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Financial Post, Weekly edition, Thu 22 Dec 88, page 8. Editorial.


No quick solution to debt crisis

Despite the concerted effort of the G-7 industrial countries, the blue ribbon international agencies such as the World Bank and International Monetary Fund, and assorted other advisory groups, not much progress is being made on the Third World debt problem. As the World Bank itself noted this week, ''an end to the debt crisis remains elusive.''

Yes, you could say so. Latest World Bank estimates are that the Third World total debt will reach $1.3 trillion by the end of this year. That's about 50% of its combined gross national product.

This year's total debt is 3% above last year's. The bright spot is that the rate of increase is slowing; 1987's total was 11% higher than the 1986 level.

The slower pace of growth is the result of three main factors, and within these factors there may lie an indication of where further improvement could be expected. For example:

In 1988 there was some voluntary debt reduction by commercial banks of loans to major middle-income debtors. Debt buybacks and debt-equity swaps were the main vehicles for this.

Currency changes helped reduce the rate of increase in the debt. During the first nine months of the year, the US$ appreciated against such currencies as the Japanese yen, the deutschemark, and the pound sterling. This has reduced the dollar value of debt denominated in those currencies. By contrast, in 1987, almost 70% of the nominal increase in the total debt of developing countries was caused by devaluation of the US$ against major currencies during that year.

During 1988, the commercial banks have not exactly rushed to lend more to the Third World, helping to hold down the absolute debt total.

While these developments have helped moderate the increase in debt, they can't all be counted on to work to the same extent in the future. Debt buybacks and equity swaps, while they had some effect, don't make much of a dent in the debt. It's true, though, that if the commercial banks take too much of a beating in the secondary market by selling off their debts - for example, at 20 cents or 40 cents on the dollar as has been the case with some Argentine and Brazilian debt - they won't be anxious to lend again in those countries.

Currency changes, while they worked to advantage of the debtors for most of this year, can't always be counted on.

The best hope is still for the indebted countries to continue on the path of domestic economic reform that will, with focused lending support, help them grow out of the red. The good news is that many of the large indebted countries are well aware of this and are working on the necessary reforms. Argentina, for example, is this week providing the IMF with more material on the country's projected fiscal deficit for next year, and hopes to reach an agreement soon with the IMF on a new debt-settlement plan.

About the best that can be expected is that next year's debt total may stay level with this year's.

This information is provided by the Financial Post.
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Revised: June 3, 1995

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