FINANCE: Developing Countries Call for Debt Moratorium

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GENEVA, Oct 12 1998 (IPS) - The 135 developing countries of the Group of 77 (G-77) suggested Monday the declaration of a temporary moratorium on the servicing of their foreign debts, to safeguard indebted nations against the global financial crisis.

At a meeting of the UN Conference on Trade and Development (UNCTAD), the G-77 declared that “a temporary standstill on debt servicing could be in the interest of both debtors and creditors.”

The idea, which echoed a similar UNCTAD proposal presented last August, drew immediate criticism from representatives of the industrialised world. A delegate from Japan said that some of the UNCTAD prescriptions, “such as capital controls and unilateral debt standstill, are presented without enough caution as to their side effects.”

But G-77 spokesman Javier Diaz Carmona, ambassador from Costa Rica, said the initiative would provide a debtor country with “the breathing space needed to design an adjustment programme that is appropiate to its specific situation and to negotiate a debt reorganisation plan.

“Other policy options could also be explored. This could restore market confidence more quickly than a deep recession,” he stressed.

The final text outlining the G-77’s recommendation was reached after lengthy debate between the three groups of countries comprising the bloc: Latin America and the Caribbean, Africa, and Asia.

Only at the last minute did the African delegates withdraw their own proposal suggesting the declaration of a unilateral and immediate debt moratorium, said diplomats.

The unexpected debate on the possibility of a moratorium took place at the opening session of UNCTAD’s Trade and Development Board, which was discussing “the repercussions of the financial crisis on trade, investment and development.”

An UNCTAD study released in August assessed means available to developing countries to defend themselves from speculative attacks by short-term capital.

According to the UN agency, the introduction of insolvency procedures in the case of attacks on currencies is a plausible alternative that would allow a suspension of debt servicing for countries to defend themselves against predatory investors, and would give countries the necessary breathing space to negotiate a debt reorganisation plan.

The measures discussed in the August report would help prevent “crises of liquidity from turning into crises of insolvency,” UNCTAD stated.

The UN agency maintained that the legal basis for declaring a debt moratorium could be found in article seven of the founding document of the International Monetary Fund (IMF).

The decision of a moratorium can be taken unilaterally by a country suffering attacks on its currency, and it would be up to an independent international body set up for that purpose to evaluate whether such a decision was justified, said UNCTAD.

The European Union anticipated its staunch rejection of any such moratorium by criticising – through its representative from Austria – “the provocative character of some of the proposals.”

The Japanese delegate underlined that “to us, the feasibility of some of the proposals, such as the introduction of formal insolvency procedures over a national economy, seems questionable.”

UNCTAD Secretary-General Rubens Ricupero pointed out that several of the agency’s forecasts had been borne out by developments in the international economy. The UN agency began early last year to warn against the risks poised by excessive flows of capital on the liberalised financial markets.