, companies involved in
such deals usually raise their "prices" to reflect the possibility that goods
received in such transactions may not be resaleable.
It is also inconvenient
for a corporation asked to resell countertraded goods outside their own sector.
Lastly, and most seriously of all, it represents a breakdown in the multilateral
international trading system into bilateral arrangements which is extremely
destructive to the allocative efficiency of the trading system.
It is not a
substitute for a more open market.
421 International Trade Reporter.
sept=ber 13, 1983. p. 868.
Export Weekly, v. 19, no. 23,
There are varied lessons to be learned from examining the debt crisis.
Some of these lessons are briefly summarized below:
Exogenous (external) factors are a major determinant of external
The price of oil was an important external variable helping
to precipitate the international debt problems in the early stages.
U . S . domestic economic policies became very important since they resulted in
high real interest rates and world-wide recession.
2. Domestic economic factors are also very inportant. Countries pursuing
export-led growth strategies, tend to have less serious problems with external
debt than those pursuing import substitution policies.
3. Poor debt management is a major cause of the crisis.
macroeconomic policies, effective external debt management involves knowing
the debt, deciding how much to borrow, and selecting the appropriate available financing. 43/
In most countries experiencing debt-servicing difficulties
these conditions for effective debt management are not met.
country after country did not keep sufficient records to determine the extent
of their borrowing.
The IMF and the investment banks are trying to improve debt
The debt problem has been met with more than an ad hoc or "muddling-
through" response. Elements of the international system have changed.
4 3 / Hope, Nicholas and Thomas Klein. Lssues in External Debt Management
and Development. September 1983, p. 2 4 .
national banks are locked into "forced lending," but are in better financial
condition than a few years ago.
The syndicated loan market has all hut dried
up, but the floating rate note market has expanded.
In perhaps one of the most
significant changes, the IMF has taken a role of leadership in the rescheduling
The rescheduling process itself appears to have been institutionalized,
with a protocol concerning the order of negotiations having emerged.
and, reluctantly, the BIS have played a very important role in providing
Trade offs must be made between the amount of financing and the amount
of economic adjustment.
To a large extent this is determined by a country's
political capacity to carry forth an austerity program.
The stability and
success of an IMF progran is, thus, the hostage of political constraints.
A miscalculation could be dangerous.
6. The timing of an IMF adjustment program may perhaps be important to
the success of the program.
The Mexicans who used "shock treatment" have had
better success than the Brazilians whose approach to the Fund was somewhat
The two cases are not entirely comparable, however, and there may be
no single "right" timing.
There is a chasm between the positions of the money center banks and the
So far, the banks have largely remained united but this unity
may fragment if conditions worsen.
Fragmentation would complicate negotiations.
Protectionism by the Paris Club creditors deprives LDCs of the ability
to pay their debts and to purchase goods inported from the developed world.
l'he developed countries, therefore, pay a substantial price for protectionism
as well as the LDCs.
During 1983 and e a r l y 1984 p r o s p e c t s f o r h a n d l i n g t h e LDC d e b t problem
The key f a c t o r , economic r e c o v e r y i n t h e d e v e l o p e d c o u n t r i e s , was
s u f f i c i e n t l y s t r o n g t o a i d t h e LDCs.
T h i s meant t h a t LDC e x p o r t s t o t h e
i n d u s t r i a l n a t i o n s expanded, h e l p i n g t o b r i n g a b o u t improvement i n t h e i r c u r r e n t account.
Commodity p r i c e s a l s o improved d u r i n g 1983.
prices, i n p a r t i c u l a r , did not r i s e dramatically.
Meanwhile, o i l
Diminished r e v e n u e s h u r t
t h e o i l - e x p o r t i n g LDCs, b u t t h e low o i l p r i c e s h e l p e d t h e o i l - i m p o r t i n g LDCs.
I n f l a t i o n was a t t h e l o w e s t l e v e l i n f i f t e e n y e a r s .
O t h e r f a c t o r s c o n t r i b u t e d g r e a t l y t o t h e improved s t a t e o f t h e LDC d e b t
problem i n 1983.
The i n t e r n a t i o n a l f i n a n c i a l s y s t e m a d a p t e d c r e a t i v e l y a s t h e
c r i s i s u n f o l d e d a f t e r l a t e 1982.
The IMF h a s p l a y e d a l e a d e r s h i p r o l e , and
i n t h e view o f many, f o r b e t t e r o r w o r s e , an IMF program i s t h e s i n e q u a non
of a d e b t rescue.
The r e s c h e d u l i n g p r o c e s s i t s e l f h a s become i n s t i t u t i o n a l i z e d
S h o r t - t e r m d e b t and d e b t s e r v i c e r a t i o s f o r t h e b o r r o w e r s d e c l i n e d .
i n t h e f i n a n c i a l m a r k e t s a l s o seemed t o improve making banks b e t t e r a b l e t o
w i t h s t a n d t h e p r e s s u r e s o f t h e LDC d e b t c r i s i s .
were g e n e r a l l y up.
Some w r i t e - o f f s were made.
C a p i t a l r e s e r v e s and p r o f i t s
Balance s h e e t s appear t o have
b e e n h e a l t h i e r , a l l o w i n g some growth i n " s p o n t a n e o u s " new c r e d i t d u r i n g t h e
l a s t q u a r t e r t o a r e a s o u t s i d e L a t i n America.
The f l o a t i n g r a t e n o t e m a r k e t
expanded p r o v i d i n g a s o u r c e o f f u n d s f o r b o t h b o r r o w e r s and f o r t h e m a j o r
i n t e r n a t i o n a l banks.
A s m a l l d i s c o u n t market f o r LDC d e b t emerged d u r i n g 1983.
Improvements in bank regulation should provide the climate for greater international financial stability.
Nevertheless, some of the achievements of 1983 appear to hide future difficulties. Despite an expansion of exports, improvements in the current account
balance were also bought at the expense of severe import compression rather than
just export expansion. Future export growth and recovery are, therefore, likely
to be hampered.
In 1983 debt service exceeded net inflows by $11 billion; the
developing countries, incongruously, have become net exporters of capital. Latin America, which has the severest debt problems, has received little new
Perhaps most seriously of all, the world debt problem is just being
rolled over into the future.
As Harold B. Malgram, former U.S. Trade Repre-
sentative, stated it, "[mlost of the debt problems have simply been postponed in
the hopes that world economic growth, improved trade performance and lower interest
rates will make the future a better time to address fundamentals." 451
Bank estimates that 65 percent of all LDC debt will fall due in 1987. 461 Finally,
the debt rescue packages result in both increased total debt and increased debt
Successful management of the debt crisis depends to a large extent on the
macroeconomic policies of the industrialized countries, especially the United
Sustained noninflationary qrowth wtth lower real interest rates,
World Debt Tables, 1983-1984, p. x.
45/ Farnsworth, Clyde H .
~ a n u a v2, 1984, p. 39, 41.
IMF Girds to Meet Bids for Aid.
461 Bureau of National Affairs.
~ e b r u z y7, 1984. p. L10.
Daily Executive Report.
New York Times,
moderately rising commodity prices, stable oil prices, and a realistically priced
dollar would provide a congenial environmnent for easing the crisis.
increases in the FJ.S.
prime rate belie such a scenario and have generated
increased concern about the ability of the LDCs to handle their debt.
Finally, concern has been expressed by some writers that the debt crisis
has moved into a new phase.
As Scott Pardee formulated the problem,
rtlhe flash point has shifted from purely financial considerations,
which influence the ability to pay, to political considerations,
which might affect the willingness to pay. The fear in the markets
now is that one or more countries will be forced by events to
flatly repudiate their debts. Such an action is likely to be
in a political context in which hard work and skillful negotiation
by experts in international finance just won't matter. Since the 1982 onset of the crisis no country has repudiated its debt and
pressures against doing so are strong.
Nevertheless, we may he moving into
a new and more difficult phase of the T A W debt crisis.
Pardee, Prospects for LDC Debt and the Dollar, p. 3.