strategy

Cancelling international debt

Synonyms:
Writing off loans
Writing off debts
Repudiating debt of developing countries
Clearing national debt
Cancelling debts of economically disadvantaged countries
Context:
Partial write-offs recognize that the book value of developing-country loans is at odds with their market value, and they secure tax deductions. If set between existing secondary market value and nominal principal, they can provide an equitable formula for limited debt relief. They can thereby improve the borrowers' creditworthiness and debt-servicing capability, as well as improve the market value of existing loans.

The IMF has blocked substantial debt cancellation. It is controlled by the voting power of its members. The G8 countries control 48 per cent of the votes; the 41 Heavily Indebted Poor Countries (HIPCs) have only 3 per cent. (If the votes were allocated on the basis of population rather than level of financial contribution to the IMF, the G8 would have 14 per cent in comparison to the HIPC countries 10 per cent.).

Implementation:
In 1993, a preliminary agreement was reached between banks and the Dominican Republic to eliminate US$260 million of interest arrears, and to implement an arrangement that would cover $775 million in commercial bank debts.
Claim:
1. In the context of developing county debts, partial write-offs of existing loans can be an effective way of sharing the burden between debtors and creditors as well as providing debt relief.

2. The World Bank and the IMF continue to force poor countries to pay back their debt despite the fact that many lack the funds to properly care for their own people. The IMF/World Bank's control of the debt issue preserves their power to impose unpopular austerity policies. Sub-Saharan African countries spend more on debt payment than on primary education and health care combined.

3. During the financial crisis in Asia, the IMF and the World Bank raised more than 150 billion dollars in a few months. Now they claim that they cannot afford to cancel the outstanding debt owed directly to them by the poorest countries, even though the debt is worth only 25-40 billion dollars.

4. The income the Japanese firm Nintendo expected to earn on US sales of its Pokemon games in the year 2000 was enough to wipe out the entire debts of Rwanda and Niger combined. The $750m spent on the Okinawa G7 summit could have written off the entire debts of Ethiopia and the Gambia.

Counter Claim:
Write-offs raise delicate operational accounting and regulatory problems. Many banks contend that partial write-offs are incompatible with existing accounting practices because these require an "all or nothing" approach.
Constrained by:
Incurring national debt
Facilitated by:
Reducing public borrowing
Subjects:
Disadvantaged
Currency
Credit
Writing
Economics
Type Classification:
D: Detailed strategies