|
|
|
| Current Issue |
|
|
| Resources |
|
|
|
A Way Out for the Debtors
| Article
# : |
15640 |
|
|
Section : |
CURRENT ISSUES
|
| Issue
Date : |
2 / 1989 |
1,506 Words |
| Author
: |
Eugene Sarver
Eugene Sarver is professor of finance at the Lubin Graduate
School of Pace University in New York. |
The $1.2 trillion Third World debt crisis justifiably continues to attract global attention. It was the subject of an initiative by Treasury Secretary Baker in 1985 and very recently has been placed near the top of the agenda for the G-7 (group of seven leading industrial nations) meeting scheduled in early 1989. Even General Secretary Gorbachev focused attention on it in his December address to the United Nations in New York.
However, the General Secretary unfortunately reinforced the myth that the solution to the debt crisis is simply one of money--he spoke of debt forgiveness and very long-term reschedulings (a benevolent posture facilitated by the fact that Soviet debt exposures total less than 5 percent of Western exposures). To serious students of the debt crisis, the real solution requires throwing intelligence and integrity at it, not just more money.
The severity of the debt crisis can be measured in several ways, such as the amount of debt in arrears with respect to principal and even interest payments, or in the degree to which banks are willing to voluntarily lend money to debtor countries. However, an effective "quick" approach is simply to look at what discounts from face value the LDC (Less Developed Country) debt is trading at in the secondary market. While several brokerage houses and commercial banks such as Shearson and Citibank participate in the market, Salomon Brothers is a market leader and has provided its Indicative Prices for Less Developed Country Bank Loans.
On average, LDC debt trades at a 50 percent discount (see table), and as low as at a 98 percent discount, on the "bid" side for Nicaraguan debt. Moreover, many traditionally strong countries are currently trading debts at drastic discounts, such as: Argentina (82 percent), Brazil (61 percent), Mexico (57 percent), and Nigeria (76 percent).
The first myth to dispel is that the LDC countries simply borrowed too much. For example, South Korea borrowed approximately as much as Argentina, yet never had any problem repaying it. Indeed, developed countries borrow far vaster sums and rarely have a "debt crisis."
So what is the problem? The problem is that the LDCs have not invested the money in such a way as to produce an income stream of sufficient magnitude to make the requisite interest and principal payments. Why haven't they?
The Wrong
...
Read Full Article
Look for this article in Ask.com
|
|
