Report on Developing Countries' External Debt and Debt Relief Provided by the United States
International Financial Cooperation for Development TD/188, TD/188 Supp. 1, Add. 1
Foreign Assets and Liabilities of US Banks Multinationals Corporations
There is a view, quite widely held, that the events of the last two years prove the fortitude of the international financial system. None of the largest banks in the world failed in the economic crisis of 1974-1975; no countries went broke. The neurotic episodes of 1974 and 1975 did not become a psychosis of the entire system, from Nassau and Liechtenstein to Chase Manhattan Plaza.
“The fear is largely behind us,” one prominent American banker sighed in 1975. International banking has come through “this period of uncertainty,” Mr. Richard Debs of the Federal Reserve Bank of New York noted, toward “the emergence of an even healthier and stronger system.”1 This view, or optimists’ position, is not ridiculous. Since 1973, the worst and most widespread international recession since the 1930s has taken place. At the same time, there was the greatest movement of financial resources—from oil importing to oil exporting countries—since the years of reconstruction after World War I. The modern financial order survived these changes without a breakdown comparable to that of the early 1920s and the Depression.
The optimists see further, positive signs of fortitude. “Despite the dire earlier predictions,” Mr. Debs writes, “the system has not only survived but has contributed in a significant way to coping with the problems of ‘recycling’ [oil revenues].” Banks, that is, have borrowed money from oil-exporting countries and loaned it to countries which import oil. Money was recycled through the intermediation of private banks.
David Rockefeller explains the procedure as a question of destiny. “Multinational financial services corporations,” he has written, “were called upon not only to expand their more traditional activities, but also to take on important new responsibilities as well.”2
All the same, one great crisis is still to come. A prospect of unprecedented peril for hundreds of banks and for the system itself, it promises misery and destruction; and with the most profound political consequences.
This is the crisis of the developing countries’ debts. During the 1970s, the developing countries, oil-exporting countries aside, have borrowed more money than in their entire previous history. They now owe some $100 billion to the rest of the world.3 Together, they are spending more than 15 percent of all the money they earn from exports to meet interest and service payments on their external debt.4 By far the fastest increase has been in debt to private banks.
The question for the financial system is not whether these debts will be dishonored. Rather, it is an issue of when, and how, and where. It is certain that at least some of the developing countries’ debts will be rescheduled; that at least some countries will find themselves unable to repay their loans on time, or to meet interest payments. Several countries—Chile and Zaire are notable examples—have renegotiated debt payments in the past year. The new military government of Argentina last month arranged a respite or “roll over” of 120 days on some of its foreign obligations.
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