Abstract
Indebted development is conceptualized in this book as a wide-ranging series of attempts by debtor states to create, implement, and sustain economic adjustment and debt management strategies. The question should not be whether such states have sufficient political will to make hard adjustment decisions; rather, the question is, given that adjustment is unavoidable, how can we explain the selection and implementation of two complementary adjustment strategies: one that targets domestic economic reforms or the other that is oriented toward external debt management? The previous chapter examined the first side of the question; that is, state economic objectives and policies that impinge on domestic interests. This chapter will analyze the second side of the question; that is, the state’s debt management policies as they impact upon international creditors. As noted in Chapter One, the state, caught in the center of often countervailing pressures, becomes empowered to respond to these pressures and demands. Through a mixture of economic orthodoxy and heterodoxy, the state uses its power in an attempt to shape the adjustment process. Towards international creditors, states choose between a) cooperating with creditors — by meeting debt obligations often through the imposition of austerity measures — and b) defecting — by selecting debt repudiation or interest non-repayment in order to pursue domestic economic growth. Of course, as demonstrated in the previous chapter on the state’s negotiating strategies toward economic adjustment, these two strategic options reflect ideal-types. State bargaining stances on debt management often involve considerable slippage.
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NOTES
Republic of Kenya, Statistical Abstract (Nairobi: Government Printer, 1984), p. 10.
Republic of Kenya, Budget Rationalization Programme (Nairobi: Government Printer, 1986), pp. 5–6.
Republic of Kenya, National Development Plan, 1989–1993 (Nairobi: Government Printer, 1988), p. 71.
Economist Intelligence Unit, Kenya: Country Report. 3 (London, 1990), p. 10.
External debt data presented in the following paragraphs are from studies by the Institute of International Finance, Kenya: Country Report (Washington, D.C.: IIF, 1991).
Clifford Clift, Aid Coordination in Practice: Are There any Lessons to be Learnt from Kenya? (London: Overseas Development Institute, 1987), pp. 9–10.
Economist Intelligence Unit, Kenya: Country Profile, 1991–92 (London: EIU, 1991), p. 35.
Economist Intelligence Unit, Kenya: Country Report, 1990, p. 21.
Institute of International Finance, Kenya, 1991.
Economist Intelligence Unit, Kenya: Country Report, 1990, p. 12.
Africa Research Bulletin, ‘Five Year Economic Reform Program,’ 28 (February 16, 1991).
Clift, Aid Coordination in Practice, p. 8.
USAID, Commerce Department, and Congressional officials, June 1988, November 1987.
Commerce Department official, November, 1987.
Jennifer A. Widner, ‘Kenya’s Slow Progress Toward Multiparty Politics,’ Current History 91, 565 (May 1992), p. 217.
Tony Hawkins, ‘Donors Face up to the Realities,’ Financial Times (8 January 1992), p. III.
For an assessment of the role of the IMF in Kenya during the late 1970s, see Tony Killick, ‘Kenya, 1975–81,’ in Tony Killick, ed., The International Monetary Fund and Stabilization: Developing Country Experiences (New York: St. Martin’s Press, 1984) and, for the early 1980s, see Martin Godfrey, ‘Stabilization and Structural Adjustment of the Kenyan Economy, 1975–85: An Assessment of Performance,’ Development and Change 18, 4 (1987).
US Treasury official, June 1988.
Economist Intelligence Unit, Kenya: Country Report, 1990, p. 11; Africa Research Bulletin, ‘Five-Year Economic Reform Program.’
Africa Research Bulletin, ‘Kenya: Funding Breakthrough,’ April 30, 1989, p. 9499.
African Business, ‘Kenyan Economy Faces Further Problems,’ 162 (February 1992), p. 7.
Africa Research Bulletin, ‘Kenya: Funding Breakthrough.’
IMF economist, June 1988.
Kenyan embassy officials, June 1988.
British economist and former advisor to Kenya, July 1988.
During the mid-1980s, an IMF consultant monitored Kenya’s financial policies from within the Central Bank.
IMF economists, November 1987; June 1988.
Lloyds Bank economist, 1984.
Recent government documents include Republic of Kenya, Development Plan, 1984–1988 (Nairobi: Government Printer, 1983); Budget Rationalization Program, 1986; Economic Management for Renewed Growth (Nairobi: Government Printer, 1986); Development Plan, 1989–1993 (Nairobi: Government Printer, 1988).
Paul Mosley, ‘The Politics of Economic Liberalization: USAID and the World Bank in Kenya, 1980–1984,’ African Affairs 85, 1. (1986), p. 112.
World Bank economist, June 1988. See also the World Bank’s report on this program in World Bank, Kenya: Second Structural Adjustment Loan and Credit: Program Performance Audit Report (Washington, D.C.: World Bank, 1985), p. 10.
Kenya’s level of indebtedness to multilateral organizations (including the World Bank) made a two and one-half fold jump between 1981 and 1988, up to $2.2 billion.
Paul Mosley, ‘Kenya,’ in Paul Mosley, Jane Harrigan, and John Toye, Aid and Power: The World Bank and Policy-Based Lending, Vol. 2 (London: Routlege, 1991), p. 291.
New York Times, ‘Citing Corruption by Kenya Officials, Western Nations are Canceling Aid,’ October 21, 1991, p. A9.
Geoffrey King, ‘World Bank Backs Kenya, but Paris Donors’ Meeting Chooses to Wait and See for Six-month Period,’ African Business 161 (January 1992), p. 19.
In 1984, Kenya negotiated a £60 million loan guaranteed by the state to purchase patrol boats. The Kenya Coffee Board received a $36 million one year trade finance loan in 1985. Also, banks provided a large loan to Kenya Airways to purchase two new aircraft from Airbus.
Barclays Bank director, July 1988.
A Lloyds banker even commented in July 1988 that he would not be surprised if a coup took place the day after the interview.
Midland Bank manager, July 1988; British financial journalist, July 1988.
Managing Director of a Kenyan commercial bank, February 1985.
See Martin Meredith, The Past is Another Country: Rhodesia, 1890— 1979 (London: A. Deutsch, 1979).
For several recent analyses, see I. Mandan, ed., The Political Economy of Transition, 1980–86 (Dakar: CODESRIA, 1986); World Bank, Zimbabwe: A Strategy for Sustained Growth (Washington, D.C.: World Bank, 1987); O. I. Nyawata, ‘Macroeconomic Management, Adjustment, and Stabilization,’ in Colin Stoneman, ed., Zimbabwe’s Prospects (London: Macmillan, 1988); Roger C. Riddell, ‘Zimbabwe,’ in Roger C. Riddell, ed., Manufacturing Africa: Performance and Prospects of Seven Countries in Sub-Saharan Africa (London: James Currey, 1990); Colin Stoneman, ‘The Impending Failure of Structural Adjustment: Lessons from Zimbabwe,’ paper presented at the Canadian Association of African Studies (May 1990); Stoneman, ‘Zimbabwe Opens Up to the Market,’ Africa Recovery 4 (October—December, 1990); Christine Sylvester, Zimbabwe: The Terrain of Contradictory Development (Boulder: Westview Press, 1991).
In the 1978/79 fiscal year, the government obtained a $290 million foreign loan designed to bolster its balance of payments position. See Whitsun Foundation, Money and Finance in Zimbabwe (Harare: Whitsun Foundation, 1983), p. 119. Drawings of $195 million were arranged, but the changed political conditions after 1980 prevented the use of the balance.
World Bank, World Debt Tables (Washington, D.C.: World Bank, 1987).
Institute of International Finance, Zimbabwe Country Report (Washington, D.C.: IIF, 1991).
World Bank, World Debt Tables, 1991–92 (Washington, D.C.: World Bank, 1991).
Institute of International Finance, Zimbabwe: Country Report (Washington, D.C.: IIF, 1990).
Tony Hawkins, ‘On Course for More Growth,’ Financial Times (August 30, 1991), p. 24.
African Economic Digest, ‘Zimbabwe: On Course for More Growth,’ 13, 4 (February 24, 1992), p. 5.
ZIMCORD, Let’s Build Zimbabwe Together (Harare: ZIMCORD, 1981).
Senior official in the Ministry of Finance, April 1985.
Ibid.
International Monetary Fund, Direction of Trade (Washington, D.C.: IMF, 1988).
African Economic Digest, ‘Zimbabwe: On Course for More Growth,’ p. 5; Economist Intelligence Unit, Zimbabwe: Country Report #2 (London: EIU, 1992), pp. 12–13.
African Economic Digest, ‘Zimbabwe: On Course for More Growth,’ P. 5.
International Monetary Fund, Zimbabwe: Staff Report for the 1982 Article IV Consultation. SM/82/187 (IMF: Washington, D.C., 1982), p. 16.
April 1985.
April 1985.
Colin Stoneman, ‘The World Bank and the IMF in Zimbabwe,’ in Bonnie K. Campbell and John Loxley, eds., Structural Adjustment in Africa (New York: St. Martin’s Press, 1989), p. 44.
Institute of International Finance, Zimbabwe Country Report, 1991, P. 5.
Stoneman and Cliffe offer a critical analysis of the indirect effects of ‘IMF-induced’ conditions upon Zimbabwe’s economy and the general welfare of the population. See Colin Stoneman and Lionel Cliffe, Zimbabwe: Politics, Economics, and Society (London: Pinter, 1989), pp. 41–44.
Africa Research Bulletin, February 16, 1991, 28, 2, p. 10295.
Africa Research Bulletin, May 31, 1989, 26, p. 9538.
World Bank economists, November 1987, June 1988.
Republic of Zimbabwe, Economic Policy Statement: Macro-Economic Adjustment and Trade Liberalisation (Harare: Government Printer, 1990).
Economist Intelligence Unit, Zimbabwe: Country Report #2 (London: EIU, 1992), p. 12.
As a total of its total external debt owed to private creditors, Zimbabwe owed 85 percent in 1981 and 73 percent in 1982. This figure has been dropping steadily to a projected 23 percent in 1992. See Institute of International Finance, Zimbabwe Country Report, 1991.
Zimbabwe’s total external debt had jumped in just three years (1981–84) by almost 60 percent, while official reserves fell by about 75 percent. The country’s debt service as a percentage of exports also increased quickly from 14.5 percent to 30.5 percent in the same period. See Institute of International Finance, Zimbabwe (Washington, D.C: IIF, 1988).
Institute of International Finance, Zimbabwe, 1990.
Bankers Trust official in London, July 1988. As of 1986, the public sector in Zimbabwe owed 96 percent of the total external debt (Institute of International Finance, Zimbabwe, 1988).
African Economic Digest, ‘Special Report: Zimbabwe,’ 1987 (April), P. 1.
Institute of International Finance, Zimbabwe Country Report, 1991.
The government has enacted several measures regulating the loan agreements with international banks: 1) according to a Reserve Bank economist in 1985, the government requires Reserve Bank approval for any foreign loan over Z $2.5 million, whether the loan was projected for use by the private or public sector, 2) the government only accepts standby loans providing they bridge the balance of payments gap or generate exports and foreign exchange; 3) after projecting the debt burden, the government further decided to accept non-standby loans only with a maturity of more than five years; and 4) the government maintained the right to turn down loans with unacceptable terms. A former senior official in the Ministry of Finance recalled in an interview that between 1983 and 1984, the government turned down Z $100 million in foreign bank loans since they would have jeopardized Zimbabwe’s repayment capacity (April 1985).
Africa Research Bulletin, 28, 6 (June 16, 1991), p. 10442.
See Jeffry A. Frieden, ‘The Brazilian Borrowing Experience: From Miracle to Debacle and Back,’ Latin American Research Review, 22:1 (1987), pp. 95–131.
Debt data are from World Bank, World Debt Tables (Washington, D.C.: World Bank, 1990) and from the Institute of International Finance, Brazil: Country Report (Washington, D.C.: IIF, 1991).
James Dinsmoor, Brazil: Responses to the Debt Crisis (Washington, D.C.: Inter-American Development Bank, 1990), p. 31.
Macroeconomic Control Plan (Brasilia: Ministry of Finance, July 1987), p. 14.
World Bank, World Debt Tables (Washington, D.C.: World Bank, 1985), p. 173.
Institute of International Finance, Brazil, 1991.
Ramesh S. Garg, ‘Brazilian External Debt: A Study in Capital Flows and Transfer of Resources,’ Journal of Inter-American Studies and World Affairs 20, 3 (August 1978), p. 342.
World Financial Markets, ‘Stabilization Policies in Brazil,’ Morgan Guaranty Trust, (July 1984), p. 3.
These figures as well as those in the next paragraph are from the Institute of International Finance, Brazil, 1991.
Dinsmoor, Brazil, p. 35.
Eliana A. Cardoso and Albert Fishlow, ‘The Macroeconomics of the Brazilian External Debt,’ in Jeffrey D. Sachs, ed., Developing Country Debt and Economic Performance, Vol. 2 (Chicago: University of Chicago Press, 1990), p. 298.
Data for much of this paragraph is from the Institute of International Finance, Brazil, 1991.
Cardoso and Fishlow, ‘The Macroeconomics of the Brazilian External Debt,’ p. 352.
Alan Riding, ‘Brazil, Fearing Reprisal, Seeking Debt Accords,’ New York Times, February 23, 1987, p. 23.
Atlanta Journal and Constitution, February 2, 1987.
Eul-Soo Pang, ‘Debt, Adjustment, and Democratic Cacophony in Brazil,’ in Barbara Stallings and Robert Kaufman, eds., Debt and Democracy in Latin America (Boulder: Westview Press, 1989), p. 136; Latin American Times, 7, 10 (March 30, 1987), p. 10.
Guillero O’Donnell has argued that the rational interest of creditors is not so much to ‘maximize what they can collect from debtors, but to prolong the imbalance of forces entailed by the fact that, while debtors are locked in a‘prisoner’s dilemma’ [perpetuated by their inability to act collectively], the creditors themselves are cartelized’ in ‘Brazil’s Failure: What Future for Debtors’ Cartels?’ Third World Quarterly 9 (October 1987), p. 1159.
Ibid., p. 1160.
Interest income recorded only when actually received.
Latin American Weekly Report, April 16, 1987, p. 7. The classification ‘substandard’ is a step before the more serious ‘value-impaired’ classification. The substandard category applies when a) a country is not complying with its external service obligations, as evidenced by arrearages, forced restructuring, or rollovers; b) the country is not in the process of adopting an IMF or other suitable economic adjustment program, or is not adequately adhering to such a program; or c) the counry and its bank creditors have not negotiated a viable rescheduling program and are unlikely to do so in the near future. See Inter-agency Country Exposure Risk Committee, ‘Inter-agency Statement on Examination Treatment of International Loans,’ (Washington, D.C., December 15, 1983).
Latin American Weekly Report, March 12, 1987, pp. 6–7.
Seamus O’Cleireacain, Third World Debt and International Public Policy (New York: Praeger, 1990), p. 189. It is important to note the distinction between writing down a loan and establishing a provision for a loan. The former refers to a reduction in the book value of the asset in the creditor’s balance sheet to a level that reflects the asset’s real net present value. Creditors make ‘provision against loans by putting aside reserves in low-earning but risk-free assets in order to cover the possibility that repayments of principal or payments of interest might not be made.’ See Graham Bird, Commercial Bank Lending and Third World Debt (New York: St. Martin’s Press, 1989), p. 51. If a default occurs, the bad debt is charged against the previously established reserves rather than against the banks’ income or capital base. So long as the banks estimate these losses adequately through the reserve account, current earnings are unaffected. However, banks incur indirect costs in forgone additional loans and potential income. Indirect costs may mount because, according to most national bank regulations, provisions must be maintained for at least five years after the most recent rescheduling agreement or episode of payment arrears.
Paul Luke, The Latin American Debt Problem: An Evaluation (London: Libra Bank, 1988), p. 31.
Latin American Markets, ‘Debt Crisis,’ September 21, 1987, p. 2.
U.S. Treasury, ‘Proposal with Respect to Certain Brazilian External Debt Held by Commercial Banks,’ September 25, 1987, p. 2.
Interttal memo, July 21, 1987.
William R. Rhodes, ‘An Insider’s Reflection on the Brazilian Debt Package,’ Wall Street Journal, October 14, 1988, p. 13.
Author’s interview, November 1987.
Author’s interview with a senior vice president of a U.S. bank, June 1988.
This citation and the ones in the following paragraph are from Luis Carlos Bresser Pereira, ‘A Brazilian Approach to External Debt Negotiation,’ LASA Forum 19 (Winter 1989), p. 7.
Jonathan Fuerbringer, ‘Brazil and Banks Reach Agreement on Reducing Debt,’ New York Times, July 10, 1992, pp. A1, C2.
Katherine Sieh, ‘New Debt Agreement Reached,’ Infobrazil, November 1987; Latin American Regional Reports: Brazil, ‘Deal with Banks Ends Moratorium,’ November 26, 1987, p. 6.
Bresser Pereira, ‘A Brazilian Approach to External Debt Negotiation,’ P. 7.
Ibid., 7.
Latin American Regional Reports: Brazil, July 7, 1988, p. 5.
Author’s interview with a British bank economist, June 1988.
Bresser Pereira was aware of the impact of this regulatory classification when he remarked in October 1987 that ‘I am interested in getting out of the moratorium, but the banks are even more interested than I am.’ See Latin American Regional Reports: Brazil, ‘New Plan Suggests Thorny Debt Talks,’ October 22, 1987, p. 6.
Latin American Weekly Report, March 17, 1988, p. 9.
Latin American Weekly Report, April 21, 1988, pp. 10–11; Latin American Weekly Report, June 16, 1988, p. 7.
Ruben Lamdany, ‘The Market-Based Menu Approach in Action: The 1988 Brazil Financing Package,’ Discussion Papers 52 (Washington, D.C.: World Bank, 1989), p. 4.
Stephen Fidler, ‘Banks Agree ‘Innovative’ Approach,’ Financial Times, June 23, 1988, p. 3. Some economists argued that the reduction in interest rates spreads achieved after a year of negotiations had in September 1988 already been wiped out by the rise in the LIBOR. See Latin American Regional Reports: Brazil, October 20, 1988, p. 2.
Gazeta Mercantil, ‘Debt Rescheduling Accord Ready,’ June 27, 1988, P. 3.
First, Brazil issued $5 billion in exit bonds carrying a six percent interest rate over twenty-five years. Banks can exchange a loan for bonds issued by Brazil, but at a lower interest rate. Banks can then reduce their loan exposure and Brazil can reduce its indebtedness. Over one hundred banks have subscribed to the exit bonds, as compared with only two banks under the 1987 Argentine accord. For a complete discussion of exit bonds, see Lamdany, ‘The Market-Based Menu Approach in Action,’ p. 6. The second option is the debt-equity conversion, in which a bank may exchange a loan at market (discounted) rates for local currency that it can use to invest in the debtor nation. A 1988 report by the advisory committee comprising the leading commercial banks with exposure in Brazil urged the government to expand its debt-equity program. See Peter Truell, ‘Brazil Could Cut Foreign Bank Debt by $19 Billion by 1994, Study Says,’ Wall Street Journal, August 23, 1988, p. 6. Finally, as an incentive to obtain the required 90 percent of Brazil’s seven hundred creditor banks, the Brazilian government agreed to pay 3/8 percent and 1/8 percent commissions, respectively, to banks that adhered by August 5 and September 2, 1988.
Stephan Haggard and Robert Kaufman, ‘The Politics of Stabilization and Structural Adjustment,’ in Jeffry D. Sachs, ed., Developing Country Debt and Economic Performance (Chicago: University of Chicago Press, 1989), p. 243.
Latin American Weekly Report, March 9, 1989, p. 4; Latin American Regional Reports: Brazil, February 9, 1989, pp. 2–3.
Latin American Weekly Report, May 4, 1989, p. 8.
Latin American Regional Reports: Brazil, August 10, 1989, p. 5; October 19, 1989, p. 6; February 15, 1990, p. 5.
Latin American Regional Reports: Brazil, June 7, 1990, p. 5.
Latin American Regional Reports: Brazil, August 16, 1990, pp. 5, 7.
Latin American Weekly Report, October 11, 1990, p. 7.
Latin American Regional Reports: Brazil, October 25, 1990, p. 5.
Latin American Weekly Report, November 8, 1990, p. 7.
Latin American Weekly Report, November 29, 1990, p. 7.
Latin American Regional Reports: Brazil, March 21, 1991, p. 5.
Latin American Regional Reports: Brazil, May 2, 1991, p. 1.
Latin American Regional Reports: Brazil, October 24, 1991, p. 5.
Brazil’s initial bargaining position provided four options: 1) the conversion of debt at par into 30-year bonds with a reduced annual coupon of 5 percent; 2) the exchange of existing debt at a discount of 37.5 percent on face value for 30-year bonds paying interest of 3/16 of a point above LIBOR; 3) fresh lending equivalent to 33 percent of existing exposure; and 4) the exchange of debt for temporary interest reduction bonds for 25 years. See Latin American Regional Reports: Brazil, September 19, 1991, p. 5. The banks countered with their own menu of options. They proposed: 1) instead of 30-year bonds with a discount of 37.5 percent on face value, they want 25-year bonds with a discount of 32.5 percent; 2) on the interest-reduction option, the banks want to set the reduced rate at 6.2 percent instead of 4.8 percent; 3) the banks have suggested the addition of a new option that would reduce interest rates for six years followed by a return to market rates; and 4) the banks have asked Brazil to set up a fund to guarantee interest payments. See Latin American Regional Reports: Brazil, October 24, 1991, p. 5.
‘Letter of Intent from Brazil to the IMF,’ December 2, 1991; published as part of Brazil: Economic Program, Vol. 31, December (Brasilia: Central Bank of Brazil, 1991), pp. 24–5.
$3 billion from the World Bank; $1.5 billion from the Inter-American Development Bank; $1.5 billion from the Japanese Export-Import Bank; and $1 billion from the U.S. Export-Import Bank. James Bruce, ‘IMF Approval of Reforms Aids Brazil’s Trade Plans,’ Journal of Commerce, February 3, 1992, p. 5A.
Economist Intelligence Unit, Brazil: Country Report #1 (London: EIU, 1992), p. 4.
Danielle Robinson, ‘Brazil’s Day of Redemption,’ Euromoney (March 1992), p. 64.
‘Letter of Intent’, 1991, p. 25.
Economist Intelligence Unit, Brazil: Country Report, 1992, p. 14.
Jonathan Fuerbringer, ‘Brazil and Banks Reach Agreement on Reducing Debt,’ p. C2.
Jonathan David Aronson, ‘The Politics of Private Bank Lending and Debt Renegotiations,’ in Jonathon David Aronson, ed., Debt and the Less Developing Countries (Boulder: Westview Press, 1979).
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© 1993 Howard P. Lehman
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Lehman, H.P. (1993). The State and Debt Management Strategies. In: Indebted Development. International Political Economy Series. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-22731-0_4
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