Advertisement

Strategic Priorities of the International Creditor Regime

  • Howard P. Lehman
Part of the International Political Economy Series book series (IPES)

Abstract

Creditors and debtor states interact with each other according to both the specific behavior of individual actors as well as to the general operating rules and norms of behavior found within the context of international finance. While the next three chapters focus on the specific policies stemming from the creditor-debtor relationship, this chapter lays out the strategic priorities of the international creditor regime.

Keywords

Debt Crisis Debtor Government Strategic Priority Debtor Country Private Creditor 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

NOTES

  1. 1.
    Although the focus in this article is on inter-creditor relations, complementary studies should analyze debtor priorities, strategies, and policies as they react to the international creditor regime. Neither creditors nor debtors act in total isolation from the anticipated and real moves of the other. However, it is necessary, as a first cut, to specify and consider creditor priorities and policies.Google Scholar
  2. 2.
    Stephen Krasner, ‘Structural Causes and Regime Consequences,’ International Organization 36 (1982).Google Scholar
  3. 3.
    Benjamin J. Cohen, ‘Balance-of-Payments Financing: Evolution of a Regime,’ International Organization 36 (1982); Charles Lipson, ‘Bankers’ Dilemmas: Private Cooperation in Rescheduling Sovereign Debts,’ World Politics 38:1 (October 1985).Google Scholar
  4. 4.
    Robert Devlin, Debt and Crisis in Latin America: The Supply Side of the Story (Princeton: Princeton University Press, 1989).Google Scholar
  5. 5.
    Reginald Herbold Green, ‘Third World Sovereign Debt Renegotiation 1980–86 and After: Procedures, Paradigms, and Portents,’ Discussion Paper, 223 University of Sussex: IDS Institute (December 1986), P. 9.Google Scholar
  6. 6.
    Stephany Griffith-Jones, ‘The International Debt Problem: Prospects and Solutions,’ in Hans W. Singer and S. Sharma, eds., Economic Development and World Debt (New York: St. Martin’s Press, 1989), P. 3.Google Scholar
  7. 7.
    Devlin, Debt and Crisis in Latin America, p. 111.Google Scholar
  8. 8.
    Paul M. Sacks and Chris Canavan, ‘Safe Passage Through Dire Straits: Managing an Orderly Exit from the Debt Crisis,’ in John F. Weeks, ed., Debt Disaster: Banks, Governments, and Multilaterals Confront the Crisis (New York: New York University Press, 1989), p. 77.Google Scholar
  9. 9.
    Devlin, Debt and Crisis in Latin America, p. 114.Google Scholar
  10. 10.
    Kari Polanyi Levitt, ‘Linkage and Vulnerability: The ‘Debt Crisis’ in Latin America and Africa,’ in Bonnie K. Campbell, ed., Political Dimensions of the International Debt Crisis (New York: St. Martin’s Press, 1989), p. 28.Google Scholar
  11. 11.
  12. 12.
    Seamus O’Cleireacain, Third World Debt and International Public Policy (New York: Praeger, 1990), p. 208.Google Scholar
  13. 13.
    Bank for International Settlements, Annual Report (Basle: BIS, 1987), p. 94.Google Scholar
  14. 14.
    ‘Cartagena Conference on 11 Latin Nations Rejects Debtors’ Cartel, Proposes Reform,’ IMF Survey, 13 (July 2, 1984), pp. 201–2.Google Scholar
  15. 15.
    For various perspectives on the Baker Plan, see Christine Bogdanowicz-Bindert, ‘World Debt: The United States Reconsiders,’ Foreign Affairs (Winter 1985/86); Patrick Conway, ‘The Baker Plan and International Indebtedness,’ The World Economy (June 1987); Cheryl Payer, ‘The World Bank: A New Role in the Debt Crisis?’ Third World Quarterly (April 1986); and William R. Cline, ‘The Baker Plan and Brady Reformulation: An Evaluation,’ in Husain and Diwan, Dealing with the Debt Crisis. Google Scholar
  16. 16.
    The original highly indebted countries eligible under Baker Plan I were Argentina, Bolivia, Brazil, Chile, Colombia, Ivory Coast, Ecuador, Mexico, Morocco, Nigeria, Peru, Philippines, Uruguay, Venezuela, and Yugoslavia. Costa Rica and Jamaica later were added to the list.Google Scholar
  17. 17.
    Cross-conditionality occurs when ‘acceptance by the borrowing government of the conditionality of the financial agency is made a pre-condition for financial support by another or others’ in Stephany Griffith-Jones, ’Cross-Conditionality or the Spread of Obligatory Adjustment,’ unpublished manuscript, (1988), p. 12. For additional analysis of the term, see Richard E. Feinberg, ‘The Changing Relationship Between the World Bank and the International Monetary Fund,’ International Organization, 42 (1988).Google Scholar
  18. 18.
    Guillermo O’Donnell, in ‘Brazil’s Failure: What Future for Debtor’s Cartels?,’ Third World Quarterly, 9 (1987), p. 1159, argues that the main obstacles to a debtors’ cartel derive from the ability of creditors to take two simultaneous actions in response to a unilateral move by a debtor: 1) threaten and apply sanctions and 2) make side-payments (differential benefits) to other debtors who might be tempted to follow suit. See also Diana Tussie, ‘The Coordination of the Latin American Debtors: Is There a Logic Behind the Story?’ in Stephany Griffith-Jones, ed. Managing World Debt (New York: St. Martin’s Press, 1988).Google Scholar
  19. 19.
    William R. Cline, ‘The Baker Plan and Brady Reformulation,’ in Ishrat Husain and Ishac Diwan, eds., Dealing with the Debt Crisis (Washington, D.C.:World Bank, 1989), p. 176.Google Scholar
  20. 20.
    Devlin, Debt and Crisis in Latin America, p. 11.Google Scholar
  21. 21.
    O’Cleireacain, Third World Debt and International Public Policy, p. 6.Google Scholar
  22. 22.
    Loans are classified as ‘non-performing’ when interest arrears exceed three months. Interest then can only be accrued as income on a cash basis. Interagency Country Exposure Risk Committee, ‘Interagency Statement on Examination Treatment of International Loans,’ (Washington, D.C., 1983).Google Scholar
  23. 23.
    O’Cleireacain, Third World Debt and International Public Policy, p. 187. Capital ratio refers to the amount set aside by banks (in the form of capital reserves and provisions) as a proportion of total assets owned by the institution.Google Scholar
  24. 24.
    An Interagency Country Exposure Risk Committee (ICERC), com-posed of the head of the Federal Deposit Insurance Corporation, the comptroller of the Currency, and the Federal Reserve Board chairman, has the authority to examine categories of loans that have been adversely affected by risk.Google Scholar
  25. 25.
    In contrast to specific provisions, ICERC also allows for ‘general provisions’ which is based on ‘normal business practice of allowing for the fact that there is statistical probability that a certain proportion of loans will encounter problems.’ Graham Bird, Commercial Bank Lending and Third World Debt (New York: St. Martin’s Press, 1989), p. 51. Tax deductions are not usually allowed against general provisions.Google Scholar
  26. 26.
    Interview with U.S. Department of Treasury economist, November 1987.Google Scholar
  27. 27.
    An ICERC position paper defined the value-impaired category as applying when a country has protracted arrearages, as indicated by more than one of the following: a) the country has not fully paid its interest for six months; b) the country has not complied with IMF programs and there is no immediate prospect for compliance; c) the country has not met rescheduling terms for one year; or d) the country shows no definite prospects for an orderly restoration of debt service in the near future. See ‘Interagency Statement on Examination Treatment of International Loans.’ For additional discussion, see C. Fred Bergsten, et al., Bank Lending to Developing Countries: The Policy Alternatives (Washington, D.C.: Institute for International Economics, 1985), pp. 25–32.Google Scholar
  28. 28.
    Interview with senior vice president of an American international bank, June 1988.Google Scholar
  29. 29.
    Nonaccrual refers to delayed interest payments which cannot be treated as received for income purposes.Google Scholar
  30. 30.
    Stephany Griffith-Jones, ‘Debt Crisis Management, an Analytical Framework,’ in Stephany Griffith-Jones, ed., Managing World Debt (New York: St. Martin’s Press, 1988), p. 24. Also, see Ch. 4 in Matthew Martin, The Crumbling Façade of African Debt Negotiations (London: Macmillan, 1991).Google Scholar
  31. 31.
    Tony Porter, ‘Regimes for Financial Firms.’ Paper presented at the International Studies Association Annual Meeting (April 1992); Ethan Barnaby Kapstein, ‘Between Power and Purpose: Central Bankers and the Politics of Regulatory Convergence,’ International Organization 46 (Winter 1992).Google Scholar
  32. 32.
    Harry Huizinga, ‘The Commercial Bank Claims on Developing Countries: How Have Banks been Affected?,’ in Husain and Diwan, eds., Dealing with the Debt Crisis, p. 137; International Monetary Fund, International Capital Markets: Developments and Prospects (Washington, D.C.: International Monetary Fund, 1991), p. 16.Google Scholar
  33. 33.
    O’Cleireacain, Third World Debt and International Public Policy, p. 188.Google Scholar
  34. 34.
    IMF, International Capital Markets: Developments and Prospects, p. 16.Google Scholar
  35. 35.
    See Howard P. Lehman, ‘From Confrontation to Cooperation: Strategic Bargaining in Brazil’s Debt Negotiations,’ Political Science Quarterly (Forthcoming, 1993) for an analysis of Brazil’s debt moratorium and debt negotiations with its creditors.Google Scholar
  36. 36.
    Huizinga, ‘The Commercial Bank Claims on Developing Countries,’ p. 134.Google Scholar
  37. 37.
    Jack M. Guttentag and Richard Herring, Accounting for Losses on Sovereign Debt: Implications for New Lending, Essays in International Finance, 172 (Princeton: Princeton University, 1989), p. 30. Cataquet defines the secondary debt market as a‘forum where a bank who no longer wants to hold a loan can sell the asset to another bank in exchange for cash, or conversely,’ in Harold Cataquet, ‘Country Risk Management: How to Juggle with your Arms in a Straitjacket?,’ in Singer and Sharma, eds., Economic Development and World Debt, p. 339.Google Scholar
  38. 38.
    O’Cleireacain, Third World Debt and International Public Policy, p. 189.Google Scholar
  39. 39.
    Bird, Commercial Bank Lending and Third World Debt, p. 51. See Ch. 3 in Bird for an extended discussion on the implications of provisioning for banks, debtor governments, regulatory authorities, and official creditors.Google Scholar
  40. 40.
    For differences between American and non-American bank regulations and their impact on bank strategies, see Bird, Commercial Bank Lending and Third World Debt; Huizinga, ‘The Commercial Bank Claims on Developing Countries.’Google Scholar
  41. 41.
    O’Cleireacain, Third World Debt and International Public Policy, p. 207.Google Scholar
  42. 42.
    Stephany Griffith-Jones, ‘Conclusions and Policy Recommendations,’ in Griffith-Jones, ed., Managing World Debt, p. 378.Google Scholar
  43. 43.
    Bird, Commercial Bank Lending and Third World Debt, pp. 66, 71.Google Scholar
  44. 44.
    O’Cleireacain, Third World Debt and International Public Policy, p. 6. Exposure refers to the amount of outstanding loans to debtor countries as a percent of bank capital.Google Scholar
  45. 45.
    From among many recent examples of the literature on the domestic politics of stabilization and adjustment, see William L. Canak, ed., Lost Promises: Debt, Austerity and Development in Latin America (New York: St. Martin’s Press, 1989); Stephan Haggard and Robert Kaufman, ‘The Politics of Stabilization and Structural Adjustment,’ in Jeffrey Sachs, ed., Developing Country Debt and the World Economy (Chicago: University of Chicago Press, 1989); Howard Handelman and Werner Baer, eds., Paying the Costs of Austerity in Latin America (Boulder: Westview Press, 1989); Joan M. Nelson, ed., Fragile Coalitions: The Politics of Economic Adjustment (New Brunswick: Transaction Press, 1989); Joan M. Nelson, ed., Economic Crisis and Policy Choice: The Politics of Adjustment in the Third World (Princeton: Princeton University Press, 1990); David Felix, ed., Debt and Transfiguration? Prospects for Latin Americas Economic Revival (Armonk, NY: M.E. Sharpe, 1990); Bonnie K. Campbell and John Loxley, eds., Structural Adjustment in Africa (New York: St. Martin’s Press, 1989); Paul Mosley, Jane Harrigan, and John Toye, Aid and Power: The World Bank and Policy-based Lending (London: Routledge, 1991).Google Scholar
  46. 46.
    Wilfred L. David, The IMF Policy Paradigm (New York: Praeger, 1985); Justin B. Zulu and Saleh M. Nsouli, ‘Adjustment Programs in Africa,’ Occasional Paper 34, (Washington, D.C.: International Monetary Fund, 1985).Google Scholar
  47. 47.
    International Monetary Fund, ‘Fund-Supported Programs, Fiscal Policy, and Income Distribution,’ Occasional Paper 46 (Washington, D.C.: International Monetary Fund, 1986), pp. 2, 22–23.Google Scholar
  48. 48.
    Richard E. Feinberg and Edmar L. Bacha, ‘When Supply and Demand Don’T Intersect: Latin America and the Bretton Woods Institutions in the 1980s,’ Development and Change, 19 (1988).Google Scholar
  49. 49.
    Devlin, Debt and Crisis in Latin America, p. 228.Google Scholar
  50. 50.
    Ibid., p. 230; O’Cleireacain, Third World Debt and International Public Policy, p. 122.Google Scholar
  51. 51.
    Intemational Monetary Fund, Annual Report (Washington, D.C.: International Monetary Fund, 1989), p. 60. In 1989, 1 SDR = $1.29.Google Scholar
  52. 52.
    ‘Ten Countries Drew on IMF Resources,’ /MF Survey, 20:12 (June 10, 1991), p. 188.Google Scholar
  53. 53.
    World Bank, Annual Report (Washington, D.C.: World Bank, 1988), p. 39; International Monetary Fund, Annual Report, p. 34.Google Scholar
  54. 54.
    ‘Ten Countries Drew on IMF Resources,’ p. 188.Google Scholar
  55. 55.
    In any event, between 1984 and 1989, the average annual amount of IMF funds committed to borrowers was only $4.88 billion (Ibid., p. 60).Google Scholar
  56. 56.
    ‘World Bank Report Reviews Initiatives to Reduce Debt and Debt Service,’ IMF Survey, 19 (January 8, 1990), p. 13.Google Scholar
  57. 57.
    International Monetary Fund, Annual Report, p. 45.Google Scholar
  58. 58.
    O’Cleireacain, Third World Debt and International Public Policy, p. 116.Google Scholar
  59. 59.
    John T. Cuddington, ‘The Extent and Causes of the Debt Crisis of the 1980s,’ in Husain and Diwan, eds., Dealing with the Debt Crisis, p. 18.Google Scholar
  60. 60.
    ‘Acapulco Commitment to Peace, Development, and Democracy,’ 1987, p. 6.Google Scholar
  61. 61.
    Ibid., pp. 19–22.Google Scholar
  62. 62.
    Brooke Hyde, ‘Summit on the Debt Moratorium,’ West Africa 3670 (December 14, 1987), pp. 2429–30.Google Scholar
  63. 63.
    World Bank, Annual Report, 1988, p. 28; Intetnational Monetary Fund, World Economic Outlook (Washington, D.C.: International Monetary Fund, 1988), p. 38.Google Scholar
  64. 64.
    ‘Latin American Declaration Deplores Adverse Impact of Debt, Protectionism,’ IMF Survey, 17:21 (November 14, 1988), p. 354.Google Scholar
  65. 65.
    Edward R. Fried and Philip H. Trezise, eds., Third World Debt: The Next Phase (Washington, D.C.: The Brookings Institution, 1989), P. 7.Google Scholar
  66. 66.
    By the end of 1989, there had been a substantial increase in forgiveness of official development assistance by industrialized governments, including the United States ($1 billion), France ($2.3 billion), Germany ($1.5 billion), and Canada ($424 million). See Stanley Fischer and Ishrat Husain, ‘Managing the Debt Crisis in the 1990s,’ Finance and Development 27 (June 1990), p. 26.Google Scholar
  67. 67.
    W. Max Corden, ‘The Theory of Debt Relief: Sorting out Some Issues,’ Journal of Development Studies 27:3 (April 1991), p. 139.Google Scholar
  68. 68.
    Buy-backs permit countries to repurchase their debt at a discount for cash. Debt-equity swaps involve a purchase of a debt instrument in the secondary market in exchange for an equity investment in the borrowing country. Debt exchanges involve the transformation of existing debt instruments for new debt instruments denominated in domestic or foreign currency. Exit bonds are issued by a debtor government to a creditor bank in place of a bank credit. Michel H. Bouchet and Jonathan Hay, ‘The Rise of the Market-Based ‘Menu’ Approach and its Limitations,’ in Husain and Diwan, eds., Dealing with the Debt Crisis, p. 151; John Williamson, Voluntary Approaches to Debt Relief (Washington, D.C.: Institute for Inteinational Economics, 1988).Google Scholar
  69. 69.
    For statements representative of the views held by the international banking community, see Institute of Intetnational Finance, The Way Forward for Middle-Income Countries (Washington, D.C.: Institute of International Finance, 1988); Institute of International Finance, Improving the Official Debt Strategy: Arrears are not the Way (Washington, D.C.: Institute of International Finance, 1990).Google Scholar
  70. 70.
    Jeffrey Sachs, ‘Making the Brady Plan Work,’ Foreign Affairs, 68 (Summer 1989), p. 95.Google Scholar
  71. 71.
    S. Islam, ‘Going Beyond the Brady Plan,’ Challenge, 32 (July-August 1989), p. 49.Google Scholar
  72. 72.
    Fischer and Husain, ‘Managing the Debt Crisis in the 1990s,’ p. 25.Google Scholar
  73. 73.
    Ibid.; Helmut Reisen, ‘The Brady Plan and Adjustment Incentives,’ Intereconomics 26:2 (March/April 1991), pp. 69–73; Jeffrey Sachs, ‘The Debt Overhang Problem of Developing Countries,’ in Ronald Findlay, ed., Debt, Growth, and Stabilization (Oxford: Blackwell, 1988).Google Scholar
  74. 74.
    Reisen, ‘The Brady Plan and Adjustment Incentives,’ p. 73.Google Scholar
  75. 75.
    Corden provides three arguments favoring debt reduction. 1) Investment capacity argument: the debtor would use the savings from reduction for internal investment which in turn would improve its capacity to pay in the future; 2) Default forestalling argument: debt reduction would prevent the debtor from defaulting; and 3) Incentives argument: this is the debt overhang hypothesis mentioned above (Corden, ‘The Theory of Debt Relief: Sorting out Some Issues,’ pp. 137–139).Google Scholar
  76. 76.
    International Monetary Fund, Annual Report, pp. 23, 25.Google Scholar
  77. 77.
    ‘Fund Acts to Strengthen Debt Strategy,’ IMF Survey, 18 (May 29, 1990), p. 161.Google Scholar
  78. 78.
    Ishrat Husain, ‘Recent Experience with the Debt Strategy,’ Finance and Development, 26 (September 1989), p. 15.Google Scholar
  79. 79.
    Fischer and Husain, ‘Managing the Debt Crisis,’ p. 26.Google Scholar
  80. 80.
    Jean-Claude Trichet,‘Official Debt Rescheduling: The Paris Club,’ in Bogdanowicz-Bindert, ed., Solving the Global Debt Crisis, p. 109.Google Scholar
  81. 81.
    Ten African countries had received preferential treatment under this new strategy as of 1989 with each given repayment periods of 15 to 20 years (Ibid., p. 118; Paris Club Implements Menu Approach for Low-Income Countries, IMF Survey, 18 (April 3, 1989), p. 103).Google Scholar
  82. 82.
    For a critical assessment of the Toronto Declaration, see G.K. Helleiner, ‘International Policy Issues Posed by Sub-Saharan African Debt,’ The World Economy 12:3 (September 1989).Google Scholar

Copyright information

© Howard P. Lehman 1993

Authors and Affiliations

  • Howard P. Lehman
    • 1
  1. 1.University of UtahUK

Personalised recommendations