Business Cycles and Depressions by An Encyclopedia

Author:An Encyclopedia
Language: eng
Format: epub
ISBN: 978-1-136-54527-6
Publisher: Taylor & Francis (CAM)

TABLE 1. External Debt and Economic Performance:1 Fifteen Heavily Indebted Countries

Policy Responses: Phase 1

The immediate policy response to this crisis emphasized continuity of debt servicing. Maintaining debt service involved case-by-case negotiations among commercial banks, creditor-countries’ official agencies, and debtor-countries’ governments. The case-by-case approach was justified by the diversity of situations faced by developing countries and the evolutionary nature of U.S. policy towards the debt problem (Truman 1989).

Since the adjustment process involved both short- and long-run considerations (Truman 1986, 1989), the strategy entailed (1) policy adjustments by debtor countries (positive real interest rates, depreciation of real exchange rates, reduction of government budget deficits); (2) continued lending by commercial banks on a concerted basis and rescheduling existing obligations with both longer maturities and grace periods; (3) official bridge financing; and (4) increased financing from the International Monetary Fund (IMF) with associated conditionality. The IMF played a central role in these negotiations, because many smaller commercial banks lacked the incentive to continue lending to LDCs but would have benefitted from the increased quality of their loans if larger banks increased their exposure. To avoid these free-rider problems, the IMF did not provide financing until all other parties agreed to supply their share of financing (Cline 1984, Truman 1989).

Debt rescheduling, official financing, and concerted lending could not, by themselves, solve the debt crisis. Debt forgiveness contradicted the overall debt strategy and the gains from adopting structural-policy changes carried unavoidable delays. Thus the brunt of the adjustment fell on debtors’ trade balances, which improved substantially (Table 1). This improvement arose from a contraction of imports induced by the depreciation of real exchange rates and an 8-percent decline in per-capita income from 1982 to 1984 (Table 1).

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