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• Publication Date: March 1, 1985
• Content Type: REPORT

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Directorate of -Sceirsr
Intelligence
LDC Debt Issues:
Developments and Prospects
GI 85-10083
March 1985
COPY 3 3 8
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Directorate of Secret
Intelligence
LDC Debt Issues:
Developments and Prospects
Chief, Financial Issues Branch, OGI,
queries are welcome and may be directed to the
Secret
GI 85-10083
March 1985
This paper was prepared by
Office of Global Issues. Comments and
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LDC Debt Issues:
Developments and Prospects 25X1
Key Judgments We believe that the debt crisis of the less developed countries has passed
Information available but that further cooperation among and hard work by both creditors and
as of 15 March 1985 debtors is necesssary-along with favorable world economic conditions-to
was used in this report.
maintain the progress. Although many financial observers are optimistic
about the LDC debt situation, we believe that the international financial
situation will remain under stress for the next three to five years because of
LDC balance-of-payments problems. Even this year could bring problems
as some countries' difficulties in meeting IMF goals lead to noncompliance,
a cutoff of new money, and increased creditor-debtor tensions.
One unsettling development is the rising outspokenness of Latin debtors on
their financial difficulties. Through a series of meetings, Latin American
countries sought to pressure creditors persistently but moderately for
additional debt solutions. At a meeting in Cartagena last June, 11 nations
formed the Cartagena Group, which established a political forum to voice
Latin concerns. The chief goal of the Group is to arrange a political
dialogue on debt among the highest levels of Latin and industrial-country
governments.
The flavor and results of the Cartagena process suggest that Latin debtors
will continue to support joint action as long as it does not threaten their
ability to negotiate individually with creditor banks and governments. They
are increasingly willing to press for changes in the policies and operations
of official and private Western institutions, which they probably will
demonstrate at the IMF/IBRD committee meetings in April. The debtors
perceive their forum as being largely responsible for concessions they
received from commercial banks last year, but we believe its influence is
exaggerated.
In our judgment, the major challenges in 1985 will relate to debtors' failure
to comply with IMF-supported programs and partly associated creditor
reluctance to lend new money. Industrial-country protectionism and
continued high real interest rates also will be key issues. Moreover, because
these problems may prevent debtors-particularly the Latins-from con-
tinuing the progress made last year, the tone of the Cartagena Group
pronouncements may become more strident.
iii Secret
GI 85-10083
March 1985
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Key Judgments
Restructurings for Other Key Debtors 2
Declaration of Santo Domingo 5
A. Individual Country Restructurings
B. Chronology of Latin American Debt Talks
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Secret
LDC Debt Issues:
Developments and Prospects
Restructurings in 1984
Debt restructurings continued at a high level during
1984. Matching 1983's record number of countries
obtaining debt relief, 25 nations formally or tentative-
ly agreed on debt restructuring with commercial
banks and Western governments in 1984. The amount
of debt covered in the restructurings totaled about
$115 billion, more than double the 1983 record of $55
billion. The $115 billion figure is somewhat mislead-
ing, however, because it includes obligations due not
only in 1984, but also in the period 1981-90 (see tables
1 and 2).
Several general trends were evident in 1984 debt
restructuring:
? A few countries negotiated multiyear rescheduling
agreements (MYRAs) from commercial banks, in
which several years of repayments were rescheduled
at one time instead of the usual one year of
repayments.
? Terms on debt restructurings generally were more
favorable during 1984 than in 1983. On average,
creditors granted debtors longer tenors-the
number of years to maturity-and grace periods,
reduced fees, and received smaller interest spreads.
agreement between the Mexicans and their bank
advisory committee marked the first time creditors
looked beyond a stopgap solution for a major debtor
country. Moreover, the concessions made by commer-
cial banks were intended to be a sign of creditor
flexibility in dealing with troubled debtors. Although
bankers agreed that the Mexican MYRA established
a precedent in debt negotiations, they also emphasized
that Mexico was being rewarded for implementing
austerity measures.
Debtors viewed the Mexican agreement as the model
for other restructurings, not only because of the
multiyear aspect, but also the more favorable terms.
The interest spread on the Mexican model averaged
1.125 percentage points above LIBOR with a tenor of
14 years; the comparable figures for the 1983 Mexi-
can restructuring were 1.875 percentage points and
eight years. In addition, the 1984 Mexican agreement
contains no rescheduling fees. Most other major debt-
ors have pushed for MYRAs, but only Ecuador and
Venezuela have received them; a Brazilian MYRA is
currently under negotiation. Like Mexico, these coun-
tries were rewarded for their progress in economic
adjustment. Poland also has received a multiyear
restructuring, but creditors regard it as a special case
because of the country's ability to make only minimal
payments on its debt.
? The IMF again played the key role, as nearly all
debt restructurings required either a Fund program
in place or provisions for IMF monitoring of a
debtor's economy.
? New lending by commercial banks to debt-troubled
countries continued to be involuntary and directly
tied to IMF-supported programs.
The Mexican Model
For many observers, the most important debt develop-
ment in 1984 was the tentative Mexican multiyear
rescheduling agreement reached in September. The
An important compromise in the Mexican MYRA
involved IMF monitoring of Mexico's economic per-
formance over the term of the rescheduling.
Mexico had insisted that it
would not implement another IMF-supported pro-
gram once its current extended fund facility expires at
the end of 1985. The banks, however, demanded a
role for the IMF. In the end, Mexico consented to
periodic reviews of its economic performance by the
IMF, the results of which will be shared with the
banks. this unique
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Table 1
LDC Official Restructurings, 1984-85
Country
Date
Amount
Restructured
(million US $)
Consolidation
Period
Tenor
(years)
Grace
Period
(years)
Arrears
Rescheduled
1984
Sierra Leone
Feb
Jan 84-Dec 84
10
5
Yes
Madagascar
Mar
89
Jun 83-Dec 84
10.3
4.8
Yes
Sudan
May
269
Jan 84-Dec 84
15.5
6
No
Ivory Coast
May
356
Dec 83-Dec 84
8.5
4
No
Yugoslavia
May
800
Jan 84-Dec 84
6.5
4
No
Peru
Jun
704
May 84-Jul 85
8.5
5
No
Togo
Jun
75
Jan 84-Apr 85
9.5
4.8
No
Jamaica
Jul
105
Jan 84-Mar 85
8.5
4
Yes
Zambia
Jul
253
Jan 84-Dec 84
9.5
5
No
Cuba
Jul
250
Jan 84-Dec 84
9
4.5
No
Mozambique
Oct
404
Jan 84-Jun 85
10.5
5
Yes
Niger
Nov
26
Oct 84-Nov 85
9.5
5
No
Liberia
Dec
17
Jul 84-Jun 85
9.5
5
No
Philippines
Dec
750
Jan 85-Jun 86
9.3
4.8
Yes
1985
Argentina
Jan
2,100
Jan 85-Dec 85
10
5
Yes
Poland
Jan
11,000
Jan 82-Dec 84
11
5
No
Senegal
Jan
85
Jan 85-Jun 86
9
4
Yes
arrangement is not considered optimal by the banks,
because it reduces the leverage that they have over
Mexico by eliminating the link between adjustment
measures and debt restructuring.
The Mexican agreement, although approved by the
bank advisory committee, has yet-to be ratified by all
530 individual bank creditors because of the paper-
work involved. Much of the delay is centered on the
currency conversion provision, which allows creditors
to convert Mexican debt held in US dollars into the
banks' domestic currency. For example, Japanese
banks. may choose to convert a portion of their
Mexican exposure into yen. In conjunction with the
currency option, creditor banks may change the rele-
vant interest rate from LIBOR to the domestic inter-
est rate of the banks' home country. Nevertheless, the
bank advisory committee expects the signing to occur
on 29 March in New York,
Restructurings for Other Key Debtors
By yearend 1984, debt restructuring negotiations
between commercial banks and most of the remaining
major debtors were either completed or in progress
(see appendix A). Among Latin nations, Venezuela,
Argentina, and Ecuador have reached tentative ac-
cords with their bank advisory committees, and Brazil
is currently close to agreement pending resolution of
its differences with the-IMF. The Philippines also has
a tentative agreement with its bank advisory commit-
tee. All of these countries are waiting for full approval
by all creditor banks. Meanwhile, Yugoslavia and
Poland had their debt rescheduled by commercial
bank creditors in 1984. Yugoslavia currently is nego-
tiating with the banks on a restructuring of 1985-88
principal repayments.
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Table 2
LDC Private Restructuring, 1984-85 a
Country
Date
Amount
Restructured
(million US $)
Years
Covered
Tenor
(years)
Grace
Period
(years)
Spread
(percentage
points above
LIBOR)
1984
Brazil
Jan
5,500
1984
9
5
2.000
Sierra Leone
Jan
25
1983
7
2
1.750
Morocco
Jan
530
1983-84
8
4
1.750
Senegal
Feb
114
1981-84
7
3
2.000
Peru
Feb
1,500
1984-85
9
5
1.750
Niger
Mar
26
1983-85
7.5
3.5
2.000
Nigeria
Apr
6,000
1984
6
2.5
1.000
Poland
Apr
1,615
1984-87
10
5
1.750
Yugoslavia
May
1,200
1984
7
4
1.625
Jamaica
Jun
164
1983-85
5
2
2.500
Ivory Coast
Jul
550
1984-85
7.5
2.5
1.875
Mexico
Sep
48,500
1984-90
14
1
1.125
Venezuela
Sep
21,000
1984-88
12.5
0
1.125
Colombia
Nov
420
1984
7
2.5
1.625
Philippines
Dec
5,800
1983-86
10
5
1.675
1985
Brazil
45,300
1985-91
16
7
1.125
(in progress)
Costa Rica
344
1985-86
10
3
1.625
Panama
640
1985-86
10
5
2.250
a Includes countries that have reached formal or tentative agree-
ment with private creditors.
A number of other larger debtors have made varying
degrees of progress on their debt restructuring. ~ Chile
and the IMF reached preliminary agreement on an
adjustment program in early March, and talks with
the banks on a restructuring of 1985-86 maturities
will begin soon. Peru tentatively agreed in February
1984 with its bank advisory committee on a restruc-
turing of $1.5 billion in 1984-85 principal repayments,
but implementation has been held up by Lima's
inability to come to terms with the Fund on a new
program. Nigeria worked out a deal in April 1984
with its uninsured creditors on a restructuring of an
estimated $6 billion in short-term trade credits. Talks
on the restructuring of trade credits owed to insured
creditors, however, have been at an impasse for nearly
a year because of Nigeria's refusal to undertake an
IMF-supported program.
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Cartagena Group Proposals
Industrial Governments
? Reduce nominal and real interest rates
? Eliminate OECD protectionism
? Help stabilize commodity prices
? Increase resources of the IMF, World Bank, and
IDB
? Eliminate regulatory rigidities that impede bank
lending
? Give longer maturities and lower interest rates at
the Paris Club
? Offer concessional official credits
IMF
? Establish a compensatory fund for high interest
rates
? Distribute a new SDR allocation
? Increase access to resources
? Relax conditionality, for example, more flexible
fiscal deficit limit
? Allow the restructuring of payment arrearages to
the Fund
? Raise funds through private markets
? Acquire more resources from official sources
World Bank and IDB
? Increase program loans
? Increase maximum allowable percentage of financ-
ing of project costs
? Accelerate disbursements of credits by rotating
funds
? Allow flexible assigning of unused resources
? Lower local currency counterpart requirement
? Reduce commissions
? Eliminate graduation of countries
? Ease policy regarding suspension of disbursements
caused by payment delays
Commercial Banks
? Lengthen repayment and grace periods
? Charge minimal spreads and eliminate
commissions
? Offer multiyear restructurings and capitalization of
interest
? Eliminate the use of administered rates, for exam-
ple, US prime rate
? Increase financing, particularly short-term credits
? Defer interest payments in extreme circumstances,
for example, Bolivia
? Drop IMF agreement as a condition for
restructuring
Apart from restructurings, the key development relat-
ing to debt negotiations during the past year has been
the rising outspokenness of Latin debtors. The process
of politicizing the debt issue began in February 1983,
when the President of Ecuador, Osvaldo Hurtado,
sent a proposal to the Economic Commission for Latin
America (ECLA), the Latin American Economic Sys-
tem (SELA), and all Latin American nations seeking
a common response to the region's economic crisis.
His initiative led to several meetings on debt, with the
first ministerial-level gathering being held in Quito in
January 1984. Out of these higher level meetings
came a series of formal statements outlining Latin
proposals on the debt situation (see appendix B).
Consensus of Cartagena
The most specific proposals came from the June 1984
ministerial-level meeting held in Cartagena, Colom-
bia. Although the resulting statement generally was
moderate in tone, the 17 specific proposals for relief
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Table 2
LDC Private Restructuring, 1984-85 a
Date
Amount
Restructured
(million US $)
Years
Covered
Tenor
(years)
Grace
Period
(years)
Spread
(percentage
points above
LIBOR)
1984
9
5
2.000
Morocco
Jan
530
1983-84
8
4
1.750
Senegal
Feb
114
1981-84
7
3
2.000
Peru
Feb
1,500
1984-85
9
5
1.750
Niger
Mar
26
1983-85
7.5
3.5
2.000
Nigeria
Apr
6,000
1984
6
2.5
1.000
Poland
Apr
1,615
1984-87
10
5
1.750
Yugoslavia
May
1,200
1984
7
4
1.625
Jamaica
Jun
164
1983-85
5
2
2.500
Ivory Coast
Jul
550
1984-85
7.5
2.5
1.875
Mexico
Sep
48,500
1984-90
14
1
1.125
Venezuela
Sep
21,000
1984-88
12.5
0
1.125
Cuba
Dec
100
1984
9
5
1.875
Honduras
Dec
230
1982-85
10
3
1.500
Liberia
Dec
64
1983-84
6
3
0.750
Zambia
Dec
75
1983-85
7
3
2.250
Argentina
Dec
13,400
1982-85
10
3
1.375
Ecuador
Dec
4,300
1985-89
12
3
1.375
Philippines
Dec
5,800
1983-86
10
5
1.675
1985
Brazil
45,300
1985-91
16
7
1.125
(in progress)
Costa Rica
344
1985-86
10
3
1.625
a Includes countries that have reached formal or tentative agree-
ment with private creditors.
A number of other larger debtors have made varying
degrees of progress on their debt restructuring. Chile
and the IMF reached preliminary agreement on an
adjustment program in early March, and talks with
the banks on a restructuring of 1985-86 maturities
will begin soon. Peru tentatively agreed in February
1984 with its bank advisory committee on a restruc-
turing of $1.5 billion in 1984-85 principal repayments,
but implementation has been held up by Lima's
inability to come to terms with the Fund on a new
program. Nigeria worked out a deal in April 1984
with its uninsured creditors on a restructuring of an
estimated $6 billion in short-term trade credits. Talks
on the restructuring of trade credits owed to insured
creditors, however, have been at an impasse for nearly
a year because of Nigeria's refusal to undertake an
IMF-supported program.
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Cartagena Group Proposals
Industrial Governments
? Reduce nominal and real interest rates
? Eliminate OECD protectionism
? Help stabilize commodity prices
? Increase resources of the IMF, World Bank, and
IDB
? Eliminate regulatory rigidities that impede bank
lending
? Give longer maturities and lower interest rates at
the Paris Club
? Offer concessional official credits
IMF
? Establish a compensatory fund for high interest
rates
? Distribute a new SDR allocation
? Increase access to resources
? Relax conditionality, for example, more flexible
fiscal deficit limit
? Allow the restructuring of payment arrearages to
the Fund
? Raise funds through private markets
? Acquire more resources from official sources
World Bank and IDB
? Increase program loans
? Increase maximum allowable percentage offinanc-
ing of project costs
? Accelerate disbursements of credits by rotating
funds
? Allow flexible assigning of unused resources
? Lower local currency counterpart requirement
? Reduce commissions
? Eliminate graduation of countries
? Ease policy regarding suspension of disbursements
caused by payment delays
Commercial Banks
? Lengthen repayment and grace periods
? Charge minimal spreads and eliminate
commissions
? Offer multiyear restructurings and capitalization of
interest
? Eliminate the use of administered rates, for exam-
ple, US prime rate
? Increase financing, particularly short-term credits
? Defer interest payments in extreme circumstances,
for example, Bolivia
? Drop IMF agreement as a condition for
restructuring
Apart from restructurings, the key development relat-
ing to debt negotiations during the past year has been
the rising outspokenness of Latin debtors. The process
of politicizing the debt issue began in February 1983,
when the President of Ecuador, Osvaldo Hurtado,
sent a proposal to the Economic Commission for Latin
America (ECLA), the Latin American Economic Sys-
tem (SELA), and all Latin American nations seeking
a common response to the region's economic crisis.
His initiative led to several meetings on debt, with the
first ministerial-level gathering being held in Quito in
January 1984. Out of these higher level meetings
came a series of formal statements outlining Latin
proposals on the debt situation (see appendix B).
Consensus of Cartagena
The most specific proposals came from the June 1984
ministerial-level meeting held in Cartagena, Colom-
bia. Although the resulting statement generally was
moderate in tone, the 17 specific proposals for relief
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went further than previous Latin declarations and
contradicted longstanding US policy. Moreover, es-
tablishment of the Cartagena Group ' created a per-
manent forum to voice Latin concerns; this consulta-
tive system would enable the debtors to coordinate
their actions more effectively by sharing information
on debt negotiations.
Mar del Plata Communique
The September 1984 followup ministerial meeting of
the 11 Cartagena Group countries in Mar del Plata
resulted in a moderately worded, 10-point communi-
que that expressed concern over the loss of the "sense
of urgency" by the industrial countries regarding debt
repayment difficulties. They also indicated that they
would invite the industrial governments to engage in a
direct political dialogue in the first half of 1985.F_
Declaration of Santo Domingo
To prepare a group position for the April 1985
IMF/IBRD Interim and Development committee
meetings, the Cartagena Group met in the Dominican
Republic in February 1985. Issues they addressed
that will be brought up at the IMF/IBRD meetings
include the extension of Mexican-like restructuring
terms to other debtors, a broadening of debt negotia-
tions beyond commercial banks to include creditor
governments and institutions, and the recognition of
hardships brought on Latin debtors by stringent ad-
justment programs and unfavorable external factors.
Objectives and Strategies
Although the Cartagena Group established a political
forum to voice Latin concerns, no consensus has been
reached in favor of radical proposals such as a
unilateral moratorium on interest payments. The cre-
ation of the consultative system does, nevertheless,
indicate a heightened level of participation on the part
of political leaders to press for changes in the policies
and operations of official and private Western institu-
tions. Debtors perceive the forum as having advanced
their efforts to obtain concessions from commercial
banks, but we believe their influence is exaggerated.
Many ofthe group's proposals-MYRAs, lower
spreads, longer tenors, no commissions-have been
incorporated into 1984 commercial bank debt negoti-
ations, but banks have done so only for debtors who
have undertaken adjustment measures.
By trying to arrange a political dialogue on interna-
tional debt between the Latin American and industri-
al-country governments, the debtor nations are seek-
ing "coresponsibility" for finding a solution.
we believe the dialogue
would begin with a general exchange of impressions
and ideas and would evolve toward the implementa-
tion of specific measures to relieve LDC debt burdens
and to promote further financial flows to debtors.
The Cartagena Group is also trying to shift debt
negotiations from commercial banks and the IMF to
creditor governments, particularly high-level officials.
The debtor group set up the consultative mechanism
to raise the debt issue to a political level among
themselves. They also have shown a willingness to use
all existing forums-including the IMF, World Bank,
Inter-American Development Bank, United Nations,
and the Organization of American States-to discuss
and issue public statements pressing for additional
debt solutions, although they remain committed to the
Cartagena movement.
According to Embassy and press reporting, to get
industrial countries involved in a dialogue with them,
the Cartagena Group intends to:
? Present a joint position at the IMF/IBRD commit-
tee meetings.
? Talk with principal creditor countries to formalize
an invitation to a dialogue on debt.
? Send their proposals to the countries attending the
Bonn Summit in May.
? Attract international public attention to their
problems.
The Cartagena Group is planning to meet again
following the April IMF/IBRD committee meetings
to assess the results of those meetings and discuss
further action.
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The crisis surrounding LDC financial difficulties has
lessened as LDCs have improved their liquidity posi-
tions, continued their economic adjustment, and
boosted their exports. In our judgment, however, the
situation remains delicate because continued progress
hinges on many players with differing agendas as well
as on developments in the world economy.
Near-Term Prospects
With most major debtors already having engaged in
debt negotiations, the volume of debt restructured and
the number of reschedulers should be fewer this year
than in 1984. We believe commercial banks will
continue to reward financially troubled countries
whose balance-of-payments positions have shown
marked improvement. We doubt, however, that debt
rescheduling terms for most countries will be as
favorable in 1985 as the 1984 Mexican agreement.
Banks will resist granting Mexican-like terms to other
countries unless they show strong performance under
an IMF-supported program.
Moreover, the restructuring packages for many debt-
ors-including Mexico, Venezuela, Argentina, the
Philippines, and Ecuador-have not been formally
approved by all creditor banks. The currency conver-
sion in Mexico, the lack of progress on private-sector
arrearages in Venezuela, and the refusal of a Saudi
bank to participate in the Philippine package all have
held up agreements in those countries. Excessive
delays in the implementation of these agreements
could lead to their unraveling and thus force a new
round of negotiations.
As the number of formal restructuring negotiations
declines, we believe debtors' compliance with Fund
programs will become the most important issue in
1985.1 The case-by-case approach to the LDC debt
problem has alleviated the crisis, but primarily be-
cause countries have undertaken financial adjust-
ments. Over 30 countries are under a standby or
extended arrangement with the IMF, and failure to
comply could lead to a rapid deterioration in a
Table 3
External Economic Factors
4.0 12.0 6.5
Average OPEC oil price ($/bbl 29.3 28.7 28.5
country's ability to service its debt. Noncompliance
also could hold up or jeopardize commercial bank
negotiations. The most worrisome situations for 1985
involve major debtors-Argentina, Brazil, and the
Philippines. The IMF suspended its program for
Brazil in mid-February, and the banks in turn halted
negotiations on a multiyear restructuring package
until a new Fund agreement is in place.
An additional factor affecting compliance is the desire
of debtors to continue their domestic economic adjust-
ments. After several years of little or no economic
growth, debtors are experiencing increased domestic
pressure to boost growth even at the expense of
sidetracking adjustment measures. Thus far, debtor
governments have determined that cooperation with
the IMF and the banks is more beneficial than
conflict, but an increase in either the political or
economic costs could change that position.
The global economic situation through the first few
months of 1985 has been generally favorable for
developing countries (see table 3). World interest rates
have continued the downward trend begun in July
1984; LIBOR, for example, has fallen from 12 to 9
percent over the past six months. Various data sources
suggest that each 1-percentage-point drop in interest
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rates results in a $4 billion saving in interest payments
by LDCs. Meanwhile, the softening of oil prices over
the past several months has benefited most LDCs,
particularly major oil-importing debtors like Brazil
and the Philippines. Major oil exporters such as
Mexico, Nigeria, and Venezuela have been hurt
somewhat by the loss in oil export revenues, but so far
they have been able to withstand the drop.
Various financial sources, however, suggest that any
further improvement in LDC trade and current ac-
count balances-after the strong showing in 1984-
will be hard. Growth in the United States is expected
by most forecasters to be slower than in 1984, while
other OECD economies will grow only moderately. In
addition, inflation will continue to be low, keeping the
level of real interest rates high. Finally, most OECD
countries have yet to indicate a willingness to ease
substantially their protectionist policies.
Cartagena Group Outlook
The flavor and results of the Cartagena process
suggest that Latin debtors will continue to support
joint action as long as it does not threaten their ability
to negotiate individually with commercial banks and
creditor governments. The unique and diverse finan-
cial situations of each debtor country, the continuing
disagreement over how to resolve their debt problems,
and the fear of financial fallout have combined to
prevent a hardline approach by the Group. Falling US
dollar interest rates, improved LDC external bal-
ances, and continued progress in debt negotiations
also have moderated Latin debtor criticism.
Several developments, however, could alter this mod-
erate stance in the coming months:
? Little show of concern and support by industrial-
country representatives at the April IMF/IBRD
Interim and Development Committee meetings
probably will upset Cartagena participants.
? A lack of progress toward obtaining a political
dialogue with industrial governments may lead to
increased frustration and a call for more hardline
demands.
? A breakdown of an IMF-supported adjustment pro-
gram by a key debtor such as Brazil, Mexico, or
Argentina could cause the affected government to
voice a less moderate position at Cartagena Group
meetings.
? An increase in either US-dollar interest rates or
OECD protectionism would be interpreted by Latin
governments as an insult and could prompt debtor
countries to seek joint solutions to their problems.
The Cartagena Group has captured the attention of
industrial governments by voicing Latin economic
concerns. It cannot, however, force concessions from
creditor governments and multilateral institutions un-
less the Group chooses to threaten banks with a
moratorium on interest-which we have yet to see
signs of its willingness to do. Although a disbanding of
the Cartagena Group is possible, we expect members
to continue to see merit in sharing information and
presenting unified positions in multilateral institu-
tions.
Longer Term Concerns
We expect the international financial system to be
under stress for the next three to five years because of
LDC balance-of-payments troubles. The key issue for
debt-troubled countries over the longer term is wheth-
er they can return to sustained moderate growth or
will experience several more years of declining stand-
ards of living and the political and social conse-
quences. With sensible policies, IMF studies project
that by 1990 the seven largest debtor countries can
reduce the ratio of external debt to exports by two-
fifths, while economic growth could increase to about
5 percent over the 1986-90 period, in contrast to a
yearly average of 0.7 percent during 1981-84. Imple-
menting and maintaining economic policies that will
be compatible with long-term growth, however, is
crucial.
The solution to the international debt problem re-
quires that current adjustment measures be comple-
mented by fundamental structural reforms. Bankers
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say that the major changes that debtors must imple-
ment include strengthening of the private sector,
cutting back government involvement in business and
industry, increasing incentives for private and foreign
investment, and adopting export-oriented policies. We
believe efforts in this direction will strengthen the
resiliency of the economies, accelerate the restoration
of creditworthiness, restore healthy domestic econom-
ic growth, and improve the external economic posi-
tion.
The adjustment efforts of LDCs will also require the
support of the international banks, but our discussions
with bankers indicate a strong reluctance to extend
many new credits to LDCs. Major banks already are
having increasing difficulty getting all creditor.banks
to participate in new money packages in cooperation
with an IMF arrangement. Some bankers state that
the banking community is about five years away from
voluntary lending. According to other financial
sources., the goal of many banks is to reduce their level
of loans abroad over the next several years.
Progress toward resolution of the debt problem could
also be halted by an external shock any time during
the remainder of the decade. In the event of sharply
rising world interest rates, slowed OECD growth,
increased OECD protectionism, or a major change in
oil prices, the financial needs for some countries
would rise substantially. Creditors, already reluctant
to extend new credits to LDCs except on an involun-
tary basis in conjunction with IMF-supported pro-
grams, would find it extremely difficult to justify any
new lending to debt-troubled countries.
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Appendix A
Individual Country Restructurings
Brazil is negotiating with its bank advisory committee
on a rescheduling of $45.3 billion in debt coming due
in 1985-91. According to the press, most of the terms
have been agreed upon-a tenor of 16 years, includ-
ing seven years of grace, and an average spread of
1.125 percentage points above LIBOR-but the advi-
sory committee is waiting for Brazil and the IMF to
agree on its adjustment program before sending the
package to the individual banks for approval.
agreement with the IMF still is
several months away, and the banks will need the
consent of newly elected President Tancredo Neves to
complete negotiations. Brazil also is talking with the
Paris Club about rescheduling official debt.
Venezuela closely followed Mexico in agreeing with
its bank advisory committee on a multiyear reschedul-
ing agreement (MYRA) in September 1984. The
restructuring covered some $21 billion in public-
sector principal repayments maturing through 1988.
The MYRA has not been formally signed by the
banks, however, because Venezuela has not yet
cleared private-sector interest arrearages that are
owed to the banks. Once this issue is settled, probably
in the second half of 1985, the restructuring should be
approved easily, largely because Venezuela is not in as
serious a financial position as other major debtors.
In December Argentina came to terms with the IMF
and its bank advisory committee for new money
($1.67 billion from the IMF and $4.2 billion from the
banks) and the restructuring of $13.4 billion of debt
maturing in 1982-85. Negotiations with both the IMF
and the banks had been long and difficult, and
announcement of the agreements greatly relieved the
international financial community.
complete approval by all
creditor banks was being held up until all of the $4.2
billion new money loan was subscribed.
rescheduling of official debt, and with the banks on a
restructuring package. The bank package included a
$925 million new money loan, establishment of a $3
billion trade credit facility, and a rescheduling of $4.5
billion in principal repayments due from October
1983 through December 1985 with an option to
include $1.3 billion in principal due in 1986. Formal
approval of the package was expected by the bank
advisory committee in late February, but it has been
postponed indefinitely
Poland initialed an agreement with the Paris Club in
January 1985 to reschedule $11 billion in principal
and interest payments that came due during 1982-84.
According to Embassy reporting, negotiations had
been held up for two months over Polish insistence on
a linkage between the agreement and the granting of
new credits, better access to Western markets, and
membership in the IMF and World Bank. The Paris
Club finally agreed to allow the Poles to present their
requests in a separate, nonbinding letter. This restruc-
turing followed the commercial bank agreement
reached last April and formally signed in July, which
rescheduled over $1.6 billion in principal repayments
due in 1984-87. Banks granted Poland a MYRA
primarily because the principal coming due on origi-
nal loans in 1985-87 is so small that annual negotia-
tions were seen as a waste of time. Moreover, we
believe many bankers wanted to clear up Poland's
remaining original maturities by 1986 in anticipation
of the difficult task of rescheduling principal that was
rescheduled under the 1981 agreement. Finally, the
banks may have wanted to stake a claim on Poland's
limited payment capacity in future years before the
Paris Club completed its negotiations.
Yugoslavia signed debt restructuring agreements with
Western governments and commercial banks in May
1984. The banks restructured $1.2 hilfinn of lORd
Another arduous set of negotiations involved the
Philippines, which in December agreed with the IMF
on a standby arrangement, with the Paris Club on a
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maturities on more favorable terms than Yugoslavia
received in 1983. The official creditors rescheduled
$800 million in 1984 obligations and carried over
nearly $400 million of unused credits from the 1983
package. Meanwhile, talks are under way between
Yugoslavia and its bank coordinating committee on a
restructuring of 1985-88 principal repayments. Pro-
gress has been slow, however, as a result of
Belgrade's prolonged attempt to secure better restruc-
turing terms from the banks and delays in reaching
agreement with the IMF on a new standby arrange-
ment-a precondition to restructuring. Yugoslavia's
official creditors are opposed to granting a multiyear
arrangement now, despite hard lobbying from the
Yugoslavs for a reversal of their position.
Ecuador and its bank advisory committee reached
agreement in December 1984 on a MYRA that covers
$4.3 billion in debt falling due in 1985-89. The
package also includes $200 million in new medium-
term loans-primarily to clear up arrearages-and a
renewal of a $750 million trade credit.
In addition, the Paris
Club may meet in April to consider rescheduling
Ecuador's debt owed to official creditors.
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