Brady bailout II - plan to guarantee loans to developing countries

National Review, May 5, 1989

SINCE GOVERNMENT guarantees for the Texas S&Ls proved to be such a great idea, why not use the same proven technique on loans we already know are worthless-namely, the tottering old loans to Latin America? Indeed, why not have government agencies guarantee all dubious loans, both for established deadbeats and for those who aspire to that title?

A particularly sour case of editorialist's irony? Unfortunately, no. The latest Brady Plan aims to bribe banks to "forgive" about a fifth of what favored developing countries owe. In exchange, the bankers would receive World Bank and International Monetary Fund (IMF) guarantees of some remaining bad debt. Since the IMF and World Bank are bankrolled by governments, particularly the U.S. Government, any future defaults would surely come back to haunt future taxpayers. This is really a hidden form of national debt -no different from an outright subsidy to banks that make bad loans, or foreign aid to governments that make sure such loans turn bad.

Fortunately, the whole idea quickly ran into obvious objections from those who never had any intention of underwriting those loans. "It is not our job to provide guarantees," sniffed Michel Camdessus, managing director of the IMF. It might have been more diplomatic to have first cleared this "guarantee" through the U.S. director to the IMF, except that the Treasury had not yet bothered to appoint anyone to that position, among others.

It must be remembered that the developing countries did not just borrow money-they borrowed real goods, including tractors and computers, in exchange for IOUs. To "forgive" the IOUs would be to make those goods a gift. Nearly half of the loans to even the "middle-income" developing countries came from the U.S. and other governments, or from their international agencies, such as the IMF and World Bank. But the Brady Treasury is definitely not talking about "forgiving" such government loans, but is instead twisting arms to obtain a charitable contribution by bank stockholders. Executives of American Express, who lobbied hard for this idea, would not be equally enthusiastic about comparable "debt relief" for creditcard holders.

The real issue with Third World debt is how to improve prospects for future production in Latin America and Africa, so that past debts become a claim on a promising future, rather than just another claim on a U.S. Government insurance scheme. Whatever the form of help to developing countries-debt relief, aid, or loans-the unavoidable question is which policy reforms deserve U.S. support? Several countries, such as Bolivia and Jamaica, have stopped inflation and started growth with the help of lower tax rates and a stable currency, but such success apparently puts them at the very bottom of the list for "debt relief." If the U.S. Treasury insists on rewarding failure and punishing success, failure is what it will get.