I n fo c u s A New Financial Crisis Around the World In a worsening global economy, forgiving foreign debt of developing countries has become more urgent

By Joseph J. Schatz to look at potential new debt in a more respon- credit difficulties assailing economies across After more than 20 years of dictator- sible manner,” says M. Nathaniel Barnes, Libe- the globe, the plight of debt-ridden developing ship and civil war, the West African republic ria’s ambassador to the United States. Barnes nations has taken on renewed urgency. of Liberia held democratic elections in 2005. says that Liberia’s leaders plan to use the money No one has yet authoritatively demonstrat- That was the good news. The bad news was saved from servicing the debt to fund hospi- ed whether debt relief programs directly im- that Liberia owed nearly $5 billion to foreign tals, clinics, road construction and schools, and prove governance and poverty rates in the de- countries, international organizations and ramp up security before its 2011 elections. veloping world. But they do produce a strong private creditors — an amount more than The country’s creditors went along with and measurable impact on national budget eight times greater than its gross domestic the agreement, since most of them had ledgers. The United States — which admin- product. bought its debt on the secondary market at isters debt programs through the Treasury Four years later, the country is still wres- large discounts — meaning that even 3 cents Department’s Office of International Affairs tling with high unemployment and a life on the dollar may have represented a profit, and via the World Bank and other institutions expectancy of just 45 years. But its debt is according to Lee Buchheit, a partner at Cleary — has forgiven more than $24 billion in debts shrinking rapidly. Gottlieb Steen & Hamilton LLP, a Manhat- since 1991, much of it recently in 20 countries In early April, with help from the Treasury tan law firm that represented the Liberian in sub-Saharan Africa. Following these efforts, Department, the World Bank and European government during the negotiations. along with those of other wealthy countries, donors, Liberia concluded a deal with a group The forgiveness of foreign debt in the de- two-thirds of sub-Saharan African nations of hedge funds and other private creditors to veloping world has long been a celebrity cause, now have “low or moderate” debt burdens, ac- buy back $1.2 billion of its commercial debt at with figures such as U2 frontman Bono leading cording to the International Monetary Fund. just 3 cents on the dollar. That move reduced the charge. But more recently it has evolved The issue has taken on special urgency in the country’s overall debt burden from about into a mainstream economic and foreign as- the global financial crisis, with contracting $3 billion in 2008 to just $1.7 billion. sistance strategy by the world’s wealthy coun- credit markets increasing the likelihood that The deal “wipes the slate clean and allows us tries, including the United States. And with countries recovering from earlier debt crises

Swimming Against the Debt Tide In 2005, the industrial G-8 nations launched the Multilateral Debt Relief Initiative (MDRI) to help nations in the Heavily Indebted Poor Countries (HIPC) program reduce foreign debt while meeting fiscal benchmarks and combating poverty.

Countries qualified to receive both HIPC and MDRI funds Countries not yet qualified for MDRI but eligible for interim HIPC funds Potentially eligible countries not yet receiving support from either fund SOURCE: IMF CQ / Marilyn Gates-Davis

www.cq.com | May 18, 2009 | CQ WEEKLY 1139 I n fo c u s could slide back into unmanageable amounts debt relief is relatively cheap and faster to lacks effective governance, for example, there’s of debt. A recent IMF report warns that for implement than traditional aid programs no guarantee that the resources it frees up countries across the developing world, “higher — while debtor countries find it affords them will be devoted to vital social needs such as borrowing to help offset the impact of the greater fiscal flexibility and the means to assert education and health care. Nor will a debt crisis could reverse these gains and pose risks, fuller control of their national economies. relief plan by itself counter deeper weakness in particular in countries that are at higher But critics contend that expanding debt in a country’s financial institutions or politi- risk of debt distress.” relief could open the door to debt cancellation cal systems — which prove to be the stronger “The financial crisis is putting a lot of pres- for countries with questionable governance or obstacles to attracting foreign capital over the sure on poor countries everywhere,” notes Neil human rights records. long term. Watkins, executive director of Jubilee USA Conversely, some argue, making debt relief Rich countries are increasingly coordinat- Network, a coalition of religious, charitable too easy to obtain could undermine the posi- ing debt relief efforts to improve oversight. and development-oriented organizations that tive economic strides that other governments Under the Heavily Indebted Poor Countries back debt forgiveness efforts. “It’s unfortu- have taken. That’s the main reason debt re- initiative, which the IMF launched jointly nate because we’ve actually been making some lief legislation — sponsored in the House by with the World Bank in 1996, and the Multi- progress. Ten or 15 years ago, our organiza- Democrat Maxine Waters of California and in lateral Debt Relief Initiative, agreed to by the tion . . . would go lobby the U.S. government the Senate by Democrat Bob Casey of Penn- Group of Eight nations in 2005, industrial- or the World Bank or the IMF and they would sylvania — failed to make it to the president’s ized nations have agreed to reduce multilat- literally laugh.” desk last year. eral and bilateral debt in 41 countries by a total of nearly $58 billion. A New IMF Mandate Expansion Plans? Nancy Birdsall, president of the Center for Bound up with efforts to preserve momen- So far, the Obama administration has sig- Global Development, a Washington think tum behind existing debt relief initiatives is a naled a provisional willingness to expand debt tank focused on development issues, argues move now afoot to overhaul the International relief efforts. In April, Secretary of State Hillary that the World Bank and IMF should allow Monetary Fund, in part by selling 12.9 million Rodham Clinton announced that the United many countries to delay debt-servicing pay- ounces of the institution’s gold reserves. Vocal States would put $20 million toward reduc- ments until conditions improve in global critics such as Nobel Prize-winning economist ing Haiti’s overall debt burden of $1.4 billion. finances. Joseph Stiglitz argue that the global lender Clinton and other diplomats had gathered “Some of the big projects in infrastruc- has in the past given ill-advised loans to poor at the Inter-American Development Bank in ture are being de-funded” in debtor nations, countries — and then compounded the diffi- Washington for a donor’s conference for the Birdsall said, adding that without assistance, culty by weighting them with onerous condi- country, which is still reeling from a series those countries “are not going to be buying tions. With the U.S. eager to use the institu- of 2008 Atlantic hurricanes that knocked anyone’s exports.” tion as a tool of restoring global financial back its already weak economy. “Their debt Still, any proposal to make debt relief more stability, emerging economies such as Brazil, obligations further constrain their ability to accessible for more countries will face rough China and India are angling for a bigger say in lay the groundwork for the future,” Clinton going in this Congress. Even though President the governance of the IMF, so that its policies said. Waters and other debt relief advocates in Obama has stressed his commitment to for- will be friendlier to the developing world. Congress want the administration to forgive eign aid and debt relief as measures to help re- Backers of the idea have powerful allies on all of Haiti’s debt immediately. pair the United States’ global image, the acute both sides of the aisle in Congress, which must For governments, the ultimate goal of debt fiscal crunch in Washington will make it hard approve any overhaul of IMF policies. House cancellations is to attract foreign investment. to follow through on such promises. That’s Financial Services Chairman Barney Frank, The United States helped bring about that already the view of Casey, who sponsored last a Massachusetts Democrat, wants to use the result when it first got into the debt relief year’s Senate debt-relief measure. gold sale to finance new debt relief efforts for business in the 1980s, when policy makers But with Congress weighing the proposal the world’s poorest countries. And the ranking recognized that developing countries in Latin to change the IMF’s structure and funding Republican on Frank’s committee, Spencer America would be unable to repay the money — which is now amended to the fiscal 2009 Bachus of Alabama, echoes the chairman’s they had borrowed from international credi- war supplemental bill in the Senate — advo- concern over the morality of forcing poor na- tors throughout the previous decade. cates on the Hill hope they can bring more tions to pay back debt rather than funding In 1989, Treasury Secretary Nicholas Brady leverage to bear. needed social services. proposed allowing indebted countries to re- Frank, for example, says that he’ll with- But Jubilee and other advocacy groups say structure and reduce their commercial debts. hold support for the IMF gold sale unless its that debt relief efforts thus far have been too Many U.S. banks strenuously objected to the proceeds go toward debt relief. After all, Frank restrictive — leaving out many of the poor- policy, since it essentially coerced them into argues, even though the resources for debt est nations — and want to make even more forgiving debts held by Latin American coun- relief may be tightening up, the supply of poor countries eligible. tries for strategic political reasons — to quell countries that need it is steadily on the rise: Supporters of broad-based debt cancella- U.S. fears that major powers such as Venezu- “We’re in no danger of running out.” n tion contend that it’s an efficient way to assist ela, which already was suffering political riot- economies in the developing world — espe- ing over its anemic economy, would succumb For Further Reading: Fiscal 2009 war cially in cases such as Liberia, where politically to chaos. supplemental, p. 1162; IMF’s changing role, unaccountable dictators racked up enormous But as critics point out, debt relief also has p. 712; U.S. image abroad, 2008 CQ Weekly, amounts of debt. Rich countries find that some inherent limits. If a recipient nation p. 2656; Waters debt relief bill, p. 1036.

1140 CQ WEEKLY | May 18, 2009 | www.cq.com