Debt Forgiveness Worries Bankers
HORST SCHULMANN was speaking slowly, trying to be discrete. ``The problem,'' said the lanky managing director of the Institute of International Finance (IIF), ``is that more and more debtors are made to believe by the governments of the industrial countries and the officials of the international institutions that it is the norm not to service your international debt.'' Commercial banks and other private sources of credit won't lend much money to the world's poorer nations if they can't expect to be repaid, Mr. Schulmann said during an interview in Washington this week. Borrowing countries will have to rely primarily on loans from industrial nation governments or from multilateral institutions, such as the International Monetary Fund (IMF) and the World Bank.
Much of Schulmann's job is to defend the interests of creditor banks in regard to their $600 billion in outstanding loans to developing nations. The membership of the IIF, a trade association and research institute for the external debt issue, includes 146 major commercial banks from 39 countries.
What alarms Schulmann is the decision of the industrial countries to forgive 50 percent of Poland's ``official debts'' (owed to governments or their agencies) and the writing off by several Arab countries and the United States of $7 billion in Egyptian debt. Officials at the IMF and World Bank keep saying these are ``special cases.''
But Schulmann worries that these incidents will set a precedent, that other debtor countries will want the commercial banks to cancel some of their loans as well. In a letter to the policymaking bodies of the IMF and the World Bank last month, he wrote: ``In contrast with governments, banks are not in the foreign aid business.'' He doesn't mind debt forgiveness for the poorest nations of Africa and Asia. Most of their debt is official anyway. But he is concerned about debt forgiveness for ``middle-incom e countries'' such as Poland and Egypt.
Some of the Group of Seven major industrial nations also want to put a fence around the Polish and Egyptian deals. But they were unable at their meeting last Sunday to agree sufficiently to put a paragraph in their communique. France blocked it. France would like to see debt forgiveness for some of their lower-middle-income former colonies, such as the Ivory Coast, Cameroon, Senegal, and Gabon, according to the Financial Times of London.
Schulmann scoffed at the idea of Gabon getting debt relief, calling it ``one of the most corrupt countries next to Zaire.''
But he's probably more concerned that a pattern of debt forgiveness would give some major debtor nations, such as Brazil and Argentina, extra bargaining leverage in negotiations with their commercial bank creditors.
The banks recognize that they won't get 100 cents on the dollar. Most developing-country debts already sell at deep discounts in a specialized market. But the banks want to lose as little money as possible in deals involving rescheduling of outstanding debts, some debt reduction, and sometimes new loans to cover interest. In the case of a major debt negotiation with Mexico, the banks gave up about a third of the face value of their outstanding loans. The debtor countries want to pay as little as possibl e and yet maintain their credit standing in global financial markets.
In the past century, Latin American nations have defaulted four times on external loans, mostly held by the British. It often has taken these nations a decade or two to become creditworthy again. They would rather not have that happen again. They need export financing, and would like to get more commercial project loans again in the future.
Bargainers nowadays often figure they must go to the brink of failure to get the best deal. So Brazil has not paid any interest on its debts to put pressure on the banks. It is in arrears by $9.5 billion. It has enough financial reserves, Schulmann says, ``to pay it off tomorrow morning.'' Such ``willful arrears'' annoy him.
To Stuart Tucker, an economist at the Overseas Development Bank, arrearages are one of the few bargaining levers these poor countries have.
The Brazilian negotiations have lasted about three years, with a tentative deal reached only last month. IMF policymakers this week urged ``all parties to expedite negotiations'' on debt issues.