TIME: Almanac 1990/1990 Time Magazine Compact Almanac, The (1991)(Time).iso/time/073189/07318900.021

Text File | 1990-09-17 | 4KB | 64 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.