PERSONAL & CONFIDENTIAL
remainder of his debt (including that owed to official creditors in the Paris Club. Some sort of scheme which tied phased debt reduction to continued adjustment by the debtor might have attractions for the banks. We have been looking at two further ways of giving them an additional incentive. One (drawing on the Mexican scheme) is to offer some sort of guarantee for repayment of part or all of the reduced debt, perhaps via the World Bank. The French and Japanese schemes both start from this principle. But the French scheme involves an SDR allocation, which Britain has long opposed as inflationary and which results in a straight forward transfer of risk; and the Japanese scheme leaves the debtors themselves to finance the guarantee, without the reserves to do so. The other approach is to look at the tax treatment of provisioning and write down to see whether the tax breaks banks get against provisions can somehow be used to get them to go a stage further and write down their claims on the debtors. One problem here is that many other countries' tax systems are far worse than Britain's in this regard, and any approach would probably involve the harmonisation of tax treatment across countries. Another is that the Chancellor will dislike using the tax system to apply pressure on UK banks.
14. Both these routes involve government contributions; and the first clearly involves governments accepting the contingent risk on existing private sector debt. But there is an argument that the "no transfer of risk" doctrine should not be interpreted too literally. As I mentioned, the Paris Club is already putting in more money by capitalising interest, while the banks are taking money out. Offering guarantees would be an alternative form of government contribution which drew a corresponding contribution from the banks by reducing their claim. A sizeable commercial debt reduction must increase the likelihood of official debt being repaid. So it may be worth governments taking a higher share of the risk if their absolute risk is less. I cannot say the Treasury are persuaded. They do not think it is the World Bank's job to engage in "financial engineering", whether through guarantees or simply through lending money to debtors to buy back their debt. But at least we are still talking; and we think we have persuaded them to drop some of their wilder ideas.
Africa
15. On a more positive note, many of you will be aware that we have recently taken the lead in constructing an international aid package for Nigeria, which is in serious economic difficulties. President Babangida has firmly committed himself to pursuing economic adjustment policies and has reached agreement with the IMF on a tough and politically courageous programme. This still left a financing gap for 1989, after rescheduling and World Bank money, of some $500 million. The programme seemed unlikely to stick unless the gap were filled with concessional aid. The consequences of Nigeria repudiating the IMF and going into default with the banks would have been catastrophic for Nigeria
SS1AKR
PERSONAL & CONFIDENTIAL
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