A SAFETY NET FOR FOREIGN LENDING

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85M00363R001302940044-9
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 2
• Document Creation Date: December 20, 2016
• Document Release Date: January 25, 2008
• Sequence Number: 44
• Publication Date: January 10, 1983
• Content Type: OPEN SOURCE

 Approved For Release 2008/01/25 : CIA-RDP85M00363R001302940044-9
A safety net for foreign lending
Hundreds of billions of dollars in outstanding exchange earnings pledged to redeem the ex-
loans to developing countries are at risk today. change participation notes, the country's ability to
Worldwide recession, falling commodity prices, borrow for self-financing trade and investment
historically high real interest rates, restraints on would also increase. Debtors would be offered an
commercial bank exposure, and, more recently, attractive alternative to default, repudiation, or
the shrinkage of the Eurocurrency market have ineffective debt reschedulings.
opened the possibility of a worsening crisis in the From the creditor's point of view, acceptance of
international financial system. Neither the will- exchange participation notes would be an alterna-
ingness nor ability of lenders to maintain their tive to additional provisions for loan losses or
exposure, much less to risk new money, in any repeated reschedulings. Bank regulators might
way matches the accumulated legal obligations of regard the notes as a higher quality asset than
the borrowers to pay interest and repay principal. existing loans. Finally, the notes could be negotia-
Efforts to meet this unfolding crisis consist ble on the secondary market to an extent to be
mostly of stopgap measures, such as debt re- determined, providing an incentive to trade and
schedulings and emergency bridge loans. These spreading risk exposure. The exchange participa-
ti notes would reduce the likelihood of defaults,
n
t
o o
are unlikely to achieve anything more than
needed is
delay the onset of a systemic breakdown. What is debt moratoriums, or repeated reschedulings. What is
needed urgently is a new financial instrument This instrument would not substitute for in- a new financial
that will preserve both the credit standing of creasing quotas at the International Monetary
debtors and the financial stake of creditors while Fund or creating an emergency fund under the instrument that
economic stabilization programs begin to achieve General Agreement to Borrow. It would consti-
results. The objective should be to create a situa- tute a complementary measure to these steps, ties repayment
tion in which the principal repayment claims of which, along with other actions, would still be to a debtor
creditors are related to a real, measurable ability needed to assure that debtor countries continue
of debtors to pay. To accomplish that goal, the to pay interest while the complexities of the new nation's future
creation of an instrument that could be called an arrangements are worked out. The creation of the export earnings
exchange participation note is needed. Simulta- notes would provide a much-needed way to de-
neously, official rescue efforts would concentrate flate the present debt bubble in an orderly fash- and thus to
on keeping interest payments current to maintain ion. The absence of such constructive alternatives its ability to pay.
the liquidity of the system. accounts to some extent for the growing lack of
These equity-like exchange participation notes confidence in the international banking system.
would constitute claims on some prudent level of
current and future foreign exchange earnings of
selected debtor nations. The central banks of
these debtor countries would issue the notes to
their private and official lenders on a pro rata
basis to replace the existing amortization sched-
ules. The central banks of the debtor countries
would accept final responsibility for repaying all
external debts, public and private, and would act
as collection and paying agents. Creditors might
form coordinating committees for each debtor
country that would be given the authority to act
as receiving and paying agent on the lender's
side. To reduce complexity, small creditors could
be paid off in advance.
Rallying point This proposed innovation has politi-
cal advantages, too. It would say to Congress
that the Administration will not be coming hat in
hand for budgetary funds to bail out banks or
countries. Few will accept the international bank-
ing system as sound or manageable if its survival
is maintained on the backs of the taxpayers.
Even more important, this initiative could be a
positive rallying point for the trade and financial
managers in the- Western alliance-one that coun-
tries of the North and South could agree on. The
South has for years been calling for a "new inter-
national economic order," and the North has been
resisting. The initiative suggested here could cut
through all of that and provide a more realistic
Dampening protectionist trends. This solution would basis for future negotiations.
offer both debtors and creditors significant incen- Voices are heard, of course, that want to bring
tives, which would work to sustain and increase the old order down in favor of a system of collet
international trade and investment and to dampen tive authoritarian rule in which all financial rela-
the trend toward protectionist measures. tions among nations will be rigidly controlled. The
Consider the proposition from the debtors' audience for these voices grows proportionately
point of view. A reasonable share of current and as the health of the international trade and bank-
future export earnings would be freed from prin- ing system worsens. Failing to take effective
cipal repayment obligations. In the lengthening measures may create a political risk that in more
list of countries where debt service now approach- and more countries these voices will come to dom-
es, equals, or exceeds total export earnings, this intte. If this should happen, we will have suc-
would provide immediate relief. Exports could be cumbed to the notion that credit is only a com-
channeled into productive investment again, and modity. We will have forgotten the principle of
not just dedicated to debt service requirements. fiduciary responsibility. None of us should wish
As exports increased, with only part of foreign to confront the consequences of that 11
Norman A. Bailey is senior director of
national security planning for the Na-
tional Security Council and a former In-
vestment banker and university profes-
sor. He is expressing his own views. not
those of the Reagan Administration.
oramr,, by Mew K Ma*
IDEAS & TRENDS BUSINESS WEEK: January 10, 1983 17
rj- Approved For Release 2008/01/25 : CIA-RDP85M00363RO01302940044-9 yEEX,rnrn arv_1a 1ARA_1