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Tsunami: Debt moratorium makes sense
03/2005 |
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[ Tsunami ]
Don’t hesitate to accept a debt moratorium
The Paris Club, the association of the most important creditor states, has offered to support tsunami-hit countries in an unbureaucratic way by freezing their debt repayments. The moratorium would continue until it is clear how much money the countries need for reconstruction. This procedure would give them some breathing space. However, the countries in the region affected by the disaster hesitate or even decline to accept.
Why is that so? One reason is the varying level of indebtedness to the Paris Club. Public creditors play an important role for Sri Lanka as the country hardly has any private debt. One third of Indonesia’s liability is to the Paris Club. A moratorium would give these two countries important leeway. In Thailand, on the other hand, foreign banks are clearly the most important creditors. Only a very small share (less than one fifth) of India’s foreign debt, which in any event is very low, is to the Paris Club. Nonetheless, a moratorium would not harm Bangkok or Delhi.
Or would it? The countries affected mainly justify their hesitation with the concern that the debt moratorium could upset investors on the international capital markets. The debtor countries might thus lose their good reputation and jeopardise their credit standing. Lenders could demand higher interest and, in the worst case, a crisis country would lose access to the international capital markets.
The herd mentality on the international financial markets makes this sort of reaction possible. Indonesia and Thailand in particular have had bad experiences. During the Asian financial crisis in 1997/98, the Indonesian Rupia lost almost 80% against the US dollar and the Thai Baht lost almost 50%. Both countries had to accept a downgrading of their credit rating with various agencies.
Nevertheless, the apprehension of the tsunami victims is exaggerated. The experiences that other countries have had with debt moratoria show that investors are not scared off so easily. Russia, for example, even interrupted debt services for three months in 1998 without creditors’ consent and, nevertheless, regained access to the financial markets relatively quickly – thanks to favourable economic data. In the short term, the moratorium certainly damaged investor confidence, but in the medium-term, they were won over by Russia’s good economic performance with growth rates between 5 and 10% since 1999. Similarly, the International Monetary Fund showed in a study of November 2004 that debt relief alone does not hinder market access.
There are some indications that the international financial markets would not penalise the countries hit by the tsunami for the sort of moratorium proposed. According to the German debt relief campaign, “erlassjahr.de”, the rating agency Standard & Poor’s considers an interest hike following after a moratorium to be unlikely. Investors look above all to the economic situation, economic policy and a country’s level of debt. Based on these criteria, all of the countries in question come off relatively well.
Another problem is that a moratorium only delays the pressure on the debtor countries but does not do away with it. The Indonesian Foreign Minister Noer Hassan Wirajuda is therefore demanding a debt swap: Indonesia’s reconstruction costs and particularly steps to alleviate poverty, should be deducted from its foreign debt. Doing so would ensure the sensible use of additional funds. In addition, this would truly relieve the burden on the countries affected and not merely spare them a short period of debt service. This proposal, of course, comes close to debt relief, and will therefore most likely not come into effect.
Kathrin Berensmann
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