Foreign Relations of the United States, 1981–1988, Volume XXXVIII, International Economic Development; International Debt; Foreign Assistance

176. Paper Prepared in the Department of the Treasury¹

Washington, August 14, 1984

THE INTERNATIONAL DEBT STRATEGY

Introduction

Our approach to the international debt problem is of necessity a pragmatic one in which countries are treated on a case by case basis. No comprehensive solution or formula could be applied indiscriminately to countries which are very different with respect to their stages of development, their adaption to global economic trends and their respective relationships to the international private and public credit system. Debtors also vary by need, capacity for adjustment, and potential for sustainable long-term growth. Creditors operate under varying constraints, with differing obligations and limits to their ability to adapt to debtor problems and demands. This diversity is the principal obstacle to a comprehensive solution to the debt problem.

For this reason, our debt strategy is a set of related conditions, which, if fulfilled over the medium-term, can lead to a basic improvement in the creditworthiness of many of the heavily indebted countries. Success would be defined by those countries developing an improved capacity to service their debt while allowing imports to grow sufficiently to support sound economic growth.

The strategy was first enunciated in the fall of 1982 in the wake of the Mexican debt crisis. It was endorsed by the seven Heads of State at the Williamsburg Summit in 1983, and has wide support throughout the international financial community. It was reaffirmed at the London Summit in early June.²

The Five-Point Strategy

In its original formulation, our international debt strategy consisted of five elements:

The first, and indeed central, element of the strategy is that debtor countries in financial difficulty adopt comprehensive, credible and effective programs for strengthening their balance of payments and stabilizing their economies.

The second element is that the industrial countries follow policies leading to sustainable, non-inflationary economic growth and keep their markets open to exports from developing countries.

The third element in our strategy has been a strengthening of the IMF. Its resources have been increased and it plays a major supporting role in helping debtor countries to formulate needed adjustment programs so that creditors are encouraged to provide financial support.

The fourth element is continued commercial bank lending for countries making determined adjustment efforts including, in most cases, the provision of net new finance.

The fifth element is the readiness of creditor governments to provide bridge financing on a selective basis when appropriate. This financing generally fills the gap between the time when a program has been worked out with the IMF but before its resources and those of the commercial banks are disbursed.

At the London Summit in early June the debt situation was reviewed within the framework of our agreed debt strategy. The Summit Communique on this issue:

a) Reaffirmed the central role of the IMF, its cooperative relation with the World Bank and called for the strengthening of the latter’s function in the area of medium- and long-term development,

b) Encouraged private banks to make more extended multi-year rescheduling of their credits and expressed the willingness of governments to consider doing the same for countries who are adjusting well, and

c) Emphasized the potential importance of direct investment.

Alternative Strategies

Numerous proposals have been presented during the past two years “to do something” about the debt crisis. Many of the more dramatic ones are quite comprehensive in scope and include sweeping transfers of private credits to creditor governments, substantial relaxation of IMF-supported adjustment programs, and increases of official credits, both for the MDBs and bilateral programs.

These proposals fail to take into account differences in the development environment and debtor/creditor relationships. Many are politically unrealistic in that they assume a public intrusion into the market place as well as a commitment of budgetary resources that neither the Executive Branch nor the Congress believe is desirable.

Resolving the debt problem will take both time and patience. All the players—debtor country governments, commercial banks, creditor governments and international institutions—need time to assess their experience and their ability to innovate. Prolonged negotiations, conducted patiently and with restraint, will be needed if the principal actors are to deepen their understanding of the dimensions of their problems and the nature of the solutions that may realistically be applied.

The Outlook

Rapid and sustained OECD recovery is critical to the process and access to industrial country markets must be maintained in the face of increasing protectionist pressures. The U.S. expansion has already had a dramatic effect on Latin American sales to us and in general, we can expect widespread LDC export gains this year and next. On the other hand, interest rates have risen and although the extent and duration of these increases is uncertain, it is likely that average interest rates paid by LDC borrowers will be higher this year and next than in 1983. Nevertheless, compared to the crisis period of 1980–82, world economic and debtor country performance is much better. This suggests that the general principles of our debt strategy remain realistic.

We are now entering another phase in which various nations are at different distances along the road to adjustment. In Latin America, for example, Mexico is the most advanced and Argentina and Bolivia the furthest back. The London Summit Communique recognized this new reality by endorsing the concept of multiyear rescheduling for countries such as Mexico that have made the best adjustment, look as if they will continue to follow sensible policies but continue to have very heavy debt service obligations. We are in the process of working out with other governments how this approach might be applied in the Paris Club for government and guaranteed private credits and the relationship of government rescheduling to private bank rescheduling.

Another important next step is increasing the awareness that, as countries strive to cope with their debt burdens, they need to re-examine their policies towards direct foreign investment. Such investments provide not only needed capital and technology, but also stabilize capital flows and improve the management of external debt. The major debtors need to become less dependent on credit.

In this evolving situation we must be alert to new problems and seek to adapt the application of our basic strategy to new problems as they arise. But whatever changes that prove to be necessary should be made in a manner which strengthens the international capital market.

1. Source: Washington National Records Center, RG 56, Records of the Office of the Assistant Secretary for International Affairs, 1950–1985, Meeting and Policy Files, 1979–1992, 56–10–60, Box 2, SIG–IG File—1984. No classification marking. Sent under an August 15 covering memorandum to multiple recipients, in which Hicks wrote that the paper was for discussion at the IG–IEP meeting scheduled for August 17. Minutes of an August 17 IG–IEP meeting have not been found. Instead, the issue of international debt was discussed at an August 21 meeting of the IG–IEP, and minutes of this meeting are in the Reagan Library, Douglas McMinn Files, Subject Files, LCD Debt.
2. See footnote 3, Document 174.