The developing countries, especially India and Pakistan, have called for
rescheduling of commercial and official debt and/or debt moratoria. Their
proposals have proved unacceptable to the United States, whose current debt
policies are based on an April, 1977, EPG
recommendation that the United States oppose calls for generalized debt
relief as well as the use of debt relief as a normal means of transferring
aid resources.8
1) Should the U.S. agree to table the USEEC debt proposal, and, if so, should
the U.S. accept the use of debt relief on a case-by-case basis as a means of
implementing the section of the US/EEC proposal on the structural balance of
payments problems of developing countries?
2) Should the U.S. seek Congressional approval for retroactive terms
adjustment on a case-by-case basis to provide assistance to poor
countries?
A decision of secondary importance at this time concerns the possible
analysis of a) the role of aid consortia and creditor clubs in debt relief
exercises and (b) bisque clauses.
The first two decision issues could involve a modification, but would not
overturn, current U.S. debt policies. In assessing these decision issues we
have to bear in mind the impact of debt policies on 1) other OECD countries, 2) the overall North-South
relationship, 3) the credit worthiness of individual debtor countries, and
4) prospective requests for debt reschedulings.
(1) U.S. opposition to tabling the US/EEC proposal and to taking any other
initiatives.
(2) U.S. support for tabling the US/EEC proposal, but opposition to taking
any other initiatives.
(3) U.S. opposition to tabling the US/EEC proposal, but support for an
initiative on retroactive terms adjustment.
(4) U.S. support for tabling the US/EEC proposal, and for an initiative on
retroactive terms adjustment.
I recommend Option (4).
The US/EEC proposal, although a relatively weak reed, should be tabled.
—Even if the United States does not agree to table the US/EEC paper, other
OECD countries probably will table it, perhaps with changes that we would
find objectionable.
—Agreement to table the proposal does not commit the United States to any
specific action, but merely to further discussion of the proposal and to
consideration, in consultation with the Congress, of various means of
implementing the proposal (see Discussion Paper, p. 5).
—Failure to table the proposal would give an impression that the US was
backsliding on the debt issue.
I recommend that the United States agree to retroactive terms adjustment on a
case-by-case basis for the least developed countries (LLDCs—15 of which owe
the United States debts on past Foreign Assistance Act and PL 480 loans) plus
those IDA eligible countries with
outstanding loans on harder than current U.S. terms.
This course of action—sub-option #3 on p. 7 of the Discussion Paper9—would affect a total of $1.5
billion of debts outstanding on U.S. loans, at a real cost to the United
States of less than $500 million. The reduction in annual debt service
receipts would be less than $50 million in 1987. (See table on p. 8 of the
Discussion Paper.)
—In my judgment, the effect on the credit worthiness of developing countries
would be minimal. The impact on future requests for reschedulings is
uncertain, but is unlikely to be sufficiently great to overturn the
traditionally cautious U.S. approach in creditor clubs or other fora;
—Comparable action is under consideration by the British and the Danes. The
Dutch are pressing for this type of measure within the EEC, as well as within the OECD. The Japanese are interested in the
proposal. The Danes have also indicated a willingness to consult with the
Germans on this issue. The recent Swedish, Swiss, Dutch and Canadian debt
cancellations or reschedulings (see Annex B to the Discussion Paper, Tab II,
pp. 6–7) have created a climate in which a negative US decision would be
unfavorably compared to other OECD
approaches to the debt issue. On the other hand, an affirmative U.S.
decision would be in step with actions envisaged by several OECD countries although the French and
Germans are said to have problems with this approach.
By tabling the US/EEC paper and announcing its willingness to consult with
Congress on retroactive terms adjustment the USG would give the UNCTAD
secretariat a fighting chance to pull off its proposed compromise. Secretary
General Corea’s attempt to reach an
intermediate position between the G–77 and
the OECD countries (as usual, the Soviets
are at the margin of these discussions) is a significant move, with
implications for the common fund talks and future North-South discussions.
We are uncertain as to whether the G–77
will accept the UNCTAD proposals.
However, the constructive U.S. action that I recommend would greatly
strengthen the hand of the moderate LDCs within the group of developing
countries. Without such U.S. action, it
[Page 937]
is very likely that the developing countries will
stick to a hard line on debt issues between now and the next major UNCTAD meeting in 1979. As a consequence,
the UNCTAD Secretariat’s attempt to act
as a “broker” would have been set back, an outcome contrary to our
interests.
Aid Consortia vs. Creditor Clubs and Bisque
Clauses
Neither one of these questions has yet been adequately examined within the
Government. The issues are familiar to those responsible for debt policy and
I recommend that a study be requested by the PRC, to be completed before the U.S.
delegation leaves for the UNCTAD
Ministerial. Bisque clauses might well be offered during the UNCTAD meeting as a possible item for
consideration by a working group comprised of experts from developed and
developing countries. Such a U.S. initiative could prevent the contrasting
approaches of the US/EEC paper and the LDC
proposals from dominating the follow-up to the Ministerial meeting.
Tab III
Discussion Paper Prepared for the Policy Review
Committee10
U.S. POLICY ON DEBT RELIEF FOR DEVELOPING COUNTRIES
February 22, 1978 The Situation Room
SECTION I: INTRODUCTION
Virtually all the LDCs are avoiding militancy on North/South issues, at
least for the moment, in part because of the continuing slackness in the
world economy and the press of immediate economic problems. However, no
significant progress has been made on such issues as the codes on
technology and multinational corporations, and the UN Overview Mechanism got off to only a
modest beginning. At the same time, prospects for movement on issues of
importance to the
[Page 938]
developing
countries (Group of 77) as a whole, the
Common Fund and debt, are uncertain.
Debt issues will be the focus of the ministerial-level session of the
Trade and Development Board of UNCTAD next month (March 6–10). The only other agenda topic
relates to development and financial problems, including debt, of the
least developed countries (LLDCs). The G–77 views the meeting as an opportunity to secure
commitments from the developed countries for increased resource
transfers, and in particular will be pressing for generalized debt
relief on official debt owed by low-income LDCs. The pressure for
generalized relief comes predominately from the few LDCs (India,
Pakistan, and Bangladesh) that stand to benefit the most, although for a
number of others (particularly African LDCs) the issue has developed
political importance.
Last week in Washington, UNCTAD
Secretary General Gamani Corea
spoke with U.S. officials.11 His presentation
represented a move away from the original G–77 position. He said that a procedural solution could be
devised to handle proposals on debt relief mechanisms. However, on the
issue of debt relief or alternative measures to transfer resources, he
felt that something needed to be done. He allowed, though, that each
creditor country could, on a case by case basis, decide on how such
relief would be provided.12
Corea emphasized that he could
not guarantee that the G–77 would
accept his position.
Differences between the developed countries (Group B) and the G–77
remain broad and substantive. The G–77
will almost certainly raise the discussion in the new Overview Mechanism
in the United Nations,13 and probably at
UNCTAD V in May 1979. (See Annex
A on the debt issue in North/South relations.)
[Page 939]
U.S. POLICY ON DEBT RELIEF FOR DEVELOPING
COUNTRIES
U.S. debt policy recognizes the distinction between an immediate debt
crisis and a structural balance of payments problem of which debt is one
element. U.S. debt relief is provided on a case-by-case basis in
situations of default and imminent default where necessary to ensure
future repayment. Debt relief should not be used as a form of
development assistance and debt reorganizations should normally take
place in the framework of a multilateral creditor club. Furthermore, in
April 1977, the EPG agreed to recommend
opposition to all proposals for generalized debt rescheduling and to the
use of debt relief as a normal means of transferring aid resources.
The U.S. policy on debt relief reflects: (a) the economic necessity of a
case-by-case approach; (b) the importance of honoring contractual
obligations; (c) a desire to adhere to the budgetary process and avoid
“back door” financing, and (d) the need to maintain the confidence of
private capital markets.
In considering the alternative positions discussed below in Section II
for the UNCTAD Ministerial meeting,
two issues arise which could lead to modification of U.S. policy on debt
relief:
—Should the U.S. use debt relief to provide assistance to LDCs on a
case-by-case basis in implementing the structural balance of payments
section of the US/EC proposal? (See
Annexes B and C.)
—Should the U.S. use, with Congressional approval, retroactive terms
adjustment (a form of debt relief) on a case-by-case basis to provide
assistance to the least developed LDCs?
SECTION II: ISSUES FOR THE UNCTAD MINISTERIAL MEETING
The U.S. objectives for the meeting are to: (1) preserve the long-term
financial interests of the U.S.; (2) maintain a unified position among
the major creditor countries; (3) keep discussion of the debt issue and
the problems of the LLDCs on a constructive level; and (4) avoid adverse
effects on overall North/South relations. These objectives must be
delicately balanced; too much emphasis on one will undercut the
others.
The major questions that need to be addressed with regard to the U.S.
position at the UNCTAD Ministerial
are: (a) whether or not to support tabling the US/EEC CIEC proposal on debt; and (b) whether or
not to support any other debt-related initiatives. There are four
possibilities:
(1) U.S. opposition to tabling the US/EEC proposal and to taking any
other initiatives.
(2) U.S. support for tabling the US/EEC proposal, but opposition to
taking any other initiatives.
(3) U.S. opposition to tabling the US/EEC proposal, but support for an
initiative on retroactive terms adjustment.
[Page 940]
(4) U.S. support for tabling the US/EEC proposal, and for an initiative
on retroactive terms adjustment.
A discussion of each of these four possibilities follows.
A. NO US/EEC PROPOSAL AND NO OTHER
INITIATIVES
Proposals from the developing countries (G–77) for generalized debt relief will be on the table at
Geneva. The developed countries (Group
B) have not yet agreed to place proposals on the table. Last
year at the Conference on International Economic Cooperation (CIEC), the U.S. and the EEC tabled a joint proposal on “features”
to guide international action in situations involving debt-servicing
problems. It was tabled as part of the CIEC package of the developed countries on a
take-it-or-leave-it basis. The proposal was not accepted by the LDCs,
but the Ministers agreed that it could form a useful basis for
consideration elsewhere. The proposal was rejected by the LDCs. At
USG insistence, this proposal has
not been “activated” for consideration at the UNCTAD Ministerial. The EEC, supported by Japan, has been pressing
to table it as the centerpiece of the Group
B position for the Ministerial. If the LDCs rejected it a
year ago, there is a presumption that they would reject it again.
In the absence of any U.S. initiative, other Group B countries might:
a. choose not to move forward on debt at this juncture; or
b. choose to go ahead with the US/EEC proposal (or a modified version of
it) without the U.S.; or
c. abandon the US/EEC proposal with each country advancing as far as it
can to meet LDC demands.
In the absence of significant Group B initiatives, the G–77 might:
a. downplay the significance of the setback by agreeing to hold further
technical discussions; or
b. hold fast to their more extreme demands for generalized relief and
pursue them in other UN fora, such as
the UN Overview Mechanism;
c. break off the discussions charging bad faith on the part of Group B, and raise the stakes by making
debt relief their major objective at UNCTAD V (May 1979 in Manila).
In short, the pros and cons of going to the UNCTAD Ministerial “with an empty bag” are the
following:
PROS:
—Ensures that the U.S. position on debt is not eroded.
—A hardline position, if supported by Group
B, might defuse expectations for future concessions in the
debt area.
CONS:
—Destroys Group cohesion on debt.
[Page 941]
—Isolates the U.S., thereby exposing the U.S. to greater pressure.
—Risks bringing the dialogue on debt to a halt and reducing chances for
compromise on other North/South issues.
B. THE US/EEC PROPOSAL, BUT NO
OTHER INITIATIVES
The value of tabling the US/EEC proposal at the meeting is essentially
tactical. Tabling the US/EEC proposal is probably the
only course of action that would keep Group B together and allow the developed countries
to say they are being responsive to LDC
concerns.
The other members of Group B could be
persuaded that the US/EEC proposal should be “activated” without any
substantive changes, and not for negotiations. Having rejected it once,
it is unlikely that the G–77 would
accept this proposal at the UNCTAD
Ministerial. The G–77 might decide to
break off the dialogue on debt in the expectation that the developed
countries would sooner or later feel enough pressure to move further
toward meeting LDC demands (perhaps at
UNCTAD V). However, it seems most likely that the G–77 will insist on continuing discussions on debt
proposals.
There is one significant drawback for the U.S. in tabling the US/EEC
proposal: we would have difficulty implementing the
proposal if it were accepted by the G–77. The section of the proposal addressed to
countries having debt problems of a longer-term structural nature
outlines a new international procedure for dealing with these
situations. The U.S. and other donor countries would be committed to
“enhance” their assistance to a country that opted to take advantage of
the new procedure. (See Annex C, page 4, subpara. (v).) This would be
done by increasing the quantity and improving the quality of their aid
by various measures with special emphasis on program aid and other
flexible forms of fast disbursing aid, as well as debt reorganization.
Thus the US/EEC proposal clearly implies a U.S. commitment to extend
assistance to LDCs experiencing structural balance of payments problems
that impinge unduly on their development.
The U.S. has no aid instruments which lend themselves readily to this
purpose. Bilateral Development Assistance, P.L. 480 and Security
Supporting Assistance (SSA) are all
subject to varying policy and legislative constraints. Moreover,
Congressional concerns expressed during the recent Witteveen Facility hearings about the
use of official financing for balance-of-payments support suggest that
the Executive Branch might face considerable criticism if it attempted
to implement the US/EEC proposal.
It is difficult at this late stage to change the language of the US/EEC
proposal to eliminate our problem with implementation. The changes we
would want to make are unacceptable to the EEC, and might open up the proposal to changes that the
U.S. could not accept.
[Page 942]
Thus, there are three alternative approaches to implementing the proposal
for benefiting countries:
ONE: Reschedule debt due on official development assistance (ODA). This could be justified under
current FAA legislation which permits
rescheduling to ensure repayment.
TWO: Adopt an ad hoc approach. Each time a country
takes advantage of the procedure, the U.S. would explore the various
ways of putting together a package of new aid from development
assistance, SSA, and P.L. 480 funds (as
was done for Jamaica). If in exceptional circumstances, debt relief were
also utilized, consultations with the Congress would be required.
THREE: Seek Congressional authorization and appropriations for the
amounts of balance-of-payments support required to meet commitments
resulting from the new procedure. Only a prior authorization and
appropriation of funds would allow fast disbursal of assistance for this
purpose.
The diplomatic benefits for the U.S. of joining with Group B in tabling the US/EEC proposal
are considerable. Against these advantages, the costs in terms of
tension between the Administration and the Congress must be weighed. If
the PRC agrees on one of these
alternatives, it would be necessary to consult with Congress prior to
agreeing to table the proposal at the ministerial in order to avoid a
reaction by Congress that could affect adversely more important actions
sought by the Administration (such as larger FAA and IFI
appropriations, or approval for U.S. participation in the Witteveen Facility of the IMF). While there may be costs in terms of
Congressional relations, the risk of incurring these costs are likely to
be small since there is a strong expectation that the
G–77 would not accept the
US/EEC proposal.
In short, the pros and cons of joining with other Group B countries in tabling the US/EEC
proposal are the following:
PROS:
—Helps assure Group B cohesion.
—Minimizes the chances of a breakdown in the discussions on debt without
yielding any additional ground.
—Serves as a counterproposal to LDC
proposals that are already on the table.
CONS:
—Risks some damage to the Administration’s relations with Congress and a
possible adverse impact on Congressional actions on bilateral and
multilateral assistance.
—The USG would have difficulty
implementing the US/EEC proposal unless it made a commitment to provide
assistance to LDCs facing structural balance of payments problems.
[Page 943]
—Since the LDCs are likely to reject the proposal and because Group B could not agree to substantive
revisions in it, tabling the proposal would be an empty tactical
ploy.
—Tabling the proposal may make it an important part of subsequent
discussions of debt relief with developing countries.
C. AN INITIATIVE ON RETROACTIVE
TERMS ADJUSTMENT, BUT NO US/EEC PROPOSAL
The terms of old aid are harder than the terms of new aid for a number of
LDCs. For the least developed, which generally receive grants now, there
is a significant discrepancy between current terms and past terms. At
the moment, AID assistance to the LLDCs
is solely in the form of grants; P.L. 480 is extended on a mixture of
grants and loans.
In a DAC meeting last month, the
Netherlands proposed that donor countries give consideration to some
form of retroactive terms adjustment for the poorer developing
countries. The UNCTAD Secretariat
sees agreement on this as the major accomplishment of the March
ministerial meeting.
Section 208 of the International Development Cooperation Act of 1978
(S.2420) would partially modify current U.S. policy by authorizing the
new aid agency—on a case-by-case basis—to waive interest payments and
use payments of principal (in the form of local currency) for
development purposes. The authority would extend only to existing
Foreign Assistance Act loans to the LLDCs. The authority proposed is
similar to existing authority covering new P.L. 480 loans under Title
III. If approved, the Humphrey
Bill would, in effect, permit retroactive terms adjustment for past
FAA loans for LLDCs.14 The rationale for and the effect of retroactive
terms adjustment is to increase resource transfers through a debt relief
process.
There are three basic options for case-by-case retroactive adjustment of
past loan terms; two with respect to the least developed countries and
one with respect to other low-income countries.
1) For the 15 least developed countries that owe the U.S. ODA debt, convert the loans provided under
the Foreign Assistance Act (FAA) to
grants. (This is basically consistent with the debt provision contained
in the recently proposed Humphrey Bill.)
2) For those 15 countries, convert both
FAA and P.L. 480 loans to grants.
[Page 944]
3) In addition to action for the LLDCs, for non-LLDC
IDA eligible countries (per capita
income less than $550 in 1976), adjust past FAA and P.L. 480 loans which are at harder than the
currently most favorable loan terms (ten years grace at two percent
interest, thirty years amortization at three percent interest) to these
most favorable loans terms.
There has been staff level considerations of other options, but they were
discarded as either impractical or too costly.
The cost to the U.S. and benefit to the LDCs of these options is
described in the table below.
As a general principle, specific action would only be taken on a
case-by-case basis to exclude countries which, for example, violate
human rights. In addition, we could seek to obtain LDC commitments to use freed resources for
agreed development objectives. This would enhance the likelihood of
obtaining Congressional approval but reduce the attractiveness of the
initiative for the LLDCs.
US Costs of Alternatives for Retroactive Terms Adjustment ($
million—For Debt as of December 1, 1977)
|
Reduction in US Annual Debt Service Receipts |
Real Economic Cost to U.S. from Adjustment |
Present Value of Debt Outstanding Subject to |
Total Debt Outstanding Subject to |
|
1977 |
1987 |
Action (Change in Present Value) |
Adjustment |
Adjustment |
|
Option 1
|
|
|
|
|
|
| Convert LLDC
FAA Debt to Grants—Humphrey Bill |
5 |
25 |
156 |
156 |
512 |
|
Option 2
|
|
|
|
|
|
| Convert LLDC
FAA and PL 480 Debt to Grants |
25 |
47 |
362 |
362 |
1051 |
|
Option 3
|
|
|
|
|
|
| (2) Plus Non-LLDC
IDA Eligible Convert to Best
Current Loan Terms |
2515
|
47*
|
425 |
666 |
1479 |
The pros and cons of U.S. support for a Group
B initiative on retroactive terms adjustment are the
following:
PROS:
—Retroactive terms adjustment is a means of increasing resource transfers
quickly to the countries most in need of additional aid.
—Announcing this initiative at the UNCTAD meeting may have a political payoff in the
North/South dialogue.
[Page 945]
—Section 208 of the Humphrey Bill
reflects some Congressional support for adjustment.
—By restricting use of retroactive adjustment to a case-by-case basis,
U.S. opposition to generalized debt relief is not compromised.
—Aid distribution, economic conditions in LDCs, and their development
commitment are taken into account.
—The cost to the U.S. is small.
CONS:
—It would not be additional if Congress responded by making off-setting
cuts elsewhere. It would not be additional for other donors that provide
debt relief within aid budget ceilings.
—It is unlikely to be of any real interest to the LDCs and thus may buy
little in the debt negotiations.
—We have been told that the French and the Germans may not be able to
support this initiative due to both statutory and political
constraints.
—It removes the main argument that the U.S. has used to resist use of
debt relief as an aid instrument—i.e., that the Executive Branch cannot
support it because of Congressional restraints. Thus it may give rise to
pressures to widen the list of countries eligible for retroactive
adjustment or to provide other forms of debt relief.
—It would require both authorizing and appropriations legislation from
the Congress.
If the PRC decides that the U.S. should
support a retroactive adjustment initiative, the U.S. delegation at the
UNCTAD meeting would only be
able to support the principle and to express the intention of the
Administration to support legislation for it.
D. THE US/EEC PROPOSAL AND AN
INITIATIVE ON RETROACTIVE TERMS ADJUSTMENT
U.S. support for tabling the US/EEC proposal plus
support for an initiative on retroactive terms adjustment would combine
the advantages and disadvantages of each component.
SECTION III: OTHER ISSUES
A. ADDING BISQUE CLAUSES TO
ECONOMIC ASSISTANCE LOANS
A bisque clause allows a debtor, at its option, to skip a few payments of
principal on a loan containing such a clause if it faces debt-servicing
problems. These principal payments can be added onto the end of
repayment schedule or stretched out over the remaining life of the loan.
Interest on the remaining payments can be increased so that
[Page 946]
in present value terms there
is no net loss to the creditor. (See Annex E on bisque clauses.)
As a further initiative for the UNCTAD Ministerial, the U.S. might propose that donor
countries agree in principle to adding bisque clauses to aid loans.
However, there has been little discussion of this possibility and it is
unlikely that the other members of Group
B would be prepared to support this on such short notice.
Since this device is closely related to aid terms, it lends itself to
examination at the technical level.
In general, the pros and cons of adding bisque clauses to aid loans are
the following:
PROS:
—The addition of bisque clauses to F.A.A., P.L. 480, and SSA loans would not require legislation.
However, prior consultations with key congressional committees should be
undertaken.
—A bisque clause is not a debt-relief device if it is written into the
original loan contract.
CONS:
—The financial benefit derived from adding bisque clauses to aid loans
would be very small, which means that an initiative of this nature would
get Group B little mileage in the
dialog on debt.
—If introduced in the context of negotiations on debt relief, this
limited initiative would compromise the U.S. position on generalized
debt relief, making it more difficult to resist other LDC proposals.
—The G–77 would not view this initiative
as being responsive to their current debt problems.
B.
AID CONSORTIA VS CREDITOR
CLUBS
The U.S. has participated in negotiations to reschedule official and
officially-guaranteed external debts of a dozen developing countries on
more than twenty separate occasions since 1956. Except for India and
Pakistan—where extraordinary conditions pertained—these negotiations
took place in ad hoc creditor clubs convened when a debt crisis clearly
existed.
At UNCTAD IV in 1976, the U.S.
announced that it would reschedule debt only in creditor clubs. This
policy statement was a consequence of an early decision to stop
providing debt relief to India in the Indian aid consortium. However,
because of the precedents of India and Pakistan, a question has arisen
as to whether any exceptions to the basic policy of rescheduling in
creditor clubs should be allowed in the future. The question is
particularly relevant because Pakistan has for
[Page 947]
mally requested that debt relief be negotiated at
the next meeting of its aid consortium.
Although other creditors are willing to address ODA debt reorganization in aid-consortia, debt
renegotiation in aid-consortia poses three serious problems for the
USG:
(1) Aid-consortia are by definition concerned with the provision of
economic assistance, and dealing with debt through them suggests that
debt relief is being used as a substitute for aid.
(2) For the USG, debt relief is in
addition to budgeted assistance. This is not the case for most other
creditors where debt relief constitutes a portion of the aid budget and
thus does not necessarily represent a real increase in resource
transfers. Thus on burden-sharing grounds, the USG is placed at a disadvantage.
(3) The IMF “conditionality” of the
creditor club exercise has been much stricter than experienced in an
aid-consortium.
The question arises, however, as to how the U.S. should respond to a
request for a consortium rescheduling by a debtor encountering financial
difficulties where ODA debt is a major
element and other creditors will not support creditor club action. The
U.S. has three basic options for dealing with these situations:
(1) We can strictly adhere to a policy of rescheduling only in a creditor
club. This would place the U.S. at odds with other donors that are
willing to negotiate debt in aid consortia.
(2) The U.S. could consider a genuine request for a rescheduling in an
aid consortium by a debtor country to facilitate the treatment of ODA debt problems in a creditor club; or
introduce some creditor club criteria, or conditionality into consortia
arrangements.
