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Debts, External

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Since August 1982 the international debt crisis has dominated economic policymaking in the developing countries, economic relations between the debtor and creditor countries, the attention of the multilateral institutions in their dealings with the debtor nations, and private sector decisions on lending to the developing countries. The period since 1982 has seen some progress. Neither the commercial nor central banks have had to deal with formal large-scale debt defaults. Balance sheets of creditor banks have been strengthened. There is an active secondary market in developing country debt, and debt to equity swaps are a reality. For the debtors, real interest rates have fallen between 1982 and 1987. Net exports showed extraordinary growth. Budget deficits have been reduced despite falling incomes. In 1987 commodity prices have begun to recover. The period has seen a shift toward rather than away from democracy. But five years after it began, the debt crisis is very much alive. None of the major Latin American countries has restored normal access to the international capital markets. At least one major debtor has been in trouble each year. Three classes of solutions are described and evaluated. Least radical are proposals for procedural reform and changes in the nature of the claims on the existing debt. Some procedural reforms such as multiyear reschedulings and exit vehicles for smaller banks have already begun to be instituted. Others include changes in accounting rules, and U.S. information provision on foreign accounts held in the U.S. Changes in the nature of claims include debt-equity swaps, country funds, interest capitalization, and payment by the debtors in their own currency. The second type of solution is the creation of a facility, or new institution to deal with the overhang of existing debt. The institution would buy the debt from the banks in exchange for claims on the institution, and in turn collect from the debtor countries. The prices at which debt is purchased, and the amounts to be collected from the debtors are the crucial issues. Finally, there are proposals for debt relief, either in direct negotiation between creditors and debtors and/or in conjunction with the creation of a facility.

Debts, External.

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This paper analyzes U.S. experience with foreign lending in the half-century from 1920. A first question raised by this experience is what ignited the process of U.S. foreign lending. I conclude that lending was restrained at the beginning of the period by the debt overhang associated with reparations and by the post World War I disruption of international trade. Intervention by creditor country governments in the form of the Dawes Loan, League of Nations loans to Central Europe and reconstruction of the gold standard system was needed to initiate long-term capital flows. A second question is how to characterize the operation of the U.S. capital market once lending was again underway. I find that while lenders discriminated among potential borrowers and demanded compensation for default risk, they did so insufficiently. Neither an efficient-markets nor a fads-and-fashions model provides an adequate characterization of the data. A third question is whether default in the 1930s made it more difficult for countries to borrow in the 1940s and 1950s. I find no evidence that countries which interrupted debt service in the 1930s found it more difficult to borrow subsequently than did countries which maintained debt service continuously. Rather, default reduced access to private portfolio capital flows for defaulting and nondefaulting countries alike.

Debts, External. --- Loans, American.

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Debts, External --- Brazil --- Economic policy.

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Debts, External. --- Investments, Foreign. --- Risk --- Mathematical models.