ces and the exchange rate at realistic levels - otherwise the capital flight which so damaged the debtor countries in the early 1980s will persist. It has been estimated that over $100 billion left the problem debtors between 1978 and 1985, equivalent to more than a third of the additional debt they incurred over that time. But Mexico has shown recently that it is possible to encourage significant capital inflow, provided sensible policies are pursued.
-
some two thirds
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The overwhelming majority
of the debts owed by the middle income debtors are owed to the commercial banks. It is clearly the joint responsibility of the debtor countries and
and the commercial banks to manage these debts.
Throughout the past five years, a variety of schemes have been put forward under which the
the governments of the industrial countries would step in and take
take it
it upon themselves to "solve" the debt problem. People argue that the magnitude of the problem is such that it demands government action.
I am not attracted to any of these schemes. They all boil down, directly or indirectly, to the taxpayers bailing out the banks.
To do this would not only be a misuse of public money. It would also encourage bad banking.
The banks embarked on sovereign lending chiefly because it looked to be a profitable business. For some years, it was. But the banks knew all along that the returns were in no sense underwritten - by taxpayers or anybody
anybody else. They knew they were in the risk business. If they did not know that, they should have done. there is certainly no case for taxpayers to pick up a disproportionate share of the bill for commercial misjudgements.
And
Thus the way forward for the banks is to treat sovereign debt as they would other types of debt. This has already meant a good deal of rescheduling of debts. And now, one by one, the major banks are announcing substantial increases in the specific provisions made against sovereign debt. In the immediate future, at least, this increase in provisioning is bound to mean a significant cost to the
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