Page 327 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

Unit 28 : International Debt Crisis

Taking these several factors into consideration, the effects of the falloff in U.S. exports that could be Notes
expected to result from major and widespread debt repudiation by developing countries would not
be large enough to create another 1930s depression. Given the state of the art, it is impossible to say
by how much U.S. real GNP would fall and unemployment would rise in the event of widespread,
major defaults; but, all things considered, the fall in GNP is unlikely to exceed 1.5 percent and the rise
in unemployment is unlikely to exceed 0.5 percent. These estimates are set forth as benchmarks for
putting the debt crisis in perspective and helping to evaluate proposed solutions. I make no claim
about their accuracy other than that they do not appear unreasonable.
What is Likely to Happen ?

Even though permanent default is not in the long-run interests of debtor nations, their short-run
interests might be served by debt repudiation. Former Secretary of State Henry Kissinger has warned
(Newsweek, 24 January 1983) :
Because the debtors can never escape their plight unless they receive additional
credits, the comforting view has developed that no debtor country would dare
default and wreck its creditworthiness. Unfortunately political leaders march to a
different drummer than financial experts. They see the political interests of their
country through the prism of their own survival. If pushed into a corner, a political
leader may well seek to rally populist resentment against foreign “exploiters.” This
will surely occur if the so-called rescue operation concentrates primarily on the
repayment of interest. A blow-up is certain sooner or later if debtor countries are
asked to accept pro-longed austerity simply to protect the balance sheets of foreign
banks.

William Ogden, vice president of the Chase Manhattan Bank, recognized—as did Kissinger—that if
permanent defaults are to be avoided, debtors must be “economically capable of servicing debt over
the long run [and] not so committed to ideological objectives as to give little if any weight to achieving
reasonable long-run performance. . . .” He told the Manhattan Institute for Policy Research (22 October
1982) that if these conditions were satisfied,

there is a negligible risk of permanent default or debt denial in sovereign lending
because sovereign borrowers cannot cease to exist. Permanent default implies both
a long-term loss of access to international private capital markets and a sharply
reduced ability to utilize the international financial service network that is essential
to the ordinary conduct of foreign trade. It implies that the great bulk of the
international trade of a country in permanent default must be carried out on a
government-to-government barter basis. Such restrictions would enormously
circumscribe the pace of economic development for a country so affected. The
negligible risk of permanent default arises out of the borrowing countries’
perceptions of self-interest.
One need not agree with Ogden that nations that repudiate their debts will lose access to international
private capital markets. By eliminating their debts to current creditors, these nations become A-l
risks to new creditors. Nonetheless, his conclusion, that debtor nations would rather not default and
will not do so unless “pushed into a corner,” is reasonably assumed. Financially strained debtor
nations will take measures that involve reasonable costs and risks to avoid default, particularly if
their creditors will “work with them.”
The risk of formal debt repudiations also depends on the behavior of creditors. Formal defaults are
not in their best interests, so the threat of default is likely to trigger offers by creditors that debtors
will find difficult to refuse, or suggestions by debtors that creditors will find agreeable. Specifically,
creditors faced with impending defaults will offer to or agree to delay scheduled loan principal.

LOVELY PROFESSIONAL UNIVERSITY 321