Related topics

Offered: A Possible Solution To The Third-World Loan Problem

December 12, 1986

NEW YORK (AP) _ Few people would endorse a program for alcoholics that held out a bottle of hard liquor as an inducement for cooperation. But Uncle Sam might be doing something akin to that with loans to Third World nations.

The problem involves the $400 billion owed at the beginning of this year by 15 developing nations. Nearly $100 billion of that is owed to the United States, a situation that provokes stiff terms from this country.

The terms are these: While you cannot repay the money, you will give the appearance of seeking to do so through economic austerity, including reductions in domestic programs, fewer imports and more exports of your nation’s output.

The reward for cooperating with the program?

″More loans, of course 3/8″ says William Dunkelberg, Purdue University economics professor.

More loans, in turn, mean further austerity. And austerity, of course, limits growth needed to build an economy capable of repaying the loans. Worse, it produces human misery, and misery breeds social and political upheaval.

″Our approach to the problem has not been particularly creative,″ the professor observes, but what dismays him more than the austerity policies themselves is the reward for following them.

″It surely parallels providing an alcoholic a program for attaining permanent sobriety through the promise of a bottle of Scotch,″ he says.

He questions how long it can continue. In his opinion ″repudiation will be increasingly attractive as the hopelessness of the situation becomes clear, inviting political unrest that is not likely to favor U.S. interests.″

Rather than enforce a policy that probably leads down a dead end alley to a figurative mugging, he throws these ideas on the table for consideration:

-Deny foreign governments the chance to borrow directly, but permit loans to be made to foreign companies ″busily investing in their own countries.″

-Offer a practical incentive to repay, such as allowing the debtor to write off 25 cents of each dollar of principal repaid. ″It appears the writedowns are unavoidable, so why not tie them to partial repayments?″

He concedes that some banks and their shareholders might be unhappy about such a prospect. But he points out that because some loans already are being written off, whatever can be salvaged is worth fighting for.

Such a procedure would offer hopes to debtors, while simultaneously sending a message to banks that they’re on their own, and that the government ″is not going to guaranatee their rather aggressive - even irresponsible - lending,″ he says.

Several years ago Dunkelberg offered a different alternative, which he says still looks reasonably good to him. These are the essentials:

-Forgive most of the debts, making them part of the U.S. foreign aid program.

-Banks that agree to forego collecting would receive in exchange special U.S. Treasury bonds that would earn a specified rate of interest, perhaps 7 percent, but would lose some, perhaps 5 percent, of their face value each year.

This, he believes, would insure an orderly writeoff of the debts over a period of up to 20 years, while forcing the banks ″to bear the major burden of the debt problem they helped to create.″

-The debtor countries would be excused from repayment of principal, but be required to pay the 7 percent interest on the declining amount owed.

He suggests that if a plan of this sort were introduced it would almost guarantee bank solvency. It would do so, he explains, by taking control from the debtor governments and putting it firmly in the hands of the United States.

Knowing that some will argue that such a program would impair bank balance sheets and reduce stock values, he offers the opinion that the market already has written down these loans, as reflected in depressed stock prices.

Indeed, he adds, ″having resolved the uncertainty about the status of these assets, affected bank stocks would likely rise from very depressed levels, and these institutions could get back to business.″

End Adv PMs Fri., Dec. 12.

Update hourly