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Countries in arrears: a threat to world banking?

Many of the world's developing countries owe a lot of money they can't pay back. In 1974, three were behind in their loan payments. Today the number is 22. The richer governments and private banks that lent them the cash are waiting for a total of $5.5 billion in late checks.

They may wait a long time. Third-world nations have continued to pile up debt at a merry pace. Their borrowing quadrupled over the past decade, reaching an estimated $400 billion by the end of 1980.

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Could a chain of hard-pressed nations going broke shatter the international banking system? Robert McNamara, retiring president of the World Bank, doesn't think so. He said recently that private banks have lent only a small percentage of their reserves to developing countries.

Chandara Hardy is not so sure. "I don't want to be talking about 'the crash of '79,' but a serious default would affect the entire Western world banking system," says Mrs. Hardy, the author of a just-released Overseas Development Council study on developing-country debt.

Economically struggling countries have trouble paying off their debts when cash flow slows to a trickle -- a "liquidity crisis." After analyzing the problems of 10 stricken countries, Mrs. Hardy maintains that these crises are caused by a general pattern of sloppy government credit policies, domestic inflation, shrinking exports, and voracious trade deficits that devour more and more hard currency.

She also concluded that inflexible creditors added to the problems.

"Very few people accept that debt problems are like a tango -- both lender and borrower have to do it together," she says.

Ever since the first cave man borrowed pocket change from his neighbor there have been debtors unable to pay back on the date due. Often, in lieu of physical retribution, creditors have agreed to wait a bit longer in hopes of getting their money back.

This is "rescheduling." Since it is difficult to throw an entire country in jail, nations in financial trouble often have their debts rescheduled.

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Between 1956 and 1980, Western creditors rescheduled developing-country debt 46 times. Most of the negotiations were settled by the Paris Club, which is not a social group but an organization of government financiers which meets in the French Treasury.

For instance, during the late 1960s Indonesia had the terms of its foreign loans extended several times, costing creditors an estimated $371 million.

Mrs. Hardy believes the Paris Club waits too long, sometimes makes decisions based on politics instead of economics, and specializes in quick patch-ups when long-term solutions are needed.

Private banks hold separate negotiations. She says they tend to look for an easy way out and are eager to chain developing nations to harsh repayment terms.

The rescheduling system "serves no one very well," she says.

She suggests that everyone would be better off if creditors realized that debt rescheduling is "a normal feature of borrowing and lending under uncertainty, and its frequency must be perceived as a normal consequence of the short maturity of the loans to developing countries."

Her solution: a reorganization of rescheduling procedures, combining the activities of the Paris Club and the individual negotiations of private banks.

"The [World] Bank and the [International Monetary] Fund should jointly convene a meeting (at the request of the debtors) of all creditors to discuss the provisions of debt relief," the report concludes.

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