CONFIDENTIAL
viii
particular, the Paris Club is in danger of becoming lender of last resort.
Improvements in a debtor's trade performance are tending to trigger less rather than
more support from creditors at the next debt negotiation, the problem being
aggravated by the independent approach of the various creditor groups each being
understandably anxious not to lose out to the others.
22 As a greater share of the ldc risk falls on official creditors, their interest
in maintaining effective conditionality ought if anything to be strengthened.
Moreover, strong programmes are a pre-requisite not only for new official lending
but for the stemming/return of flight capital and new equity inflows which offer the
best potential for future private sector financing. The case for strong
conditionality could nevertheless be reinforced by giving greater emphasis to
providing shorter-term, tangible returns to debtors who accept the discipline.
After six years the argument that higher debt service payments will bring their own
reward in terms of restored market access is wearing thin: the efforts of one
debtor to improve its market rating can be nullified by the failure of others.
any case, for some middle income debtors current levels of indebtedness are probably
an effective bar to voluntary borrowing at an acceptable cost for the foreseeable
future.
In
23 Greater co-ordination between creditor groups, coupled with some medium term
agreement with the debtor on acceptable targets for both debt service and the
distribution of unexpectedly high or low trade receipts, might be a solution (the
1986 Mexico agreement with the banks contained a contingency element). Such
agreements would, however, be difficult to negotiate. It would be hard to convince
the banks that they had much to gain from such burden sharing.
24
A more promising alternative might be to encourage a more vigorous exploitation
of the opportunities provided by the secondary market for debtor buybacks. Banks
would be more actively encouraged to sell out. Those that chose to would be
forgoing their claim on future payments to which they attached a low probability of
ever receiving. In return they would be released from any obligation to
participate in future reschedulings. Losses would be realised but at a level many
banks have demonstrated that they are able to sustain. Debtors and remaining bank
and official creditors stand to gain from this process to the extent that sellers
underestimate the potential of countries to service their debts in future, a
potential which may be enhanced by a favourable impact on adjustment incentives of a