International Debt Problem

Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority and you can order it here)

During the 1980s many Third World countries, especially in Latin America, were unable to service their international debt.  The United States and other creditor countries adopted a case-by-case strategy for dealing with the problem.  Debtors often received financing from the International Monetary Fund and from commercial banks.  Economic austerity programs were imposed and implemented to help resolve the problem.  Such programs slowed economic growth in the debtor nations, resulting in cutback of imports and expansion of exports by the debtor nations, which contributed to the deterioration of the international trade balance of the U.S.

The U.S. proposed a program for sustained growth (the Baker Plan) that focused on allowing debtor nations to grow out of their debt problem with financial backing of $20 billion to be provided by commercial banks and $9 billion by multilateral development banks.  Unfortunately, debt and net outflow of financial resources from debtor nations continued.  The proposed funds were not provided in the amounts projected.

In 1986, proposals were introduced in Congress to deal with the debt problem.  Such proposals were usually based on debt relief instead of new financing to avoid an increase in the debt levels of the debtor nations.  The Bradley proposal suggested a 3% cut in interest rates and a 3% decrease in principal for each of three years.  The Obey-Sarbanes proposal proposed the establishment of a debt facility that would purchase Third World debt at a discount and pass the discount on to the debtors.  The Schumer proposal proposed limiting interest payments by the debtor to 2% of a country's annual export earnings, limiting a country's debt service to its ability to pay.  The Kerry proposal suggested the debt relief be related directly to a debtor's trade balance; countries having a trade surplus would receive less debt relief than those having a trade deficit.  No write-offs were proposed for commercial banks.

In 1989, President Bush cancelled the debt of sub-Saharan African countries to the United States.  Africa south of the Sahara Desert refers to all of Africa except South Africa and the North African countries on the Mediterranean – Egypt, Libya, Tunisia, Algeria, and Morocco.  The State Department put the total of U.S. loans to sub-Saharan Africa at $4.3 billion, including $743 million in development loans, $1.5 billion from the U.S. government's Export-Import Bank and $1.5 billion in U.S. government loans to buy surplus American form products.

Back to Information