World Bank Eyes Brady Plan Effect. THIRD WORLD DEBT. US effort to deepen World Bank and IMF involvement in third-world debt reduction garners support at international parley
THE International Monetary Fund and the World Bank are being dragged further into the third-world debt bailout. After three days of meetings, the finance chiefs of the industrial countries are pushing both the bank and the IMF into support efforts to lower the debt burden of the developing countries.
Further involvement by the international organizations is part of the plan put forward by US Treasury Secretary Nicholas Brady March 10. The idea, however, is getting support from other industrial countries attending the spring meetings of the IMF and World Bank. It is being called an evolution of the debt strategy.
``It is an important step,'' says John Williamson, a senior fellow at the Institute for International Economics.
The Brady proposal received backing from German Finance Minister Gerhard Stoltenberg, who said in a speech on Monday, ``The need for an active, even enlarged role of the fund is clear.'' Mr. Stoltenberg added that it was important that IMF members quickly decide on how much new money needs to be added to the fund.
Stoltenberg and Mr. Brady differ, however, over the need for any new contribution to the IMF. A senior US Treasury official told reporters last week that the IMF has ``adequate resources'' at the moment. The United States is supported by Britain on this point. Any increase in the funding at the IMF has budget implications for the US and would probably meet with opposition in Congress.
The Monitor has learned the World Bank has begun a key study to determine the implications of substantial debt reduction on the bank. The international finance organization is specifically looking at how much debt relief could be provided with the bank's money.
``It's all hypothetical,'' a senior bank official says. ``We don't know what's acceptable to creditors. We obviously will need more money than we or the fund have available.''
Although the bank does annual studies on the shortage of funding for third-world countries, a bank source says this is the first time the institution has done a detailed study on the impact of debt reduction on the bank. It is expected to be ready for the bank's board of directors next month. ``We're really scrambling,'' says an official involved in the study.
According to a senior bank official, this study will ultimately decide how the bank gets involved.
The issue is controversial within the bank. One potential effect the bank will be considering is how debt relief might affect its credit rating. Last week, Moody's Investor Service said the debt-reduction plan suggested by Brady could affect the bank's preferred credit rating.
Bank officials are determined to avoid a downgrading of their credit rating. This could ultimately increase the cost of any bailout since the bank's borrowing costs would be higher.
The finance chiefs are continuing to stress that any third-world aid would supplement increased savings in the individual countries, the return of flight capital, and new lending by commercial banks.
The seven leading industrial countries - Italy, France, West Germany, Britain, Canada, Japan, and the US - agreed to review their tax and regulatory statutes to see if they have laws which are obstacles to a negotiated debt reduction.
Some European countries, particularly Britain, are concerned that the resources of the IMF and the World Bank will be used in a bank bailout. ``This is an area where governments of the industrial countries should not step in and try to impose a solution - or worse, take over responsibility for the debts themselves,'' says Nigel Lawson, Britain's Chancellor of the Exchequer. Mr. Lawson warned against a transfer of risk from the private sector to the public.
IMF board members are still pressing for reforms in third-world countries. As Lawson noted in a speech on Monday, ``The primary responsibility for solving their economic problems must lie with the debtor countries themselves.''
The debtor countries, for the most part, maintained a relatively low profile at the meetings. They endorsed the Brady concept. Twenty-four of these countries said in a statement that they welcomed the Brady initiative and urged new resources be made available quickly.
Although the major industrial countries agreed on many points, there are still many unanswered questions. Some of these questions include how to convince the commercial banks to provide new loans and whether debt relief will be in the form of interest-rate cuts, or a paring of the principal amount owed.
According to a bank official, many of these details will be worked out over the next few months. A more complete program may be ready by the Paris Economic Summit in July.
``It is a gradual process. This is major step-by-step approach,'' he said.