Moratorium: A Dissident View of LDC Debt The 1987 Vienna Economic Summit highlighted the problem of international debt. Despite periodic warnings from Foreign Service, State Department, and OECD analysts of the impending problems of mounting LDC debt during the mid '70s, U.S. Treasury Department officials continued misguidedly to view the debt situation as a useful recycling of the OPEC petrodollar surplus. Not until LDC debt reached the trillion dollar level, and the recession of 1981-82 posed serious repayment problems did lender nations begin to pay real attention to the problem. Even now it is not fully recognized that the contemporary situation bears striking parallels to the post WWI debt burden--though the causes are of course totally different. It is probable that none of the debt restructuring formulae presently being proposed can resolve the problem. Attention should therefore be given to adopting a "Dawes Plan" moratorium based on the same reasoning which prevailed with respect to the WWI German war debt and its bearing on world economic health. The problem is how to do this without triggering a protectionist wave. In early 1987 President Sarney of Brazil announced that Brazil would pay no further interest on its debt of approximately $115 billion. In an attempt to minimize foreign bank reaction, he added that Brazil had no intention of repudiating its debt, leaving in question what would be done about payments on principle, future payments on unpaid interest, and what would be done about accrued interest or unpaid interest. The LDC debt crisis did not happen overnight. Some of us have been crying "wolf" for some time. Fifteen years ago one of the authors was counselor of embassy for Economic and Commercial Affairs in Rabat, Morocco. He sent dispatches to the Department of State and the U.S. Treasury lamenting (and warning about the future results of) the bright young men left behind after visits of David Rockefeller and Tom Clausen to play golf with the king, and whose purpose, as it seemed to him then, was to sell the government of Morocco on projects that had previously been reviewed and turned down by the IBRD and USAID. Later as senior economist in the Office of Monetary Affairs of the Department of State he wrote a paper warning about the future effects on world monetary policy of such mounting (and obviously unrepayable) LDC debts. Neither the dispatches nor the paper received much attention. Somewhat later, as deputy director of the State Department Office of Economic Research and Analysis, he put part of his research team to work on a comprehensive listing of world debt, and astonished at their findings, wrote another report for the under secretary (then William Casey) sounding the alarm. Still no response. It seemed that Treasury officials had been persuaded by bankers that they were actually performing a useful function by recycling excess petrodollars, and taking this short term view little or no attention was being paid to long term repayment prospects. Following retirement from the U.S. Foreign Service, he served as professor of finance and economics at the American College in Paris. He then assigned as a seminar topic, an update of the status of world debt. With a letter of introduction from him, some of his students talked to the OECD officials responsible for monitoring LDC debt. In 1982, we found that the debt burden was nearing a trillion dollars--meaning annual servicing approaching $100 billion, clearly beyond the repayment capacity of the Third World. He summarized the situation in a chapter of a book we published in 1985. See Chapter 7 of The International Economic Coordination Instrument: Some Considerations Drawn From the OECD Experience, University Press, Lanham, MD., 1985). The highly capable OECD Secretariat had done its task, but the political masters weren't listening or didn't want to hear. Based on what we had observed and conversations we had had with senior American bankers in Morocco, Washington, and Paris, we decided that the banking community had discovered a new niche to fill and was exploiting it for all it was worth, depending on the U.S. Government and/or international community to rescue them if and when the situation required it to avoid a world economic crash. There is an old saying, "Owe a thousand dollars to a bank and you are the bank's servant. Owe ten million to a bank, and the bank is your servant." In present circumstances, this could be translated, "If the banking community has made bad loans of $50 million and something goes wrong, dividends may be cut. If the banking community has made bad loans of a trillion dollars and something goes wrong, the world will leap to its rescue." At the end of WWII, and following the creation of the IMF and IBRD, the U.S. representative to the Bretton Woods Conference in his final address described the purpose of the conference as having been to "create new institutions which would be instrumentalities of sovereign governments and not of private financial interests. . .to drive. . .the usurious money lenders from the temple of international finance" (Ibid . Footnote 2, p. 1). We have casually permitted the private commercial banks driven from the temple in 1946 to climb back in through the windows negligently left open by inattentive guardians of the public interest. Some five years ago, in a last ditch attempt to induce some action, one of the authors wrote a letter to the (then) U.S. Secretary of the Treasury drawing attention to the Dawes Plan moratorium on payments of WWI reparations debt. As will be recalled, prostrate Germany couldn't make payments on the heavy reparations imposed by the French and British. And, in turn, the Brits and French couldn't continue making payments on the U.S.'s wartime loans. This was the occasion for one of John Maynard Keynes' most trenchant books. (As a side note: this debt is still carried on the books. One of our jobs in the Office of International Monetary Affairs was to update annually the quantity of non-performing debt owed to the U.S. Would any bank carry non-performing debt on its books for sixty-five years?) At any rate, by this time Germany was running substantial balance of payments surpluses with the U.S. and much of the rest of the world, and it seemed to us an appropriate moment for convening a meeting to consider declaring an end to the WWI moratorium. He suggested that repayments could be used either (a) to reduce the U.S. balance of payments deficit, or (b) be dedicated directly by Germany, or indirectly through repayment to Britain, France, and the U.S., to supplement official development aid to the most debt-ridden LDCs, permitting them to get out from under their heavy interest payments on commercial debt. He really didn't have much hope, since as a state department official he had had the responsibility for writing bland answers for the secretary or under secretary to hundreds of interested citizen letters. The Secretary's response, which came in time, was that with all the border changes in Central Europe it would be exceedingly difficult to fix responsibility for repayment of the debt (with the sous entendu that this would, in any event, be a lot of work). The official who drafted this response for the Secretary of the Treasury was shortly thereafter seconded to the OECD in Paris and one of the authors had a chance to discuss the proposal in greater detail. The official agreed that, in principle, it wasn't a bad idea--just bad politics at a time when we were depending on German support for the deployment of cruise missiles in Europe. This also afforded one of the authors the chance to congratulate him on having come up with such a beautiful bureaucratic ploy as changes in national boundaries for sidetracking such a promising, if tough to deal with, idea. The co-author is not sure this dodge would have occurred to him had he been called upon to come up with a response to this particular citizen letter (citizens can come up with some of the darndest ideas for running the government better: some of them quite good ideas, but always implying a shift from the comfortable bureaucratic ruts the civil service travels in). So, if we didn't mean it when we drove out the usurious "money changers" back in Bretton Woods' times, and if we're unwilling to disoblige the now prosperous mega-debtors of the past by asking them to abandon their protective moratorium and adopt the "Magnificent Obsession" approach of helping in turn their fellow man in trouble, what is left? Well, even before President Sarney beat us to the punch, the authors were considering another approach. Clearly debt repudiation is a non-starter. This would offend the citizens of rich countries who would be compelled to bail out their own commercial banks who had so cleverly exploited this lacuna in post-war international monetary/financial policy. And, in all probability, it would affect both economic aid programs and the short-term willingness of commercial banks and governments to make further loans. So some plausible dodge must be developed (as in responding to constituent letters). Our thinking was running along the line of an announcement by the members of UNCTAD (joint action is always to be preferred to unilateral in these matters, viz . OPEC), of an interest payment moratorium--with careful reference to the WWI debt situation of Germany, a respected member of the international community. A little finger pointing often helps to divert attention from what is being done. We would have had UNCTAD emphasize that this was not a repudiation of debt, that every centavo of capital debt could in fact be accomplished). And we would have suggested that UNCTAD members take care not to miss a single payment on capital to preserve this image of integrity. We are pretty confident this would have played well to the house. Like President Sarney, we would have been silent about the future of interest payments. If after the capital debt was repaid and thus accruing no more interest, we would suggest that the UNCTAD nations reconsider what to do about the unpaid interest. If Third World economies were by this time doing reasonably well, we would encourage them to start paying off the accrued interest (but we would have them hang tough regarding interest on the unpaid interest. We think they could get away with insisting that accrual of interest on the unpaid interest was part of the original moratorium. But we would say nothing about that at the time of the original announcement, and we would deliberately obfuscate when governments or media hounds tried to clarify.) In short, we were in process of writing a policy paper suggesting just about what Brazil has done, except we would have tried to bring more countries in with us (though Sarney, a better politician than we may have chosen the better part, jumping into the water alone. He preserved surprise and secrecy and avoided a lot of the useless palaver that customarily precedes such major policy initiatives--and it looks as if he may yet convince Mexico, Argentina, and perhaps Venezuela to join him for the swim.) The problem now is for the creditor nations to do something before most of the Third World declares an interest moratorium, leaving us to bail out our "unwise virgin" commercial banks to avoid the onset of a major world recession (are we in a position to do this given our spendthrift national budget and balance of payments folly?). Were the co-author still in a policy advisory position within government, he would be recommending this as an ideal moment for a major U.S. government "jawboning" campaign. Instead of attacking Brazil for its folly, or encouraging U.S. commercial banks in their threats of retaliation, he would be publicly welcoming President Sarney's promise of complete repayment of principle, and comparing our present situation to that following the end of WWI, drawing parallels with the Dawes War Debt Moratorium Plan. (Too bad Brazil missed this ploy--almost as good it seems to us as pointing to the changes of boundaries in Central Europe to divert attention from the do-nothing position taken by the Treasury Secretary on the co-author's earlier suggestion). Indeed, the two situations are fundamentally similar in economic terms though their causes are poles apart. The LDCs have major debt problem their economies can't handle. And the debt is owed to the rich and prosperous who, if the public relations aspects are handled as deftly as was post-WWI debt, should not encounter any problems in their economies more basic than those encountered in the '20s. In short, the solution seems inevitable. Moratorium. There's simply no other effective way out. The remaining problem, and admittedly it's a major one, will be to maneuver the world economy so that, given the enormous debt overhang and existing trade imbalances, we don't end up adopting the protectionist beggar-my-neighbor measures which have in the past led nations into disaster when they've confronted similar crises. Fortunately, Europe and the United States now have a number of built-in, automatic stabilizers, governments are more ready than in the past to adopt activist measures instead of merely waiting for the economy to return to equilibrium, and we have available an additional policy tool, the International Economic Policy Coordination Instrument, which can give an additional degree of freedom in wielding the traditional monetary, fiscal, and trade tools. The Paris-based OECD is this year celebrating its Silver Anniversary, and the forums it offers to Economics and Finance Ministers for discussion and coordinating the policy measures of its twenty-four member countries, representing upwards of seventy per cent of world commerce, can be a formidable weapon in confronting the waves which are sure to arrive following the Sarney interest moratorium announcement. The 1987 economic meetings in Vienna make it too clear that we are still ignoring harsh reality. Let us hope ears of policy makers are at last open and that we won't wait for the Tsunami before preparing for action.