TIME: Almanac 1993/TIME Almanac 1993.iso/time/073189/07318900.021

Text File | 1992-09-23 | 3.7 KB | 70 lines

                                                                                WORLD, Page 25

America Abroad

Debt and Forgiveness


By Strobe Talbott


    Around the world the U.S. is confronted by the plight of
poor but friendly countries that have borrowed heavily and
spent unwisely. A traditional American approach has been to make
new loans so that the debtors can repay old ones. Debt
forgiveness, by any name, has always been anathema, since most
of the borrowed money comes from private banks whose directors
and shareholders are not in the forgiveness business.

    The Bush Administration has worked out a formula to help
ease the burden on some borrowers while maintaining the
confidence, and therefore the cooperation, of lenders. Announced
by Treasury Secretary Nicholas Brady in March and endorsed by
the World Bank and the International Monetary Fund, as well as
at the economic summit in Paris last week, the plan calls for
"reducing" -- in fact, forgiving -- some principal and interest,
thus freeing borrowers' resources for growth. The banks end up
holding IOUs that have a lower face value but a higher chance
of being repaid. The increased prospect of the debtor nations'
economic and political stability becomes reassuring collateral.

    Senator Bill Bradley is a Democrat who has been hammering
away at the importance of the Third World debt issue for years.
He praises the Bush Administration for realizing that "the
answer to the problem of too much debt is not more debt but
less." That may sound like mere common sense, but Republicans
must overcome a distrust of giveaways and interference in the
private sector. "It is an ideological breakthrough," says former
Assistant Secretary of State Robert Hormats.

    The first test case for the Brady plan is appropriately
Mexico, whose economic distress is fully matched both by its
strategic significance to the U.S. and by the avowed commitment
of its leadership to reform. Mexico has drastically cut spending
and started selling inefficient state enterprises. Still, the
economy is stagnant. No wonder. The equivalent of about $13
billion a year that might otherwise go to internal investment
or the purchase of imports is being siphoned off to service
Mexico's nearly $100 billion debt. Under quiet prodding from
Washington, the Mexican government and a consortium of
international banks have been negotiating an agreement to ease
the terms of repayment. Next in line for debt relief are three
other democracies whose future growth could be in jeopardy:
Venezuela, the Philippines and Costa Rica.

    Welcome as the Brady plan is, it may end up being foiled
for the most ironic of reasons: the U.S.'s mismanagement of its
own economy. Under the arch-Republican Ronald Reagan, the U.S.
spent so much more than it collected in revenues that it became
the world's No. 1 debtor. Says C. Fred Bergsten, the director
of the Institute for International Economics in Washington: "The
richest country in the world is competing with the poorest for
the pool of available capital. American indebtedness tends to
drive up U.S. interest rates, which in turn drives up the cost
of loans to other nations, which threatens to wipe out the
benefits that Nick Brady has made possible." Meanwhile, the U.S.
trade deficit is provoking protectionism, which would make it
harder for developing countries to work off their debts by
exporting their products to a key market. If the U.S. is really
going to help, debt reduction must begin at home. Otherwise, the
promise of the Brady plan -- along with much of the rest of
America's influence abroad -- will be squandered. That, truly,
would be unforgivable.