International debt renegotiation: Lessons from the past

World Deselopment Vol. 7, pp. 199-210 Pergamon Press Ltd. 1979. Printed in Great Britain.

International Debt Renegotiation Lessons from the Past

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ALBERT C. CIZAUSKAS* The World Bank, Washington, D.C. Summary. - Numerous accounts are available of the external debt of the developing countries. Many of these provide quantitative details of the recent growth, character and size of the debt, or discuss its implications to creditors. Little has been said, however, of the diversity in the treatment over time of individual debtor countries by creditors when relief of contractual obligations was required, and of what had motivated creditors when doing so. The account that follows attempts to do so but makes no claim to a quantitative or exhaustive study, presenting instead a qualitative and selective review of international debt relief negotiations in some of which the writer has participated. 1. EARLY RENEGOTIATION EXTERNAL DEBT

little foreign lending was done by governments prior to World War I. Two characteristics of these earlier negotiations are especially worth noting. One is that debt relief arrangements which had little regard for the underlying economic position of the debtor country had to be repeatedly renegotiated, usually on terms less favourable to the creditors. The other is the variety of techniques of debt relief employed, often out of necessity but sometimes out of enlightened self-interest. Commenting on the diverse and involved international debt renegotiations of the past, one .observer2 concluded that the essence of a satisfactory debt adjustment was the realistic assessment of a debtor country’s ‘capacity to pay’. This was, however, an elusive criterion to establish and one on which creditors and debtors often held divergent views leading to subsequent difficulties. Such mutually satisfactory debt settlements as were occasionally achieved did much to restore the debtor’s credit standing in international capital markets, obviated the need for further debt relief and improved the prospects for economic growth. There is nothing surprising about these conclusions, nor about the cause of previous international debt renegotiations. A British report of the 19th century cited in one country large military expenditures, excessive foreign borrowing and poor fiscal management.’ Conditions in other countries which led to defaults on their international obligations were described as political instability, wasteful expenditures, inequi-

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The rapidly accelerating growth of the external debt of developing countries, particularly during the past several years of international financial uncertainties, has focused widespread attention on the ability of these countries to meet their contractual obligations to foreign lenders. International proposals (such as those at UNCTAD IV in 1976 at Nairobi and at the ‘North-South’ conference in 1977i) to increase the flow of resources from the richer to the poorer countries in part through generalized debt relief, and the highly publicized cases of recent payments difficulties experienced by a few countries such as Zaire, Turkey and Peru, only served to aggravate the prevailing sense of anxiety among both public and private creditors. This atmosphere of concern with the rising external debts of the developing countries tends to blur memories of earlier periods when developing and developed countries also experienced repayment difficulties culminating in international debt renegotiations. It may therefore be worth recalling that international debt difficulties and renegotiations are not recent and unique phenomena, but, like the poor, have been with us for a long time and will probably continue indefinitely into the future. The 19th and 20th centuries abound in instances of international debt renegotiations. There is a dbja vu feeling about much of the current debate, with many of the protagonists and issues familiar to us today, even though

* The views expressed in this paper are those of the author and not necessarily those of the World Bank. 199

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table and unproductive taxation, corrupt administration and absence of budgetary control. Abuses and inefficiency of borrowers were matched by the imprudent eagerness of private lenders. During the 19th century, such countries as Mexico, Peru, Portugal, Turkey, Egypt and Greece enjoyed easy access to extremely large sums in the form of bond issues. Under the circumstances, it is not surprising that debt payments were often suspended leading to numerous settlements and subsequent defaults. Ad hoc associations of private bond-holders were the customary means employed during the 19th and earlier 20th centuries to negotiate with debtor governments when payment difficulties arose. They were at times assisted by their governments which, on occasion, even employed gunboat diplomacy to enforce compliance with contractual obligations. The precise methods of debt relief took many forms, including the consolidation and reduction of the face amount of existing bond issues, refunding at substantially lower rates of interest, and cancellation or capitalization of arrears on more liberal terms. For example, bonds defaulted by Portugal were converted in 1902 at half to threequarters of their nominal value, repayable in 99 years at an annual interest rate of 3%. Another settlement involving Peru in 1947 included the cancellation of interest arrears, a new maturity of 50 years, and a sliding scale of interest rising from 1 to 2.50%. Sheer necessity rather than altruism was more often the guiding motivation after repeated attempts to impose stringent terms generally led to failure. This is not to say that debtor countries, with inefficient financial management and an eagerness for foreign borrowing, were not at least equally at fault, but rather that a realistic assessment of the capacity to repay was seldom a serious initial consideration of the earlier international debt renegotiations. (a) World Wur I The history of inter-governmental debt renegotiation as a result of World War I is also instructive in the light of current issues affecting the indebtedness of developing countries today. There is no need to review in any detail the tangled history of the war reparations imposed on Germany which embittered international relations for a generation, and, like many of the private settlements of the 19th century, had to be repeatedly renegotiated. The reparations were, of course, indemnities and not loan repayments, although new international credit to Germany was subsequently

associated with the various attempts at settlement. It is important to note, however, that later attempts at settlement shifted the focus from what Germany should pay to what it could pay, based upon a broad index of Germany’s economic situation at any one time. Reductions in scheduled payments by Germany, and even their temporary suspension, were provided for, as well as the reverse possibility of increased payments. This principle of ability to pay, applicable in both directions, was important in the negotiation of the much later Indonesian debt settlement of 1970. The renegotiation of loans by the United States Government to its allies during World War I also deserves attention. When initial conditions laid down by the US Congress were believed to be beyond the capacity of the debtor countries to fulfil, the terms were adjusted. The rescheduled debt settlement with the United Kingdom was typical: it provided for repayment over a period of 62 years (rather than 25 years) with interest at the rate of 3% per annum for the first 10 years and 3.50% for the remaining 52 years (rather than 4.50% for the full original term). Another action of a highly unusual nature in the history of international debt was taken in response to the financial dislocations of the world-wide depression of the 1930s and Germany’s defaults on its rescheduled reparations. Recognizing the need for international cooperation, President Hoover of the United States proposed a multilateral moratorium in 1932 on all inter-governmental payments related to World War I due to the United States, provided that these governments extended similar relief on war-related debts owed to them by other governments. The amounts suspended were to be paid over a period of 10 years beginning in 1933 at the rate of 4% interest per annum. Most of the governments indebted to the United States accepted this proposal. (The severity and the persistence of the depression, as welI as other adverse developments including the outbreak of World War II, resulted in the indefinite if unofficial suspension of most of these payments.)4 (b) World War II Following World War II, the United States Government entered into a series of international financial agreements which are of considerable significance to an understanding of the past treatment of international indebtedness .

The Anglo- American

Financial

Agreement

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of 1946 in particular had an important bearing on the later multilateral debt renegotiation with Indonesia. When certain conditions in the original repayment agreement were found in 1956 to be ambiguous and probably unworkable because of changed conditions, the agreement was amended so that the United Kingdom could at its option postpone a number of instalments of principal and interest. These unilateral deferments were to be repaid after the expiration of the original maturity of the loan. (The technique became known as a ‘bisque’ clause, after the handicap to be taken when desired by one side in certain games of sport .) The multilateral London Conference on German External Debt of 1953 was another important milestone in the history of the treatment of international debt. The Conference agreed to settle all pre-war external debts owed by German public and private debtors, as well as large sums owed mostly to the United States Government for various forms of official postwar economic assistance. The United States Government valued its assistance at $3 billion; this amount was scaled down to about onethird of its nominal value to be paid over 35 years at 2.50% interest per annum (all of which has been subsequently repaid). As one observer put it, the concessions were large but they appeared to make possible a fair recovery on what then appeared as a very weak asset, i.e. the agreement took into consideration the capacity to pay of an economy that had been severely disrupted by the war and still had, at the time, uncertain prospects. This international agreement on generous terms, which permanently settled Germany’s foreign debts to all Western countries (except for World War I reparations which arguably were not debts), was an important contribution to Germany’s rapid recovery.

2. POST-WORLD WAR II: RENEWAL OF PRIVATE LENDING The character of private lending, which resumed with the rehabilitation of the major industrialized countries from the disruptions of World War II, altered significantly. Private lending became primarily associated with the financing of exports, and was guaranteed to a large extent against risk of loss by the governments of the exporting countries in distinction to the private bond issues of earlier periods which were not so guaranteed. The contingent liability of the creditor governments, together

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with the large amounts of public credits extended directly by them, shaped the course of international financial transactions for years to come and helped to account for the development of a more orderly and structured means of dealing with debt repayment difficulties than had existed up to World War II. The years subsequent to World War IIrelated international settlements, for our purpose, might be conveniently divided into two periods, the first from 1956 to 1966, and the second from 1966 to the present. (a) 1956-66 The first period was characterized by relatively short-term relief for the commercial debts of developing countries. Two principal institutional arrangements emerged for this purpose. The first was an informal and ad hoc grouping of creditor countries known as the Paris Club. Its purpose was to provide the minimum relief when payment difficulties arose, required largely on supplier credits (i.e. credits extended by a supplier/exporter to a buyer/importer), in order to prevent default and to do so in a coordinated and non-competitive manner. While both the nature of debt relief and the type of debts renegotiated broadened considerably over time, the original impetus of the Paris Club as essentially a creditors’ consortium to deal with debtor problems on a pragmatic and, if possible, non-concessional basis, has persisted to the present day. The other institution to concern itself with debt relief was official in nature, the Organization for European Economic Cooperation (now the OECD). Its aim was economic rehabilitation through official lending and accordingly it arranged debt relief for one of its members, Turkey, on somewhat more concessional terms than the Paris Club. (i) Paris Club By the mid-1950s private lending had resumed in fairly large amounts, mostly in the form of supplier credits insured by the governments of Western European countries anxious to support economic recovery at home. Not surprisingly, Latin American countries presented a potentially rich export market and were among the first in the post-war period, through expansionary policies and excessive commercial borrowing, to encounter serious repayment difficulties on private credits. In 1956, certain European creditor governments met in Paris under French chairmanship to restore orderly trade and payments relations with Argentina,

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including the rene otiation of supplier credits insured by them. P Under the terms of their policies, the official insurance agencies had paid off their private exporters and, as the new creditors, attempted to recover these claims and forestall default. The group came to be called the ‘Paris Club’ because of the locus of the meetings (although some of the reschedulings were arranged elsewhere, for example, at The Hague). Similar adjustments of insured export credits were also negotiated with Brazil and Chile during the decade up to 1966.6 The Paris Club has never had a legal organization or secretariat. The participating countries, however, viewed the absence of institutional arrangements as an advantage which made recourse to debt relief an ad hoc procedure for debtor countries. Nevertheless, certain informal understandings grew up among the creditors most of which, in more or less modified form, are adhered to in Paris Club negotiations to this day. Some of the more significant are the following: (1) The debt servicing burden for the next several years had to be perceived by the creditors to be so heavy, that, in the absence of relief on scheduled payments, default was an imminent prospect. (Often substantial arrears had already accumulated.) Debt relief was therefore to be treated as an ‘unusual event’. (2) All participating creditor governments agreed to negotiate bilaterally the same or similar terms of repayment. The interest rate, however, was usually left open for bilateral negotiations with the intention of having it reflect the cost of capital in the various creditor countries. Occasionally uniform interest rates, or a range of agreed-upon rates, were specified. This understanding on comparable terms for the purpose of ensuring substantial equity among the participants has always been regarded as an essential characteristic of the Paris Club. Paris Club members have usually required the debtor country to seek comparable concessions on debt payments to non-participating governments and less often to private !enders (generally suppliers and private banks) whose credits had not been insured by their own members. This latter requirement was difficult to comply with as well as to monitor, so that it became in effect more of a desirable objective than a strictly-enforced obligation. (3) Only private supplier credits insured by creditor governments (normally with maturities of at least six months or more) were at first subject to renegotiation in the belief that direct loans from governments, usually extended on more concessional terms, were not the cause of

debt repayment difficulties. However, official export credits, and loans for development assistance on concessional terms, were later considered on a case-by-case basis for debt relief. (4) Debt relief was not to be directly associated with development assistance. This separation was (and still is) deemed important because of the Paris Club’s perception of debt relief as a unique phenomenon of an exigent and short-term nature, to be treated on its merits alone without consideration of longerterm development needs. (5) Debts once rescheduled were not to be rescheduled again. This principle has at times proved to be unworkable. (6) Initially, periods of debt relief (i.e. when due payments were deferred) were relatively short, generally about 2 years and the terms non-concessional (on the average, about 2 years of grace, followed by 5 years of re ayment at or near market rates of interest). P Also, less than the full amounts of debt service falling due were usually rescheduled. (7) The Paris Club ordinarily required the debtor country to adopt a stabilization programme approved by the IMF and to obtain an IMF stand-by arrangement (which often included ceilings on the assumption of new commercial indebtedness). This procedure relieved the creditor governments of the onus of imposing appropriate economic and financial conditions on the debtor country, and provided an impartial monitor of the country’s economic performance. (8) By 1961, the staffs of the IBRD and IMF were invited to attend the meetings of the Paris Club as observers, and were increasingly asked to supply information and technical advice. In fact, the contribution of the staffs of both institutions often went beyond providing these valuable services, particularly in the Indonesian and Ghanaian debt renegotiations where their unofficial suggestions were materially helpful to both creditors and debtors. To sum up, the debt relief extended by the Paris Club in its early years was regarded as the minimum short-term assistance required to ensure the orderly resumption of repayments without ‘rewarding’ those debtor countries seeking relief for what was usually considered imprudent management of their economies. Longer-term considerations were generally viewed to be irrelevant. As it turned out, the 3 affected countries - Argentina, Brazil and Chile - underwent a total of 6 reschedulings up to 1966. The Paris Club in time developed greater flexibility but most of the procedures cited above, and the Paris Club’s basic attitude

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toward debt relief as an ‘unusual event’ to be treated on its merits and not to be regarded as a precedent, have been maintained to the present time. (ii) Turkey The debt renegotiations of 1959 and 1965 involving Turkey were transacted outside the context of the Paris Club and involved arrangements considerably different from those developed by the Paris Club. Turkey experienced a rapid increase in external debt during the early post-war years due mainly to expansionary policies. When these were not adjusted after the collapse of the Korean war boom led to a decline in export earnings, severe debt servicing difficulties ensued. Once again, however, Western suppliers, supported by their official export credit insurance agencies, continued to extend large amounts of essentially short-term credits even when serious repayment difficulties were apparent. Since Turkey was a member, the Organization for European Economic Cooperation convened an international debt conference, the outcome of which was a rescheduling of that country’s extensive commercial debts. A multilateral agreement was reached in 1959 which is notable, among other things, for the inclusion of uninsured private credits,a for terms more generous than those up to that time accorded by the Paris Club, and for the association of debt relief with balance-of-payment loans on concessional terms by members of the OEEC and the United States. The renegotiated terms, among other provisions, allowed for repayment to be made over a 12-year period in progressively larger amounts (to ensure greater relief in the critical earlier years) and at an interest rate of 3% per annum. Turkey’s military importance to NATO undoubtedly facilitated the proceedings. Despite the relatively liberal treatment accorded to its commercial debts, Turkey continued to experience balanceof-payments difficulties. As a result, the Consortium for Turkey (which had been organized under the aegis of the OECD in 1962) arranged in 1965 to extend relief on payments due to member Governments of the Consortium (including some of the rescheduled debt of the 1959 agreement) on variable terms to be negotiated bilaterally. A few of the members, however, extended balance-of-payments loans instead of direct debt relief. This second multilateral debt renegotiation for Turkey is thus notable for: (a) the rescheduling of some previously rescheduled debts, a

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procedure which is opposed in principle by the Paris Club; (b) non-uniform terms extended by the creditors (although these were subject to review within the Consortium); (c) the explicit recognition that balance-of-payments loans, when they are fast-disbursing, fulfil at least two of the principal attributes of debt relief (the third being the untied nature of the foreign exchange which, at least in theory, becomes available when contractual obligations are deferred); and (d) flowing from the preceding, the explicit association of debt relief and official aid which is avoided by the Paris Club. Confronted by mounting inability to meet its scheduled debt payments, Turkey was, in May of 1978, granted substantial debt relief in a third rescheduling by OECD members, but on terms more typical of Paris Club arrangements. However, short-term debt of less than one year, normally excluded from multilateral debt relief arrangements, was included this time due to Turkey’s unusually large accumulation of such debt. (b) 1966 to the present Two dramatic events ushered in this period which, despite some recent indications to the contrary, was generally characterized by more flexible and imaginative treatment of external debt difficulties than prevailed during the preceding decade. There was also an increased awareness that it was sensible in the long run to view debt relief, whatever the causes of the underlying debt difficulties, within the overall context of a country’s development rather than narrowly as a bail-out operation for a country in balance-of-payments distress. It is an interesting coincidence that these events occurred in the same year (1966) and involved the overthrow of two heads of govemment (Nkrumah of Ghana and Sukamo of Indon’esia). During their regimes, very large external debts had been incurred by profligate borrowing and unwise lending. Heavy military expenditures by Indonesia and fluctuations in the price of cocoa, Ghana’s principal export commodity, exacerbated their respective situations. The successor governments, finding themselves unable to meet contractual obligations on these debts, requested debt relief. The nature and outcome of the subsequent debt negotiations were, however, very dissimilar. Both countries at first stressed to creditors their intention to honour in full all external obligations, but that to do so on existing payment

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schedules would depress investment and consumption to unacceptable levels for some time. Both pointed out that more rapid economic growth and eventual repayment in full of past obligations would be possible only if the burden of existing indebtedness, assumed under very different circumstances, was substantially alleviated. The United Kingdom, at Ghana’s request, convened Ghana’s Western creditors. At first the Japanese, and then the French, chaired a Western creditors’ group to which Indonesia’s socialist creditors (including the USSR) were invited but declined to attend. Protracted debt negotiations ensued for both countries within a Paris Club framework. (i) Indonesia Three successive annual reschedulings were arranged for Indonesia which provided total balanceof-payments relief for several years on the so-called ‘Sukarno’ debt’ owed to participating Paris Club creditors. Fully 100% of the principal and contractual interest due in these years (including arrears) was rescheduled and interest on the deferred amounts was capitalized for later payment. The Indonesian situation, however, was complicated by the fact that more than half of Indonesia’s total external public debt of $2.1 billion accumulated by the Sukamo regime was owed to Eastern European creditors, particularly the USSR for substantial military assistance. (The above amount excluded relatively small sums of private uninsured debt for which separate arrangements were undertaken by the concerned private creditors and the Indonesian Government.) Paris Club members eventually realized that a viable resolution of all of Indonesia’s past indebtedness on a longer-term basis was essential to restore its creditworthiness in international capital markets and to free Indonesia’s own resources, and the new aid she was receiving,” for development rather than repayment of old debt. Accordingly, the Paris Club, recognizing its own limitations and divergent national viewpoints, requested an outsider, a prominent German banker, Dr. Abs,” to undertake a study of Indonesia’s balanceaf-payments prospects with a view to a longer-term settlement of the entire ‘Sukamo’ debt, including obligations owed to the socialist countries, and one which would be based upon an assessment of Indonesia’s projected capacity to repay. The emphasis of the study would be the restoration - and maintenance - of Indonesian creditworthiness to permit a resumption of growth. Dr. Abs’ international repute and objectivity

enabled him to make far-reaching proposals which, with some important changes, were accepted by the Paris Club in 1970. The principal of the entire ‘Sukamo’ debt (including development credits on concessional terms, and amounts which had been renegotiated previously by the Paris Club), was consolidated for repayment in 30 equal annual instalments at zero interest. Contractual interest, and interest on the earlier Paris Club reschedulings, was to be deferred until 1985 and paid thereafter in 15 equal annual instalments, but with no additional interest ap lied to these deferments of interest payments. Pz Economic prospects at that time were so unfavourable for Indonesia that the Paris Club, in addition, permitted Indonesia, under a bisque clause arrangement similar to that contained in the Anglo-American Financial Agreement, to defer at its option up to one-half of the principal payments falling due during the early years of the new schedule. These deferred obligations were to be repaid with interest at 4% per annum during the final years of the agreement. Indonesia availed itself fully of this advantageous arrangement, which, incidentally, has not been granted since to any other country. The 1970 debt renegotiation was unprecedented because of its unusually generous terms, exceptionally large volume and the inclusion of Indonsia’s entire external public debt incurred prior to 1 July 1966. It was also unprecedented in that the socialist countries, which had refused to join the Paris Club negotiations, rescheduled their portion of the debt on essentially the same (and, indeed, in certain respects, slightly more liberal) terms. This is all the more notable since much of the USSR debt consisted of military credits, a category excluded from previous Western renegotiation of the indebtedness of developing countries. A further unusual feature merits attention: keeping in mind the situation of the post-war German economy which changed so rapidly after the renegotiation of its external debts in 1953, the Paris Club envisaged the possibility of accelerated repayments after 1980 but also, at Indonesia’s request, did not exclude the possibility of additional relief on the rescheduled ‘Sukarno’ debt. The 1970 Indonesian debt renegotiation thus represents an important milestone in the treatment of international debt. The Paris Club, which had previously pursued a relatively cautious and basically commercial approach, displayed a flexible amd imaginative attitude in dealing with Indonesia. In part, this may be ascribed to the political reorientation of

INTERNATIONAL DEBT RENEGOTIATION Indonesia after Sukarno’s downfall. Also, the constructive positions of the United States and Japan, the major new Western aid donors, had an important bearing on the outcome. lronitally, the very large debt owed to the socialist bloc facilitated liberal treatment by Western creditors who were concerned that, otherwise, their newly-resumed aid programmes would in effect help pay off Indonesia’s heavy indebtedness to the socialist bloc which had discontinued lending after Sukarno’s downfall. Thus, the Paris Club creditors required Indonesia to apply the agreed-upon terms to all creditors, including those outside of the Paris Club. This condition was a key requirement in the Indonesian debt agreement of 1970. Other reasons for the unusually forthcoming attitude of Paris Club creditors may be attributable to the influence of a highly-regarded private banker, to the cooperative attitude of the postBukamo Indonesian Government, and to the contributions of the staff of the World Bank and the International Monetary Fund during the protracted and at times emotionallycharged negotiations. Nevertheless, Paris Club members assured themselves - and particularly other developing countries - that the Indonesian debt settlement of 1970 was sui generis in nature and that its repetition should not be expected. (ii) Ghana The debt renegotiations involving Ghana were in sharp contrast to the Indonesian experience. While generally more innovative and less commercial than earlier Paris Club reschedulings of Latin American debt, the three renegotiations by Western creditors through 1970 of heavy repayments due on large amounts of expensive supplier credits accumulated during the Nkrumah regime provided only partial and short-term relief largely at market rates of interest. Furthermore, Ghana could not understand or accept the contrast in treatment accorded to it and to Indonesia by virtually the same creditors at virtually the same time. When, in addition, questionable practices were discovered in many of the supplier contracts whose payments were being rescheduled at substantial rates of interest, relations with the creditors deteriorated and Ghana eventually repudiated all previous debt repayment arrangements. Prolonged negotiations ensued finally leading to a settlement in 1974 whose terms were fairly complicated but in essence provided for repayment of the supplier credits from the Nkrumah era during a period of 18 years after 10 years of grace and at 2.50% interest-per annum on the deferred amounts.

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The terms ultimately negotiated were reasonably consonant with Ghana’s ability to pay but, like many of the debt renegotiations of the past, took a high toll on the time, resources and good will of both creditors and debtor because of the limited nature of the earlier agreements. Perhaps one of the underlying causes for the difference in treatment accorded to two debtor countries by the same creditors during virtually the same years was the absence of any strong political motivation for the creditors to regard the Ghanaian debt problem as requiring anything more than typical creditor Club arrangements. The existence of an international aid Consortium for Ghana (chaired by the World Bank), whose participating governments were also members of the Paris Club,r3 emphasizes this difference in creditor attitudes. (iii) India and Pakistan Debt relief for both countries took place within the context of aid consortia chaired by the World Bank. In both cases, therefore, debt relief was viewed in a broader framework which included concern for the countries’ longer-term development needs. Here again, however, the treatment given the two countries differed substantially. (a) India’s debt repayment difficulties were very different from those normally encountered. India had never engaged in large-scale commercial borrowing. It had managed its external debt prudently, generally within the limits of the more or less concessional loans provided through the Consortium.‘4 However, many of the contributions of the members had been extended on terms unsuited to India’s weak balance-of-payments position, particularly in the earlier years of the Consortium. Furthermore, long grace periods on large credits from the United States were expiring in the 1960s resulting in a rapid increase in repayments. Accordingly, debt service payments were consuming large proportions of India’s export receipts in convertible currencies, and net transfers of external capital (i.e. after principal and interest payments on existing debt) were declining as a proportion of the assistance provided through the Consortium. Nevertheless, India met its contractual obligations punctually even when under balance-of-payments pressure. Therefore India was confronted with a ‘development debt’ problem rather than the typical one of balance-of-payments difficulties induced by excessive commercial borrowing. The nature of the very limited debt relief given to India was the outcome of a complex set of factors. In part it was due to the lack of a

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visible emergency and in part to dissatisfaction with India’s lethargic export performance. India’s political and military difficulties with Pakistan were also a possible consideration. Furthermore, an attempt was made to induce Consortium members who had provided assistance on less concessional terms to bear a morethan-proportionate share of debt relief; in Paris Club renegotiations all creditors shared in granting relief on an identical proportion of the debt service coming due to them. This attempt at ‘more equitable burden-sharing’ caused serious dissension among the members of the Consortium and had to be considerably modified. The final outcome was disappointing in that a relatively small amount of debt service (about $100 million per year for the 3 years of 1968/l 969 to 1970/1971) was rescheduled. This was estimated to be sufficient to keep India’s debt service at an estimated level of about 20% of its export earnings, a benchmark conveniently, though often erroneously, regarded as a limit beyond which a country might be likely to experience difficulties in meeting its external payment obligations. Each member’s share was assessed in accordance with a complicated formula and was to be deferred for 10 years at a zero rate of interest or on other equivalent terms. However, members were permitted to provide their share either through direct debt relief or balance-of-payments loans and to consider this contribution as part of their annual aid giving through the Consortium. Consequently, Indian debt relief was limited in amount and, although ‘additionality’ is an elusive concept, may have provided few if any resources additional to what would have become available through the normal procedures of the Consortium. The clear benefit to India was that the ‘debt relief’, given by most members as balance-of-payments loans, was not tied to procurement from the creditor country, and was generally extended on more concessional terms than the same members provided in the Indian Consortium. Similar arrangements were repeated in later years for roughly double the original amounts. (b) Debt relief for Pakistan, also within the framework of an aid Consortium chaired by the World Bank, was nevertheless arranged under very different circumstances. Due to a combination of natural calamities and adverse political and military events, including the stoppage of exports from one part of the country, Pakistan felt obliged to declare a selective moratorium (which excluded payments to commercial lenders and international institutions) in mid-l 97 1.

Emergency debt relief was extended by the Consortium in 1972 and 1973. These actions, however, created a substantial bulge in payments for several years thereafter because of the very short-term nature of the debt relief. More substantial and longer-term relief was arranged in the agreement of 1974 under which roughly two-thirds of the payments due over the next 4 years were to be repaid on terms slightly more concessional than those arranged for Ghana in the same year (30 years’ repayment, inclusive of 10 years of grace, at 2.50% interest). Pakistan was also given to understand that it would not be expected to service after 1974 any debts incurred prior to separation of the country for projects ‘visibly located’ in Bangladesh, but with exceptions as noted below. These concessional terms were offered partly as implicit compensation for the inclusion of debt service payments associated with projects in Bangladesh which had been incorporated in the interim relief agreements and were intentionally retained in the 1974 renegotiation. Furthermore, because of the practical impossibility of attempting to impute to Bangladesh substantial balance-of-payments Ioans estimated to have been utilized within that country when administered by Pakistan, they were regarded entirely as the responsibility of the latter. From Pakistan’s viewpoint, the concessionality of the debt renegotiation of 1974 and its value were diminished by the inclusion of debt service payments more or less attributable in its opinion to Moreover, while the problem of Bangladesh.” the bulge in debt service payments caused by the 1972 and 1973 renegotiations had been effectively resolved, substantial debt service payments on existing debt will be resumed in full after the fourth year (1977/l 978) of debt relief, and these, combined with debt service payments on heavy new borrowing, wilI result in another payments bulge after 1978. As a matter of fact, Pakistan is currently seeking additional debt relief from its bilateral creditors within the Consortium.

3. OTHER ISSUES It has been suggested throughout this paper that whether debt relief is granted by external lenders and on what terms, depends upon a complex mix of economic and political considerations which differ with each individual case. For example, an unresolved expropriation issue and serious concern over the direction of

INTERNATIONAL DEBT RENEGOTIATION Peru’s social and economic policies influenced the outcome of the multilateral debt relief arranged for that country in 1968 and 1970. Peru did not invite the United States Government to participate in the debt negotiations because it understood that this would not be possible for the latter due to statutory reasons involving the expropriation. Complicated negotiations took place with private banks and official creditors which resulted in short-term, high-cost relief on Peru’s commercial borrowing. There was only a bare minimum of terms harmonization among the official European and Japanese creditors, and parallel but uncoordinated accommodations with United States and Canadian private banks. The results did little more than prevent a potential default in the period 1968/l 970. The cost was a further deterioration in Peru’s longer-term debt profile which was subsequently aggravated by continued heavy borrowing on relatively short terms. Recurrent balance-of-payments difficulties finally culminated in a Paris Club rescheduling in 1978, as well as additional relief provided by private banks. The Chilean debt rescheduling in 1972, its second through the Paris Club, took place under very difficult economic circumstances complicated by two issues which delayed negotiations. One was Chile’s refusal to accept a link between debt relief and a Stand-by Arrangement with the Fund, although this had been a standard practice (with some exceptions) in Paris Club arrangements. The issue was resolved when Chile agreed to issue a unilateral declaration of intent with implications for economic policy comparable to those normally included in the Fund’s Stand-by Arrangements. The other issue, also subsequently resolved, was Chile’s initial refusal to acknowledge its obligations arising from the nationalization of foreign investments. The terms subsequently negotiated were typical Paris Club arrangements, which were followed by two additional rounds of debt relief shortly thereafter. These later renegotiations, in which some European members of the Paris Club refused to participate, became politically-charged issues because of the overthrow of the Allende regime. An example of the importance of political ties between a creditor government and its former colonies was the forgiveness in 1972 by France of certain debts owed by former Frenchadministered territories in Africa incurred prior to their independence. These debts amounted to over $200 million and were attributable to expenditures financed with the proceeds of loans from the French Government.

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(a) Bilateral debt relief In addition to multilateral arrangements through the Paris Club and international institutions, debt relief has also resulted from strictly bilateral negotiations between creditor and debtor countries. Creditors have generally agreed with considerable reluctance to such arrangements because of the difficulty of ensuring equity with other creditors. Debtors often prefer bilateral negotiations in the hope that they might play off one creditor against another, or secure more advantageous treatment through bilateral political leverage than they consider possible within a multilateral forum where the debtor is confronted with a unified creditor position often reflecting terms set by the ‘hardest’ lender. Debtor countries, in addition, are often concerned about the possible adverse reflection on their credit reputation in international capital markets from the publicity attaching to multilateral debt negotiations, and are also uneasy at the prospect of one debtor country dealing at one time with a group of creditors. Among the more notable bilateral debt renegotiations in recent years were those engaged in by Yugoslavia and Egypt through about 1972. The information available suggests that the terms were roughly equivalent to those typical of Paris Club arrangements. Without discounting the genuine concerns of debtor countries about the multilateralization of debt negotiations, the heavy cost in terms of the increased time consumed in individual negotiations with many creditors, and the fact that creditors can also apply pressure in bilateral relationships, makes a bilateral approach less attractive than it might at first appear. (b) Private creditors Uninsured private creditors have usually been able to work out their own accommodations with debtor countries. By and large, these have generally been at least no more costly for the private creditors than arrangements negotiated by creditor governments. There has in the past been no consistent view among the latter on how debt owed to private uninsured creditors should be handled, in large part because of differing legal and policy considerations in the various creditor countries. Nevertheless, Paris Club creditors have often inserted clauses in their multilateral agreements requiring debtor countries to seek comparable debt relief from uninsured private creditors. As sug-

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gested earlier, however, this requirement is difficult to enforce and official creditors have not always been insistent on strict compliance. Debtor countries, in fact, have at times extended preferential treatment to private creditors in order not to jeopardize their access to private capital markets. As indicated, this occurred in 1971 when Pakistan deliberately excluded the debt4 owed to private creditors (as well as to international institutions) from the moratorium on debt payments which it had imposed unilaterally.‘6 A more recent development which has been repeated in subsequent negotiations of private debt took place during 1976 when commercial banks, now the largest and most coordinated group of private creditors, reached underwith Peru and Zaire that both standings countries would put into effect far-reaching stabilization programmes. In Zaire’s case, this was done through a Stand-by Arrangement with the IMF. While the ‘understandings’ may not have been formal requirements, the implication was nonetheless clear that the financial assistance of the banks was conditioned on the adoption of economic stabilization programmes by the countries to be assisted. Thus, private banks, in order to help protect their own increasingly large holdings of the debt of developing countries, adopted a practice that has been followed for some time by official creditors in the Paris Club. If pursued in future private bank negotiations with debtor countries, it could represent a step forward in harmonizing the treatment accorded to debtors by public and private creditors. 4.. LESSONS FROM THE PAST As indicated earlier, the 19th century was characterized by irregular bursts of private lending in the form of bond issues with little attention paid by either lenders or borrowers to the absorptive capacity and repayment prospects of the latter. Not surprisingly, defaults were not uncommon and bond issues had to be renegotiated, usually more than once and generally on terms less favourable to the creditors. Lending to developing countries following World War II became largely a matter of official

debt, as creditor governments instituted programmes of development assistance and insured private credits for export lending purposes. Debt relief for insured private debt (and subsequently even for concessional public lending) was arranged through coordinated action between creditor governments and the debtor country, a process which was more structured and orderly than the private renegotiations of the 19th century. Despite these changes, certain basic similarities are apparent between the private debt renegotiations of an earlier era and the public debt relief accorded to developing nations since World War II, While only 12 developing countries since World War I1 have received some form of coordinated international relief from their scheduled obligations,” these 12 have participated in a total of 40 multilateral debt renegotiations. Some of these reschedulings were deliberately extended on a ‘short leash’ basis, mainly in the expectation that this would facilitate monitoring the debtor’s performance and aid in determining whether additional relief in the future might be warranted. The possibility of additional relief was usually embodied in what came to be known as ‘goodwill’ clauses, which were, by and large, an implicit recognition that the initial debt relief arrangements might prove inadequate. Severai of the reschedulings were ultimately concessional and more suited to the particular debtor’s anticipated ability to repay than earlier arrangements, but these were arrived at only after prolonged negotiations. As indicated earlier, the toll on the time, resources and goodwill of both creditors and debtors, as during an earlier era, was generally higher than it need have been in most cases.” What stands out is that debt relief, in the past and at present, has been extended for varied reasons and on terms not always related to a debtor’s needs, and that it has been more costly to creditors and less beneficial to debtors when the latters’ capacity to repay has been inadequately assessed at the outset. This history of debt relief has repeatedly shown that it is nc exception to the general rule: when lessons from the past are overlooked they have to be relearned.

NOTES 1. Formally known International

Economic

as CIEC, or the Conference Cooperation.

on

2. Edwin Borchard, State Insolvency and Foreign Bondholders, Vol. I, General Principles (Yale University Press, 1951), pp. 321 et passim.

3. Accounts of specific debt renegotiations of the 19th and early 20th centuries may be found in Vol. 1; of the abovecited work, Selected Case Histories of Governmental Foreign Bond Defaults and Debt Readjustments, by William H. Wynne.

INTERNATIONAL DEBT RENEGOTIATION 4. For further details of these post-World War 1 debt renegotiations, see Harold G. Moulton and Leo Pasvolsky, War Debts and World Prosperity (The Brookings Institution; New York: The Century Co., 1932). While the debt renegotiations discussed in this section deal only with inter-governmental transactions, it is important to note that private lending, mostly in the form of bond issues, was revived briefly during the 192Os, but was then largely discouraged by the ensuing depression. 5. Austria, Belgium, Denmark, France, Italy, Norway, the Netherlands, Germany, the United Kingdom, Sweden and Switzerland. The United States and Japan joined the ‘Club’ later which now includes any interested creditor government. Austria, Belgium, Denmark, Norway, Sweden and Switzerland did not reschedule because of the minor nature of their claims against Argentina. 6. Substantial bilateral debt relief on export credits, including official credits of the US Export-Import Bank, had been made available to Brazil in 1955 prior to its first Paris Club-type rescheduling in 1961. These arrangements included balanceof-payments loans by the United States to pay off commercial arrears. 7. ‘Short-term’ debt relief, as used in this paper, is meant to denote terms roughly equivalent to the above. 8. Mostly from the United States. Their inclusion entailed complicated arrangements by the United States Government with over 100 private creditors.

14. India also had accumulated substantial debt obligations to socialist countries which were tied to repayment in Indian exports. 15. In a similar case, Turkey had succeeded in 1925 through the League of Nations in attributing a large proportion of its outstanding indebtedness to newlyindependent countries which were formerly within the Ottoman Empire. This principle had been recognized earlier by the Congress of Berlin in 1878 when portions of the Ottoman Empire’s externai debt were assigned on an ‘equitable’ basis to Bulgaria, Serbia and Montenegro. See Wynne, op. cit. 16. More recently, with the heavy bank lending uninsured by creditor latter have become increasingly uninsured private debt should be governments on a basis comparable for official and insured private debt.

11. Dr. Abs had been the principal negotiator for the Federal Republic at the London Conference on German External Debt. 12. Dr. Abs had recommended the elimination of all interest, both contractual and ‘moratorium’, but the Paris Club found this proposal unacceptable. In debt reschedulings, additional interest is normally charged on all deferments of contractual obligations, including interest. This additional interest is usually referred to as ‘moratorium’ interest. 13. The term ‘Paris Club’ is employed here in ageneral sense, although the meetings were held mostly in London, to denote the procedures and prevailing orientation typical of the Paris Club.

growth in private governments, the concerned that treated by debtor with that arranged

17. A list follows of multilateral debt renegotiations for developing countries since 1956. Terms and amounts of individual renegotiations have been cited in the text when this was deemed helpful to illustrate the points made. A useful source of published material on multilateral renegotiations may be found in Henry J. Bitterman, The Refunding of International Debt (Duke University Press, 1973). The IMF has prepared a series of reports on multilateral debt renegotiations with detailed-information on the experience of Fund members. The IBRD and OECD have also renorted on multilateral debt renegotiations. The reports of these international institutions, however, are normally limited in circulation to member governments.

9. External public debt, including private debt guaranteed by creditor governments, with maturities in excess of 180 days incurred prior to 1 July 1966. 10. Debt renegotiations were purposely, if somewhat obviously, kept separate from aid meetings. Representatives of finance ministries generally attended Paris Club negotiations, whereas their counterparts from other ministries usually attended the meetings of the Indonesian aid consortium in the Netherlands immediately afterwards.

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Country Argentina

Brazil Cambodia (now Kampuchea)

Chile

Ghana

India

Year 1956 1962 1965 1961 1964 1972 (Two separate agreements, one in January and one in November 1965 1972 1974 1975 1966 1968 1970 1974 1968 1971 1972 1973 1974 1975

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210 Table (Continued) country

Year

India (Cont.)

1976 1977 1978

Indonesia

1966 1967 1968 1970 1972 1973 1974 1968 1969 1978 1959 1965 1978

Pakistan

Peru

Turkey

Sierra Leone

1977

Zaire

1976 1977

18. The ‘North-South’ conference, referred to at the beginning of this paper, addressed itself, among other matters, to the issue of formulating internationallyaccepted guidelines for the handling of multilateral debt renegotiations, but agreement could not be reached. There is, however, an understanding in UNCTAD that creditor and debtor governments would continue working on the establishment of such guidelines. In addition, there now appears to be an increased awareness on the part of creditor governments that special consideration is appropriate for the poorest developing countries with regard to their external debt obligations. This has been reflected in the willingness of a growing number of creditor governments to make arrangements for the forgiveness of repayments to them of debt incurred on concessional terms.