PERSONAL & CONFIDENTIAL
last year's Mexican scheme offered collateral on the principal (but not the interest, which is of more
which is of more concern to the banks). Venezuela has recently negotiated the exchange of $400 million of new bonds for old debt. A variant is the use of exit bonds. When a rescheduling arrangement involving new money is negotiated the banks with smaller exposures may be prepared to take these bonds at a loss as an alternative to putting up new money and facing further rescheduling. At least exit bonds winnow out the small player who should never have got into third world lending in the first place.
8.
Finally, I should mention the straight debt buy-back, where the debtor finds the money to repurchase its own debt at a discount on the secondary market. Needless to say the banks are reluctant to see a debtor profit from the often artificially low secondary market prices of its debt. They also fear that using reserves to buy back part of its debt will leave the debtor even less able to service the rest. In any case, most debtors simply do not have enough reserves. Bolivia has managed to buy back half of its commercial bank debt at 11 cents per $ and plans to repurchase the other half. But the banks only allowed it to do so on condition that the necessary finance came from aid donors. So this option is really only a starter for the poorer aid-worthy debtors, or for the very few debtors with sizeable reserves of their own.
9. What does all this 'voluntary' debt reduction add up to? The answer seems to be not very much by comparison with the total stock of debt and probably not much more in prospect. The Treasury reckon that $27bn of debt may have been converted in one way or another in 1984-8, only 10% of debt outstanding to private creditors at the end of 1987. But even this is an overestimate, since some of this $27bn has been converted into other, more secure forms of debt. We agree with the Treasury's conclusion that "there must be doubts about whether negotiated debt reduction without use of public sector resources can be on a sufficient scale to achieve significant savings to the middle income debtors ... there are also doubts about how far the banks would be willing to provide new money in circumstances where they are also providing some debt reduction to a given country."
10. Put another way, most banks see no reason to reduce their claims simply to help resolve the debt crisis. If they hang on long enough, they might yet be repaid in full; and they have been remarkably successful since 1982 in obtaining interest payments from the Baker 15 debtors (an annual average of $27.6bn out of $28.3bn due). But, from G7 governments' point of view, it is politically unattractive to coerce the banks into writing down debt. Yet why should G7 taxpayers provide money to induce the banks to write down loans that they freely entered into? Hence the catchphrase at last autumn's Fund and Bank meetings in Berlin that there should be "no transfer of risk from the private to the public sector"
SS1AKR
PERSONAL & CONFIDENTIAL
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