High-Level Expert Group Meeting
24-25 September 1987
Wolfsburg, Germany
Chaired by Kurt Furgler
I. INTRODUCTION
1. Since the eruption of the Mexican debt crisis in 1982,
the issue of international debt ranks high on the
international agenda, as today many developing countreis
are struggling with the consequences of unprecedented
levels of indebtedness.
2. This development calls for a manifestation of political
will and leadership. Any strategy to tackle the
multifaceted debt problem hs to conform to the principle
of achieving sustainable, long-term growth and must
preserve the long-term growth and must preserve the
long-term political stability of the countries concerned.
Otherwise, the debt crisis will become unmanageable.
3. Since 1984, the InterAction Council has advocated that
the principle of joint responsibility is the key factor to
a comprehensive solution of the debt crisis as to all
other world problems. All parties involved have to
contribute: debtor and creditor countries, multilateral
financial organizations, commercial banks and the private
sector.
4. Temporary relief has been gained as a result of
"muddling through" policies. Nevertheless, the overall
situation has shown less improvement than expected. In
many important aspects the situation has even
deteriorated. Debt-induced developments have led to social
unrest and tensions, political instability and threats to
democratic structures and institutions.
II. DEVELOPMENTS IN THE WORLD ECONOMY
5. The current economic situation is marked by sluggish
growth and acute protectionist pressures in the
industrialized countries.
6. Extreme volatility of exchange rates within a
relatively short time frame has coincided with persistent
high real interest rates.
7. Commodity prices have fallen to low levels causing a
deterioration in the terms of trade of many developing
countries.
8. Growing absolute levels of debt and a deterioration in
the financial situation of developing countries have
brought about the collapse of their domestic
investment.
9. Since 1982 the net investment position of the United
States has dramatically changed. At the beginning of this
decade the rest of the world owed the U.S. some US$15O
billion. By the end of the decade the strongest economy of
the world will owe foreign investors some US$6OO billion,
even if it should succeed in eliminating its current
account deficit over the next four years.
10. This unprecedented level of indebtedness has been
accrued as a result of a series of current account
deficits mushrooming from US$8.7 billion in 1982 to
U5$141.4 billion in 1986. The United States who should be
a net capital exporter is thus drawing heavily on the
resources of the rest of the world.
11. Obviously the debt-induced growth of the U.S. economy
has had positive effects on the exports of its trade
partners - among them highly indebted countries like
Brazil, Argentina, and Mexico. Although its debtor
position may be considered as digestible to the U.S. there
is widespread concern about the future of the unwinding
process. These concerns have been justified by the recent
dropping-out of private capital influx into the U.S.
during several months.
12. So the situation is highly unstable, as nobody can
foresee how long creditors of the U.S. will patiently
transfer the needed capital. Macroeconomic mismanagement
by the U.S. could bring about a global economic crisis
with sky-rocketing interest rates and retaliatory
protectionism.
III. GENERAL PRINCIPLES
13. The debt issue is a common problem, to be jointly
addressed by all parties concerned, yet without a
universally applicable solution.
14. Its resolution requires acceptance of certain
commitments and obligations by all involved. In that
context, conditionality is indispensable. It must,
however, be reviewed to take into account real economic
potential, social circumstances and objectives as well as
the particular impact of certain debtor countries in their
respective regions.
15. The prospects for the success of debt payment
solutions are related to adjustment policies and depend
heavily on the readiness of industrialized countries
- to liberalize trade and access to their markets without undue delay;
- to improve and enlarge financial assistance flows;
- to realize higher growth rate for their economies; and
- to avoid measures causing an increase in interest rates.
16. All debtor countries should initiate, adopt and pursue
growth-oriented, long-term structural adjustment policies,
taking account of specific local needs and circumstances,
aiming at economic reform and strengthening of national
economic management while safeguarding and making possible
human development.
17. Debtor countries should, through policy and economic
reform, increase overall economic efficiency and faster
export growth (the range of measures could include, inter
alia, a substantial reduction of state intervention and
regulation; a reduction of budget deficits; the adoption
of realistic exchange rates; and the reduction of barriers
to imports and exports).
18. To support debtor countries in their adjustment
efforts, new liquidity should be created without imbuing
inflation. This could be accomplished through a World Bank
capital increase or a new allocation of SDR on a selective
and non-quota basis.
19. OECD countries should agree on better management of
the process leading to an elimination of their external
imbalances. In particular, a situation should be avoided
where an improvement in the US trade balance would
negatively affect exports by developing countries.
20. Industrialized countries, in particular the Federal
Republic of Germany, Japan and other surplus countries,
should aim at higher non
21. The United States should take more vigorous steps to
reduce her budget and trade deficits. Improvements in the
letter should, however, not be brought about by import
restrictions and other protectionist measures. Moreover,
the US should contribute to a reinforcement of the
financial base of multilateral financial and development
organizations.
22. If arms control agreements by the superpowers entail
reductions in military spending, a substantial portion of
the funds thus released should be allocated to development
purposes. Given the high percentage of military
expenditures in budgets of developing countries, they
equally should pursue policies, such as non-aggression
pacts, that would lead to lower levels of armaments and
related spending.
IV. SPECIFIC MEASURES PROPOSED FOR LATIN AMERICA AND
OTHER HIGHLY INDEBTED MEDIUM-INCOME COUNTRIES
23. To maintain and restore long-term credit worthiness,
and to secure export opportunities, the central approach
to commercial debt should be on the basis of full-value
maintenance to be arrived at through voluntary
negotiations between all parties involved. Multi-year
rescheduling of 20-30 years, with smaller spreads above
reduced interest costs, remain the most appropriate way
for containing annual debt repayments.
24. Negotiated supplementary or alternative mechanisms,
available on a voluntary basis, could usefully include:
a) exit bonds (banks not wishing to participate in new
money packages may exit by replacing their old loans
through bonds issued by debtors at a concessional discount
- conceivably with international guarantees);
b) buy-backs (repurchase of loans by debtors at a discount
based on econdary market value);
c) discounted debt-equity swaps (loans acquired at a
discount in the secondary market are converted into local
currency for the purpose of investment in the debtor
country); and
d) interest caps.
25. Under certain circumstances, negotiated payment
ceilings (e.g. export share limits or limits related to
GNP growth) might be considered. The imposition of
unilateral ceilings, however, can be counterproductive for
a country and may isolate it from financial markets.
26. New lending by commercial banks should principally,
and to the extent possible, be in the form of bond
purchases. As countries did previously not reschedule
bonds, a continuation of this practice would mean that
fresh money obtained through issuing bonds would de facto
be accorded preferred status over past debt. This might
provide an incentive for new lending.
27. To induce exclusively productive investment and trade,
commercial banks should provide additional new finance
through syndicated loans based on medium-term floating
rates. Safeguards should be taken to ensure that such
loans not be used for balance of payments financing or
military procurement.
28. Export-credit agencies should assume a more active
role and with less conditionality.
29. To induce new commercial lending the World Bank and
regional development banks and their affiliates should
take the lead in a further expansion of lending to
countries making adjustment efforts and in fostering
private sector investment.
30. As military expenditures absorb a significant portion
of national budgets, all peace efforts in Latin and
Central America should be strongly supported and the
conclusion of regional non-aggression pacts be promoted
which might bring about an overall reduction in levels of
armaments.
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31. All these measures could lead to such a change in the
overall economic environment and climate that further
capital flight might recede and previous capital flows
even be reversed.
V. SPECIFIC MEASURES PROPOSED FOR LOW-INCOME
SUB-SAHARAN AFRICAN COUNTRIES
32. Industrialized countries that have not yet done so
should retroactively cancel all outstanding official debt
(including that of export-trade agencies) for those
countries suffering from severe debt problems and judged
to have little chance of early access to capital
markets.
33. All industrialized countries should provide new
additional finance through a substantial increase of
long-term ODA on concessional terms.
34. The IMF Board of Governors should conclude, by the end
of 1987, an agreement to triple the Structural Adjustment
Facility aimed at providing long-term support for domestic
policy reforms.
35. An agreement for a substantial increase in World Bank
capital should be speedily concluded, enabling the Bank to
increase significantly its assistance to African
countries. The early decision of the US Congress will be
crucial for the realization of this proposal.
36. A new allocation of SDR on a non-quota basis, and
coupled with specific conditions favoring low-income
countries, could be a further source of additional
external finance.
37. Industrialized countries could increase the soft loan
facility of the African Development Bank to foster
increased lending.
38. Bilateral and multilateral donors should co-ordinate
their approaches so as to avoid conflicting or
cross-conditionality.
39. Unrelated to adjustment policies, commercial banks
should urgently step up trade financing, especially for
short-term purposes, to reinforce the otherwise scant
export opportunities of African countries.
40. Private sector corporations should be encouraged to
increase direct investment, leading to an inflow of new
non-debt creating capital.
41. Multilateral financial organizations should waive
requirements for counterpart funds to avoid delayed
implementation of projects and programmes.