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Craxi Bettino - 7 luglio 1990



(Provisional Draft - This document represents a synthesis of the general report now under editing)


Introduction and main suggestion


The great challenge


Debt crisis and underdevelopment


Debt, rich countries and poor countries


The origins and factors of the crisis


Structural analysis of the debt issue and the economic factors of new growth


Quantitative parametres


The factors of international and domestic policy for overcoming the debt crisis


The ways out


The techniques for reducing the debt burden


Debt to equity swap


Debt to debt conversion




Development finance. New money, new regional common markets


Development finance


New Money


New regional common markets


Debt reduction vis a vis commercial banks and official creditors


The Brady plan


Debt remission with official creditors


Suggestions for regional areas and for groups of countries


Mediterranean Africa and Subsahara


Latin America and Caribbeans


East European Countries


Debt alleviation strategy by different group of countries




1. Innovative tools of new finance

We may distinguish three main groups of "new money" operations through which one should channel the flow of private finance to LDC (inclusive of Eastern European Countries) assisting them with public incentives, as - in particular public insurance and co-financing;

A) Project financing

B) Commodity financing

C) Current business operations' financing

The first group of operations of new finance relates to the realization of rentable investment projects by investors of the industrial countries. The most interesting formulas are BTO (Build Transfer Operate) and BOT (Build Operate Transfer). Both imply the management by the foreign investor with the twofold benefit of bringing in - managerial and technical know how and of joining the two figures of the "principal" and of the "agent" of the (financial) operation, which - in the normal loans - are distinet.

It is important, to this end that public insurances should accept to insure not only goods but also projects.

A second group of operations related both to the financing by foreign investors of given exports by firms of the LDC and the to providing industrial credit to LDC firms engaged in export activities.

The most interesting model is that of merchant banks, particularly practiced by the Japanese and which Japan has recently proposed, for operators with Mexican business.

The service given by the foreign bank to the LDC firm, in this case, does not only consist in credit, but in technical assistance as well, to get an exportable product and, above all, in the international trade service. In this way the LDC firms, of small dimension too, can sell on the great international markets.

Another interesting model is that of the commodity bonds.

Those bonds, with the principal reinboursed at the end of their maturity and interests' payd during their life, are connected to real (raw materials or minerals) parameters through an indexation of the principal or/and of the interests.

Minerals may perform particularly well the function of guarantee since they can do that even remaining as a reserve in the underground.

The function of real parameter and that of real warrant could be also absolved by non mineral raw materials, e.g. wood and non perishable crops as cereals.

If one will be able to realize effective warrant conditions, all kinds of commodities might be the counterpart of these bonds.

2. Direct investments

Direct investments may take different shapes in the cooperation of foreign investors with the private and public investors with the private and public investors and entrepreneurs of LDC. The international corporation may be entirely foreign or, a part of its equity capital could be owned by domestic investors of the LDC. Or it could be a mixed economy venture or with public enterprises of the LDC a joint venture between private business of the two areas.

In corporations whose voting equity capital is entirely foreign there might be the domestic capital of the LDC, through bonds convertible in equities without voting rights.

These various formulas have a particular interest to provide opportunities as for the repatriation of capital flown abroad. This possibility is related, to a large extent, to tax and currency control factors.

This theme presents very delicate tax justice issues whose appreciation should be left to the decision of the LDC governments.

Particularly, they should assess whether it may be convenient to submit the dividends distributed to domestic investors of LDC and/or to the foreign investors to final tax withholdings, leaving unknown their perceivers; or to submit them to provisional withholding.

To stimulate capital repatriation and domestic savings one should favour residents of LDCs allowing them a better treatment than to the non residents.

Joint ventures among domestic (of LDC) and foreign business appear particularly appropriate as for medium and small firms.

It has been written - with particular reference to Africa, but with a broader scope (1) that:

"A first step towards a balanced approach in favour of joint ventures arises from the "learning by doing issue".

"Most of the skills of the competitive environment are built up through learning by doing. This implies that skills are specific to a productive unit or to a country, and straightforward transfer of skills does not take place.

Consequently, if the pattern of technological innovation (i.e. learning) depends on the level of skills already available in the firm or in the country, also learning is localized".

"Local entrepreneurs often lack the right skills and values to enter the more sophisticated formal sector. Although the issue is also a matter of general schooling and training and of overall social transformation, experience in the modern sector seems to be a crucial requirement for formal activities".



1. The difficult upshot of the Uruguay round

The results of the Uruguay Round, at present, seem highly uncertain. A stalemate, if not broken, would be extremely worrisome for North-South relations (and more generally as well). However, one should recognize that some of the difficulties with which we are confronted in the field of agriculture, labour intensive low quality manufactures and technological services mirror the simplism of generalized pure laissez faire.

Agricultural markets, in one way or another, need to be "governed" up to an extent. Even if EEC common agricultural policy deserves criticism, one must admit that, under its regime, a wonderful productivity has developed. These interventions may now be reduced, because they have been fruitful. A similar reasoning must be applied to US agricultural policy.

It is not maintained generally that, as for the agricultural raw materials of LDC, stabilization funds are needed? And that more effective assistance is needed to promote productivity and diversification?

Research performed by IASA seems to point out that a generalized adoption of the US proposals concerning agricultural liberalization would lead to world price increases in major agricultural commodities. Therefore the situation of the less developed agricultural countries would worsen rather than improve, because the latter are net importers of food.

On the other hand, an indiscriminate liberalization, as for the labour intensive manufactures, without controls relating to the respect of ecological safeguards, and without principles of non-exploitation of cheap labour in the LDCs, could become the source of a dangerous degrading race.

A liberalization of high tech services is desirable and feasible, provided that rules for the control of monopolies are set as for the weak markets of LDC.

2. Toward new regional common markets between LDC and developed countries.

All this brings us to the conclusion that it may be more convincing and fruitful to aim at the development of regional "common market areas", each shaped according to the local requirements and peculiarities, with appropriate rules of the game, rather than aiming at indeterminate, universal free trade.

The recent USA-Mexico project, proposed by President Bush, about setting up a free trade area appears to be much more promising - because it may extend southward to other Latin American and Caribbean countries and north to Canada instead of attempting to stake everything on the Uruguay Round.

Similar projects should be undertaken or implemented in other areas of the world.

The time for great regional policies has come. The issue of the debt burden in Latin America, Africa and Asia will find a much easier solution if, together with the "new money", the "new common market areas" emerge, in each of these continents, between industrial countries and LDC belonging to the same region.




1. The Brady plan is a courageous approach in the right direction

The Brady program explicitly recognizes that a reduction of bank debt is necessary and that, in order to do so, an important public financial support is needed.

It is known that this reduction would be convenient both for creditors and debtors; therefore it may be achieved on the basis of general consensus agreement.

It also recognizes that indebted countries need new money too.

The great length of the negotiation process of the Brady plan and its shortcomings may be explained in several ways. The first one stems from contract waiving by banks, or mutual interference. On the one hand, since they are belong to a lending pool, they are usually linked by the "sharing" clause, which implies that any one of them - in cases where a certain benefit is gained - is required to share it with all the others.

The banks are usually bound by the "negative pledge" clause, whereby it is impossible to meet a given obligation contracted at a later stage before complying with a previous one.

The Brady plan was an attempt to break that cartel by means of moral persuasion. But - as professor Dornbush observes - gives its lack of an institutional mechanism endowed with consistent tools and capable of operating in a cartel-wise through a comprehensive "all or nothing" offer (1) it had to adapt itself to a long negotiation and to undergo changes from its original line of action.

It is recognized in the most different quarters that the Brady plan is "underfunded" and that this fact neither allows to accomplish to accomplish reductions in the desired amount with the desired speed, nor allows to attract new money, in the desired amount to the countries submitted to it and eventually restored through its application.

Other countries should follow Japan in the recycling program providing means to the Brady plan. And one might employ SDR of the industrialized countries to increase its resources.

2. Shortcomings and Difficulties in the Brady plan.

The lack of interests' guarantees (except for 18 months) strongly reduces the enhancement of bond certificates.

(1) Cp. R. Dornbush "The Brady plan won't work", International Economy, May-June 1989, pg. 46

It suffices to consider that a 30 year loan without interests, assuming a real market of 4% and accounting for a 4% annual inflation rate, has a current value of about 10% of its face value.

A greater collateralization or warrant of interest services could lead to consider acceptable reduction of the principal or of the interests' service up to 50%. And it appears desirable to adjust the debt burden to the ability to pal, which may require an interest rate not higher in real terms, than 1-2% of GNP.

Another explanation of the long time expended in reaching an agreement is that it is linked to the acceptance of the credible plan of economic and financial adjustment. Short of a permanent institution responsible for the solution of the debt problems, the related negotiation will be based on a sporadic procedure and not a super-game, where one party can react negatively to the moves of the other, in case the latter does not keep its promises.

The flow of time therefore becomes an indispensable element in the agreement, although it is impossible to reach it with the adjustment process already underway, given the interrelated nature of debt reduction and the adjustment process.

Another point refers to up-fronting, namely the immediate disbursement of financial resources that multilateral institutions are called upon to allocate in order to ensure the implementation of restructuring operations concerning bank debts.

It must be noted that such problems arises because there is no permanent entity responsible for restructuring. Otherwise, there would be no need for commercial banks to perform bridging, which would then be among the ordinary tasks of the said entity.

Another difficulty with the Brady plan arises from the distorsion and deficiencies of the tax, accounting and banking control rules relating to loans to LDC of the industrial countries.

In some of them - Switzerland, Great Britain, Germany, France - a deduction is allowed, from the income tax, for ample provisions on risky credits, at the moment in which those are set aside.

In others (Japan, USA, now Italy) the deductability of provisions is not allowed (or is allowed in very modest percentages), while full deduction is given as for losses, when realized as true capital losses, when realized as true capital losses. This is so, even if for banking control, in some countries (USA) this provisioning implies a reduction of stock value of the credits by the same amount and if they, cause, as for the commercial accounting, a diminution of profits or even a loss, all in the financial year in which this reserve is set forth.

Banks of the first group are not interested in operations leading to the coming out of capital losses, because they do not get any tax benefit, while the related risk, at any rate, is already covered through the provisions.

The U.K. and French banks supervisory boards allow these credits not to be devalued until they are executed without positive result.

What reason is there, then, for them to be officially reduced ahead of time?

Where the tax reductions of losses is allowed but not that of provisions - or in a small amount only - banks were not always capable of covering themselves with enough large reserves because they could not employ them to reduce taxable benefits and, in this way, produce a "tax dividend" to improve their balance sheet. Nor can they be amortized over a number of years.

This group of banks, in the Brady menu of options, are interested in reductions of the principal not so much in those of interests, because these second up to now have not been considered as tax losses.

From present distortions one might sort out setting that deduction of reserves still can be very comprehensive, but act only as a tax deferral.

If after a certain period of time, say 5 years, owing to creditors' uncollectableness those provisions should not have been used to back the restructuring of the debts in question or to carry out real devaluations of them, said provisions will become taxable. This could be applied in tax systems like that of the United States and Japan, which do not (or will not) allow any more provisioning on loans to debtor risk countries.

Furthermore, accounting amortization quotas should be allowed for losses recorded in a certain fiscal year when such losses result from operations of overall reduction or reconversion, as with the Brady plan.

In the countries where only true losses on debt are tax deductible, one should also concede the deductability for capital losses due to interest rates reductions, to assure the tax neutrality among the various options of the Brady plan enhancing its incisiveness. Similarly one should procede as for the provisions related to the "new money" options.

Banks who choose the option of reducing the principals on their loans (e.g. by 35% as in the "Mexican menu") enjoy the immediate benefit of a full tax reduction. However, they lose the benefit of collateralization as for the lost share of the principal, without getting it back on the interests.

Banks who choose the option of reducing the interests'change lose the benefit of tax reduction, but maintain the collateralization on the entire principal of their credit. Banks who choose the "new money" option have (in US or Italy) no tax benefit or (Japan) a minimal one and no collateralization or equivalent warrant.

Thus this option is a sort of Cinderella.

One should assure full tax neutrality and indifferent of guarantee for the different options.

3. New money and the Brady plan

It is illogical that a large restructuring with guarantees on the remaining debt should not have positive effects on the quality parameters for evaluating the portfolio or the company assets to own capital ratio; and on the assessment of the provisions required for the new money to that country.

If other debts are converted in addition to bank debts, leaving rates of individual discount unaltered, the ability to pay is increased to and the insurance risk on converted certificates is reduced.

Another point is related to broadening co-financing by the new Expanded Co-financing Operation (ECO) of the World Bank. It is a facility intended both for countries that have not restructured their debt, such as Colombia, and for countries such as Mexico (and in the future, more as Venezuela and Uruguay) that have finalized the Brady plan deals and accepted the terms of economic adjustment that are the normal prerequisites for such a plan.

In my interviews with the main banks of the world, I have ascertained that there is a group of important banks in several industrialized countries, willing to continue their operations in developing countries, especially in Latin America and Asia. Citibank, the only case among large banks, announced with pride in operating also in Africa.

It has been underlined how right it is to provide incentives to those who make such a choice for the development of LDCs. Such incentives include trade-finance facilities, on-lending, project financings, new-money bonds, debt-equity conversions and co-financings, with the World Bank and with regional development banks, as the InterAmerican Bank and with regional development banks, as the InterAmerican Development Bank.

4. Suggestions for the improvement of the Brady plan.

The Economic Commission of Latin America and Caribbean after having claimed that the Brady plan lacks funds, argues that for banks the incentive to forego their demands are not so strong and what follows is a tendency to step back. "There is no substitute for a coherent institutional framework that makes each country's offer of debt reduction - within the context of an officially supported adjustment program - one that most banks cannot refuse. The framework must include incentives for good social behavior and sanction for anti-social free-riding.

"The Brady plan lacks such a coherent structure" (1). The criticism is, perhaps, excessive. But it leads to reflection. In their joint evaluation of the first results achieved by the Brady plan, World Bank and IMF acknowledge that so far a lower number of agreements have been finalized than those expected. They stated the desirability that negotiation delays be overcome but without jeopardizing adjustment programs and without increasing the vulnerability of those countries whose debts have been restructured on the face of future adverse conditions, also within a debate context, without producing a burden transfer between private and official creditors. The two agencies also affirm that all in all, governments have not made efforts comparable to those required from banks concerning official creditors towards highly indebted medium income countries, while for the poorest, even the Toronto plan seems inadequate.

Financial resources for debt restructuring are therefore to be added to those made available by multinational agencies for development purposes, in order not to reduce funds available for developing countries less affected by debt problems.

Debtor countries too - as stated by the World Bank and the IMF - should encourage and not discourage direct foreign investments, together with specific project financing and trade operations by commercial banks, and also the repatriation of flight capital.

(1) ECLAC Options reduce the debt burden, Santiago, Chile, 1990

This implies the adoption of "market oriented reform measures, including the provision of timely repatriation of dividends, the development of local capital markets, the full protection of domestic domestic courts in case of private default, and the elimination of financial repression and unfair taxation practices".

A peculiar problem is that of increasing arrears. Here one should distinguish, through objective parameters, those which really arise from inability to pay from those which arise from a deliberate bargaining policy or from sluggishness: adopting differentiated policies for each different case.

For the stregthtening of the Brady plan, especially in relation to countries whose debt crisis is more difficult and whose economy has fewer immediate capabilities than Mexico or Venezuela, the following suggestions seem appropriate:

a) options' neutrality through equivalent collateralization (and/or warrants) on capital, interest as well as new money and through equivalent tax regimes;

b) additional funding to enhance the reductions (e.g. up to 50% (on the interest or on the principal);

c) possibility of paying a share of the interests (e.g.up to 1% of the principal) in "bills" in local currency indexed as export commodities, fully convertible, at par, in any property of equities, land, commodities or other wealth or local services;

d) institution of an official coordination committee or agency or the like within the IFI, flanked by the interested regional development banks, endowed with the means to finance or co-finance collateralizations, bridging, but-backs, "new money" operation and to provide incentives for the rapid conclusion of the negotiation and the subsequent respect of its deal;

e) recognition of the effectiveness of the Brady deal, after the agreement for the given country, through changing (reducing) the obligation of setting aside provisions and the eligibility for public insurance as for exports and investments in that country.



1. The Toronto Program

The Toronto program applied by the Paris Club - in line with the Toronto G7 agreements finalized in Berlin in the annual World Bank and IMF meeting of 1981 - is related to the restructuring of LDC debts with governments in affluent nations. But while the Brady plan calls upon the commercial banks to implement substantial debt reductions to all the highly indebted countries, the Toronto program only addresses governments in the poorest among highly indebted countries, leaving out both poor countries with medium debt levels together with medium and low to medium income countries, although highly indebted.

On the other hand, those limited and questionable and benefits are not applied by the Paris Club to all debts with bilateral official institutions, but only to non concessional lending with governments. Concessional lending to governments is not eligible for restructuring, nor is bilateral non concessional lending to official entities other than governments.

Then there are creditor countries that finance this restructuring with the resources of development aid, thus reducing the additionalities of the Toronto commitment.

The three options, as illustrated in the Toronto official communiqué, are as follows:

a) Concessional interest rates with short maturities;

b) Longer reimbursement periods with commercial interest rates;

c) Partial cancellation of the debt service obligations during the consolidation period.

The weak point of the Toronto options - as can be easily checked in the charts attached - is just the growth of the future debt burden.

Option A seems the most logical to solve the problem of difficult or impossible payments because it includes a reduction of the interest burden. Yet, it can be criticized for two reasons. First of all, such reduction is not enough for the poor countries since it amounts to a half or to 3.5% according to the smaller percentage. Assuming an interest rate of 9-10%, the reduction is only 3.5% that is to say a level comparable to that of the Brady plan, a level already insufficient to help medium income highly indebted countries out of the crisis and that applies to highly indebted poor countries a fortiori.

More generally, the accumulation of debt burdens in the future prevents low income indebted countries from having access to commercial credits and investments, hampering their return to the market, usually regarded as fundamental by adjustment plans.

Governments have obviously no reference to the secondary market of their credits. But if they took into account the secondary market for bank credit in low income highly indebted countries, they should realize that the ability to pay is estimated around 10% and less. It rarely happens that secondary market values for low income countries in Africa reflect elements of "moral hazard", based on strategies suitable for devaluating their debt on the secondary market.

Usually, insolvencies now arise dramatically towards multilateral and bilateral public institutions, thus reflecting real impossibilities. It is true that it frequently depends on large wastes carried out in the past by the governments of indebted countries, owing to serious mistakes in the economic organization and to excessive military spending. It is true that those countries often need a stringent perestrojka, but it is also true that their real ability to pay - also in relation to debts with public bodies - is given by the secondary market debt values, which would imply debt discounts much larger than those established by the Toronto program.

2. IMF Facilitations

In December 1989, the World Bank launched at a conference of the donor countries the SFA (Structural Program for Africa) for low income debt-ridden countries in the Sahel region of Africa.

That program does not tackle directly the problem of those countries' debts with the World Bank or with other multilateral public bodies. Nor does it tackle the issue of financing operations or debt re-purchase, swap or cancellation with commercial banks which besets those countries (at 10% of the face value, the medium term bond debt of those countries could be paid off with 150 million dollars.

The program provides during the three years 1988-90 highly concessional finance for specific structural programs and for the financial relief of the balance of payments of indebted countries in order to allow them essential imports.

The program is compressed by three strict conditions:

1) eligibility for IDA credits (as poverty indicator);

2) indebtedness problems (originally, a relation of 30% or more between debt service and exports projected over the three years;

3) implementation of an adjustments program approved by the World Bank. Interventions are of two types: a) more IDA loans; b) more co-financing of adjustment operations with other bilateral or multilateral donors.

The financing of said initiatives has been carried out by the World Bank by asking industrial countries a commitment for $6.4 billion for those African countries during the three years. Unfortunately, it is a question of financial resources that those countries usually take away from their normal funds for the development of LDCs.

The IMF set up in late 1987 the ESAF (Enhanced Structural Adjustment Facility) to help low income countries with long-standing balance of payment problems to adjust their policies and to launch a more effective medium term process of growth. This program adds to the SAF (Structural Adjustment Facility) set up in March 1986.

Together, the two programs provide low income countries - especially in Africa - the sum of $11.7 billion in 10-year credits at a highly concessional interest rate of 0.5% with a 5-year grace period (almost 2/3 ESAF and 1/3 SAF).

This is not a negligible amount, considering conditions of extreme financial stringency besetting poor countries, especially in Africa. In effect, without said support and without that coming from the special interventions of the World Bank already illustrated, the picture would be tragic instead of dramatic. But those actions have a sporadic and insufficient connotation, since they do not face directly the issue of the burden of existing debts.

Therefore, the Facility does not tackle the debt problem directly and this can only point to technical difficulties of the IMF, together with excessively rigid postures by some of the countries having a pre-eminent role within the IMF.

Those rigid postures are reflected in the strings attached to SAF and ESAF.

The 0.5% concessional lending by the IMF is linked to the quotas of the various countries within the IMF. In addition, it has a maturity of 10 years, which involves an annual 10% disbursement on average. The 5 years of grace (although the interest burden thus accumulated is low) only makes the problem worse, with a concentration of the reimbursement burden in the second 5-year period, causing problems of liquidity that are absolutely critical.

It is true that - given the current inflation rate of the dollar - the loans in question have a negative real interest rate, but it is also true that reimbursement is a burden put off to a not remote future and that the low income countries in question are not in a condition to pay for it until the structural and institutional causes of their low ability to export are removed, as well as the reasons for their low growth rates.

Even the 165% extension of the share of IMF concessional lending to low income countries does not solve the problem. In a certain way, it only moves it on in time, driving those countries more and more away from the usual channels of the financial market and increasingly discouraging the investment of domestic savings as well as direct foreign investments, with the only exception of some powerful multinational capable of overcoming through its own might every possible barrier to the return of foreign exchange coming from their exports.

There are fears that in may cases reimbursements will not be possible. Right now, arrears towards the IMF are dangerously expanding.

Extreme penalizations of those countries - such as expulsion from the IMF - are unthinkable, owing to their inequity and to their devastating economic effects.

But even depriving those countries of their voting right in the IMF often appears a disproportionate sanction. Those insolvencies are almost always produced by economic and political impossibility to pay, and it cannot be turned upside down by sanction, but it has to be met with financial policies that can leave debtors wider room for manoeuvre: an extension of payment deadlines and possibility to pay in local currencies.

The problem connected with credits from governments, from the IMF and from the World Bank, as well as related arrears, is not confined to poor countries but also concerns medium income and low to medium income countries.

The potential role of these institutions for those countries is twofold: financial backup of buy-back operations with swap or debt cancellation for medium income highly indebted countries concerning debts with commercial banks; finance debt reduction with multilateral official creditors and, if the case, with state insurance companies in industrial countries.

A serious shortcoming in the Toronto plan is that of including only creditor countries that are represented by the Paris Club, namely Western countries plus Japan. That means the exclusion of Arab oil exporting countries.

Starting with Saudi Arabia, they play a very important role in the financing of the LDCs, with particular reference to African countries and to Arab non-oil exporting countries in the Middle East. A similar exclusion took place with the Brady plan in connection with regional development banks. Regional banks in Arab oil-exporting countries are very important.

In particular, since 1980 Saudi Arabia has provided aid in the form of grants and highly concessional lending for about $60 billion, 40% of which was made of loans.

Part of those loans have been granted by the Saudi Bank for Development with concessional interest rates of 1 to 4% on the basis of a rotating fund of $6 billion which is connected to its endowment fund of the same amount.

Loans in question cannot be restructured, subject to causing damage to the operational character of the fund in terms of new soft loans to developing countries. However, another important share of the loans of Saudi Arabia and of the other Arab countries have been granted by governments with different techniques from those of rotating funds and could be included in the restructuring of the Paris Club, should oil-exporting countries be called to join it.

On the other hand, regional institutions financed by Arab countries play or can play a role comparable to that of the World Bank in supplying new funds for programs of structural adjustments in indebted countries. This holds true particularly for Saudi Development Bank, whose interest rates are very interesting.

The Saudi Arabian government has expressed to us its regret for not having been called to play any role concerning the problem of LDC debts with commercial banks, with governments and multilateral institutions, and also on the issue of new finance for indebted countries.

In a more coordinated context of government and multilateral institutions acting in relation to those debts, Arab oil-exporting countries and their regional financial institutions can in actual fact make a substantial contribution to solving the problems of the African and Middle-East regions. This is in line with the principle whereby a system crisis has to be faced in a systematic way.

It is appropriate to recall that Arab oil-exporting countries already play an exemplary role in development aid. In the '80s, Saudi Arabia provided development aid for a GDP percentage that was a multiple of that in Western Countries.

Even now that such aid is being cut, figures show 2.75% of GDP in 1989, with about $2 billion per year.





1. The intermediate Mediterranean African countries

The problems of debt burden in Africa - around 250 billion lire - are composed of two parts: those of Mediterranean Africa (about 105 billion) and those of Subsaharian Africa (about 145 billion).

The debt of mediterranean countries relates to those nations officially classified as middle income because their per capita income is higher that $500. Their income ranges from the less than $600 of Marocco, to about $1200 in Tunisia, to $2,700 in Algeria and presumably, of Libia.

But Egypt, Morocco, Tunisia belong to the group of countries - between $500 and $1300 - which I think should be classified as "intermediate", between those defined as poor and the middle - income ones.

The group of Leven should recognize this class of countries as distinct from the middle income countries, for the purposes of the strategy of alleviation of the debt burden and of the supply of new finance at (highly or moderately) concessional terms for economic and social growth.

This implies broadening the line of countries eligible under the Toronto plan and broadening this scheme to fit the wider requirements resulting from a systemic view. It also implies an ad hoc consideration of these countries through concessional facilities by the IFI.

Finally this recognition implies particular reflections on the development aid policies.

2. A mediterranean development bank and the new finance.

Debt and development of Mediterranean African Countries are a common interest problem of Africa and Europe as well. A Regional Development Bank, operating on the example of the InterAmerican Development Bank and of the Overseas Development Corporation of Japan, and of Saudi Development bank as well seems necessary to channel new financial resources to these countries for their infrastructural investments and to sustain, through insurances and co-financing, their productive investments.

As for the middle income countries such as Algeria and Libia, the problem is essentially that of new finance and of better considerations by the public insurance corporation and by the commercial banks of industrial countries of the new innovative formulas of financing, different from the traditional loans.

3. Reductions of Debt with Official Creditors as for intermediate countries.

Additional problems arise regarding Morocco, Tunisia and, above all, Egypt, whose debts are, to a large extent, with Governments and multilateral institutions.

A share of the Egyptian debt - 10 billion - is a military debt mostly with the USA. This debt was originally 4.5 billion arising out of defense supplies, of common interest of Egypt as well as of the Western countries.

On these 4.5 billion, Egypt was burdened by a 14% interest rate, which - through arrears - has brought this military debt to 10 billion. This seems to be an abnormal case which deserves a peculiar and highly concessional solution.

As a general line it seems advisable - as for the intermediate countries - to set a substantial reduction of the Governments bilateral credits and of those of the public insurances assisted by governmental warrant, increasing their maturity to 30 years and diminishing their interest service up to 60% with devolution of a share, amounting, for example to 1/4 of the remaining service to funds to the environment, human capital, children, growth. Here appear to deserve particular attention environmental projects relating to the mediterranean basin and vocational education programs for emigrants.

4. Restoration policies

It is very important that domestic restoration policies should be accomplished with determination. Often what is required are improvements and increases in public revenues, modifications and simplifications of the host of corporate command regulations and the dismantling of collective and paracollective institutions thereby striving to achieve an effective modernization of market structures.

The adjustment process must be selective, however. One cannot ask a country which lives on corn to double corn prices from one day to the next: this boils down to several hundred million dollars against human survival.

5. Debt and underdevelopment

Let us, the, consider the subsaharian countries' heavy debt issues. This debt has climbed to 145 billion.

There is much talk lately of economic ethics and business ethics.

I believe that ethical considerations on the debt issue are warranted.

For the poor countries of Africa, the full payment of interest and amortization on their debts means foregoing basic needs. This in turn opens the tragic and insoluble dilemma of whether or not to cut the already low investments or the supply of essential consumer goods which is already below the survival threshold.

In subsaharian Africa, under the burden of this debt, in 1980-86, per capita GDP went down by 3.1% a year while individual consumption decreased by 2.4% and exports by 2.1% in quantities (twice in constant value) thus deteriorating the ratio between debt service and exports.

Imports, because of the worsening in terms of trade, (of about 13%) which increased their price, went down by nearly 7.5% a year, cutting - concurrently - new investments, maintenance and consumptions.

The "growth fatigue" also derives from repeated natural calamities and from the downfall of the prices of raw material which contribute most of the export of these countries.

The aggregate inflow of resources, thanks to the official grants and bilateral and multilateral loans, still constitutes 7.3% of the GDP of these countries: of which, however, the share devoted to investments is only 2.3%. There results an alarming decline in capital accumulation from 21% down to 17% between the beginning and the end of '80.

By now, the problems of the Subsaharian economies, without drastic cuts in their debts and exceptional measures on concessionality by IMF and World Bank appear to be insoluble.

6. Remission of debt with official creditors for the poor countries.

As for the poorest countries - IDA eligible - in the wake of what has already been decided by France and Italy - an ethical duties devolves to cancel the service on these credits, imputing the loss to the budget of each of the years of competence.

As for the bilateral credits vis-à-vis poor countries non IDA eligible, I suggest a conversion in 40-year bonds at a very low interest rate, such as 1%, whose service should flow into counterpart funds in local indexed currency to finance growth, human capital and projects of preservation and valorization of the environment (as a safeguard of the equatorial forest and the struggle against environmental degradation).

Similar but smaller reductions should be afforded to middle income countries.

Around 3.2 billion per year in interests could be globally "remitted" in these various ways, while the remaining 0.8 billion along with the amortizations would flow into the above indicated counterpart funds.

Five billion less in debt service, to impute as for 3.5 to the public budgets, and as 0.7 each to those of the banks and of the multilateral institutions, do not appear a great amount for the finances of the rich countries but are an enormous amount for the poor nations and pave the way for receiving more new money. The aim to achieve is that of 6% GDP growth which is considered feasible and imperative.


1. Transfer from Latin America and Caribbeans to developed countries

Latin America and Caribbeans is the only developed continent which, for almost a decade, has been transferring resources to the rich countries.

From the 10-11 billion dollars of net flow to Latin America and Carribbeans of 1980 and 1981 there is a shift to an outflow of 18 billion in 1982, 31 in 1983 and soon; up to the outflow of 25 in 1989.

The amount would have been much bigger if arrears had not been accumulated, - because of the "debt fatigue: an alarming pathological situation which aggravates problems and complicates the ways out.

Latin America and Caribbeans since 1982 has been transferring to rich countries 231 billion in net financial flows. Interest and amortization payments from 1982 to 1989 total 382 billion, which is equivalent to nearly four years of exports.

The debt which was 340 billion in 1982 - because of compounded interests on the arrears - became 416 billion in 1989.

If instead of deflating the interest rate (Libor plus) due by these indebted countries to the foreign banks through the industrial countries' price index, one deflates with the unit price in international currencies of exports from Latin America and Caribbeans, one finds - as for the last ten years - a real interest rate ranging from 25% to 10%.

The surplus needed to service the foreign debt has been mainly obtained compressing imposts through devaluation, money squeeze, and controls and through forced reductions of investments and real wages.

Generally, debt service has been financed through the budget only to a limited extent. It has mainly been financed through monetary expansion, while savings flew abroad

The average inflation rate of Latin America has jumped from 57% in December 1981 to 994% in December 1989 with peaks of 3000% and beyond in Argentina, Uruguay and Peru, while the inflation rate in Brazil averaged 1500% and in Uruguay and Venezuela it ranged between 80% and 90%.

Other countries, like Chile and Mexico have been able to tame the galloping inflation.

Several states have reordered along democratic patterns. Many are now following less incoherent economic and fiscal policies which are less permissive compared to the previous policies in recent years.

2. Debt and Underdevelopment

Latin America and the Caribbeans do have huge resources whose valorization has been hindered by the debt burden. In the Eighties, GDP grew only by 1% per year. Pro capita GDP, therefore, declined by 0.8%.

The explanation for this is to be found mainly in the squeeze in investments due to the great financial net outflow referred to previously. The loss of growth, however, should not be measured only by the capital directly missed through this outflow. To this one must add the deflationary gap caused by the compression of internal demand designed to create a commercial surplus and by the disincentives to savings and capital accumulation arising from the uncertainties of financial perspectives and the distortive policies which the indebted governments have often adopted, either by necessity or because of ideological and operative mistakes.

The loss of growth has cut the ability to pay and the crisis has precipitated.

3. A recycling and reduction plan.

For Latin America and the Caribbeans as a whole, I would recommend to set in place, as a systematic objective, a reductions-recycling plan such as eliminating and eventually inverting - thanks to public and private contributions - the present yearly financial outflow of 25 billion.

This should be done however, without creating a new burden of official debt; therefore different and diversified ways of "new money": from direct investment, to co-financing between private and public authorities on specific projects, to new financial formulas as BTO and BOT to commodity bonds, to bilateral and multilateral grants and highly concessional credits for public works and human capital, to repatriation of capital.

The Group of Seven should concern itself with this problem of transfers from Latin America and more generally devoted renewed attention to the relation between the debt problem and the problem of restoring growth in LDCs.

The plan of recycling and reduction to relieve Latin America and the Caribbeans from the crisis and enable them to grow according to their full capabilities, requires fours pillars.

First of all, governments, through their bilateral credits as for middle income countries should give reductions and alleviations comparable to those already granted to this kind of countries by way of commercial banks under the Brady plan.

The program should be reinforced through the conversion of a share of the debt service in counterpart funds, paid indexed domestic currency, for growth, environment, human capital and children.

As for the intermediate countries (from $500-$1300 per capita), the previous suggestions concerning African countries of the same group should apply. A country which deserves particular concern, as for debt with official creditors, because of the causes and conditions of its debt burden, is Jamaica.

A second pillar, in fact, is also needed. The IFI now provides a zero difference between their disbursement and payments vis-à-vis Latin America and the Caribbeans. The balance of payment should be in the black ink, through facilities similar to those available to the poor countries, albeit with a lower concessionality. This is required to sustain the adjustment process, finance the delicate period of transition towards liberalization and implementation of the Brady plan.

The third pillar is that of public resources to finance, in concessional terms, infrastructures and provide incentives for production and exports diversification.

The fourth pillar is the re-financing and strengthening of the Brady plan. Brazil and Argentina, (not to mention Peru, Equador and Bolivia, which belong to the intermediate group), cannot find their relief in a Brady plan agreed upon in Mexican terms or according to proposals under negotiation with Venezuela.

Incentives on interest need to be more effective, (in addition to the equalization of this option with that of principal reduction). Within this framework, one should also examine the previously-mentioned possibility that for some countries, a share of interests could be paid in domestic currency Bills, indexed and fully convertible at par in local properties.

Incentives are also needed to speed up the conclusion of agreements and the implementation of the new money options. (Highly) Concessional means are also needed to finance buy-backs, which, in some extreme cases, appear as the best solution and, in other, broaden the menu of options.

4. Everybody should assume the responsibility

Latin American and Caribbean countries should also take on their responsibilities. These should be taken by the governments - above all those in the middle income countries - accepting the impopularity of higher taxes, by the bureaucratic powers adapting themselves to mixed managerial economy formulas and privatizations. The affluent should also take their responsibilities by investing at home rather than abroad.

Everyone should do his duty by paying taxes and renouncing populism.

The recovery of Latin America and Caribbean growth is of common interest to all in relation to political, economic and social international balance as well as such plagues as drug-trafficking, disorderly emigration, environmental decay caused or aggravated by related under-development.

After the "lost decade" of the Eighties, citizens of this continent are entitled to a decade of hope and progress in the '90.

With our help, but also by helping themselves, there may exist an atmosphere of constructive institutional cooperation.


1. East European debt size and slow growth, ineffectiveness of investment and management.

At the end of 1988 the East-European debt (with the exception of the USSR) had reached the amount of $ US 100 billion, of which 40% was accounted for by Poland and 20% by Hungary.

The bureaucratic planning and also the economic planning, being centralized and subsequently monopolized, were unable to substitute the organizational and productive flexibility of the market-oriented enterprises of the Western countries, which had already the qualitative growth path or growth through "gray matter" growth (software) as opposed to "heavy matter" growth (hardware).

The open economy challenge made the difference.

This is the point where the Soviet bloc failed, leading to a decline in east European countries like Czechoslovakia and East Germany and more generally of countries with a solid agricultural tradition and a medium-size economy such as Hungary.

All of this occurred with no capital accumulation decrease.

From 1974 to 1984, productivity in the USSR declined by 1.4% yearly, while increasing by 1.3% yearly in industrialized countries; labor-productivity grew by 1.0% as against 2.7% in industrialized countries.

East European countries, on the whole, experienced the same trend.

2. The same risk of excessive flow of new debt.

What surfaces is in fact that the real problem for these countries is not a financing quantity problem, but rather, a problem involving the quality of financing.

Too much unselective financing could lead to ineffectiveness and cause new problems because of heavy indebtedness. The debt accumulated by some of these countries is often the result of collectivistic concerns. It must be kept in mind that their management has constantly been carried on without ties, under the assumption that it was the government's gab to offset the losses by financing them directly abroad or modifying the nation's standard of living.

Managers were not appointed on the basis of results but on political ability as well as their ease in coping well with bureaucratic intricacies.

Remarkable progress toward the market economy has been made after the fall of the Communist regimes in Poland and Hungary, and some headway is forthcoming in Czechoslovakia, with courageous planning changes in planning, price-systems, exchange rates, the organization of the capital market, labor market and service market, with improvements in public finance.

3. The speed and magnitude of the adjustment process.

It is not an easy task, the medium-term goals are not completely clear, and it is difficult to learn in the world of enterprises not so much the technological bases as the know-how required to enhance quality, to fit the product in the market, improve the efficiency of production means, reduce capital circulation, develop efficient enterprises as well as savingS and loan institutions.

On the other hand, the partial reforms implemented in these countries during the 70s and 80s worsened, rather than improved, the solution of problems by loosening wage constraints and the overall inflexibility of the state economic plan without providing, as a counterpoise, elements of market stimulation and corporate autonomy, capable of promoting effectiveness and competition. The result was a surge in inflationary trends, which should not be confused with those experienced when hidden inflation surfaces following manoeuvres designed to adopt prices to costs and exchange rates to purchasing power.

In the latter cases, the emerging inflation is part of the adjustment process and leads to equilibrium. It is a temporary cost that has to be endured while waiting for a permanent advantage.

In the former, inflation depends on the ability to implement the adjustment process process, thereby leading further away from equilibrium.

4. Two kinds of transition policies

It is very important, in the transitional strategy, to draw a distinction between the two phenomena.

Debt reduction strategies towards these countries and the new money provided to them have to avoid falling into previous mistakes or making some new ones.

A fast transition process has to be favored first of all by enterprise financing.

Public debt has to be substituted by private debt and direct investment, new financial innovative solutions based on projects and on raw-materials and on international merchant banking.

Most important of all may be the creation of a new east European Payment Union. Linked with EEC and its financial institutions to foster trade among Eastern and Soviet economies as well as towards a general currency convertibility, as it was done in Western Europe in the postwar period with American support.

5. These suggestions have two important positive effects: they promote and facilitate the development of the enterprise financial and organizing autonomy and favor also the medium and small-sized enterprises and avoid new dangerous external debt burdens on governments.

This new debt burden could only provide ephimeral relief to the economy, and finally would damage the national ability to pay and then prevent financing for business.

Free-trade areas, associated with the EEC, should be promoted to grant more efficiency rather than big concessional loans from Governments to Governments.



The above recommendations may be summarized as follows:


a) Full relief from debt service for aid loans for "IDA only" countries.

b) Conversion of aid loans and bilateral official loans for the "non-IDA" countries to forty-year loans and IDA-type interest rates, with the possibility of converting the residual debt installment into index-linked local currency counterpart funds in order to finance environmental protection growth and human resources development projects.

c) Broadening of the IFI facilities for the poor countries, relaxing the existing limitations.


a) Partial conversion of official bilateral loans (aid loans and publicly guaranteed loans) for severely and moderately indebted countries to thirty-year loans at highly concessional rates, with the possibility of creating local currency counterpart funds as under b).

b) Bolstering the "Brady Plan" for private debt, by increasing the funds available to IFI's for facilities on interest, so as to establish indifference between capital and interest reduction transactions and to increase the reductions to al least 50% of the burden. Other measures should include "bridging" transactions, financing buy-backs, payments in local currency indexed and tax and accounting improvements for creditor banks engaged in debt reduction and new finance transactions (see introduction).

c) Concessional financing by the IFI

d) Highly concessional loans for investments by the regional development banks.

3. ALLEVIATION FOR MEDIUM INCOME DEVELOPING COUNTRIES (between 1,300 and 6,000 dollars per capita).

a) Conversion of bilateral official loans for severely and moderately indebted countries to thirty-year loans at concessional interest rates, with the possibility of creating local currency counterpart funds under 1b).

b) Bolstering the "Brady Plan" for the private debt, in the modes described under 2b).

c) As under 2b but with lower concessionality.


a) Conversion of official debt for severely and moderately indebted countries, in the modes provided for under 3a above; for other countries, rescheduling over periods exceeding thirty years.

b) Application of a bolstered "Brady Plan" for private debt for severely and moderately indebted countries, with special regard for the new financial tools described in the introduction.

c) New multilateral financial tools ("Group of 24" BERS) designed to sustain and thereby help speed up the transition to market economy, and to undertake investment in infrastructures in a number of key sectors.


with special regard for B.O.T. and B.T.O. transactions, and commodity bonds (to be assisted by public insurances) and merchant banking.

6. DEVELOPMENT OF REGIONAL COMMON MARKET AREAS involving industrial countries and less developed countries.

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