Maintaining solvency of the banking system
Context: Proposals for solving the debt crisis reflect a range of views about the nature of debt-servicing difficulties and appropriate responses to them. They include [ad hoc] financing arrangements; case by case debt reschedulings; interest capitalization schemes; formal insurance; stabilization funds; innovative instruments, including equity shares in public enterprises in borrowing countries as swaps with outstanding debt; and comprehensive restructurings, including write-downs or external claims. These proposals all aim to to permit growth of developing countries to be resumed and to restore their creditworthiness while allowing commercial banks to resume "spontaneous" lending. Since major banks hold or have held claims on developing countries equal to several times their capital, any scheme that implies a large write-down of debt must provide for the continued operation of these banks. This need to maintain bank solvency means that most proposals minimize write-downs as much as possible. Alternative suggestions have included the use of official capital to buy part of developing-country debt.
Implementation: In the period immediately after 1982, most commercial lenders holding outstanding developing country debts shared an interest in concerted lending to protect the financial system and gain time to reduce their individual exposures to developing countries. A round of "defensive" lending (to support growth in the debtor countries), debt restructuring and re-selling of loan was made. Now that both objectives have largely been accomplished many smaller banks are trying to leave the debt-restructuring process - even at the cost of substantial write-offs - to redirect their lending to more traditional activities.
Type Classification: E: Emanations of other strategies