Debt Forgiveness: Dangerous Trend or Absolute Necessity

Debt Forgiveness: Dangerous Trend or Absolute Necessity

Found this paper from 1991!  Its a short paper from what seems to be a Berkeley student who is not surprisingly quite smart.  It may not be the most well written document, but who am I to judge!  In any event the passages are strikingly familiar, and the content terribly relevant.  Certainly supports the quote attributed to Mark Twain that says history does not repeat, but it certainly rhymes.  Download a copy of the entire paper by clicking on the image above or this link Debt Forgiveness: Dangerous Trend or Absolute Necessity   Consider the excerpts below:

…In any case, despite bankers’ claims of careful risk analysis, they have a strong herd instinct. Flush with funds in the 1970s from petro-dollar deposits, banks lent to almost anyone. Interest rate spreads did not reflect the differing risks that banks were taking when making loans. And in 1982, when Mexico began having problems, the banks retrenched en masse, cutting off funding to countries undertaking sound adjustment programs and throwing them into crisis. Today, when asked about their future plans, most bankers recoil from the notion of large-scale lending. They say they won’t resume lending in their lifetime, under any circumstances….

…Second, manufacturers in the developed countries now face a deluge of imports as debtors attempt to service their debts by sharply increasing exports. Because banks insist on complete servicing and repayment of outstanding loans, debtors attempt to export through all possible means, including subsidies, tax incentives, and other strategies that the GATT has been trying to eradicate as unfair trade policy. Recently, Mexico’s largest cement producer paid the U.S. a $10 million fine for dumping. This export drive has encouraged firms in the developed countries to cope with growing competition by reducing their work-force and seeking protection. In the short run, such protection has immediate costs for consumers; in the long run, protectionism creates inefficiencies of resource allocation. One need only recall the 1920s and 1930s when creditors insisted on the deadly policy of full repayment — in a time of growing protectionism. The economic instability this provoked in Germany helped pave the way for fascism….

…On the whole, then, history provides no evidence that debt reduction hurts countries’ ability to borrow in the future, especially if reduction is achieved through negotiations….

…The upshot is that prospects are dim for large transfers of capital to needy borrowers — even those pursuing sound macroeconomic policies. Those who have been faithfully repaying their debts have not significantly benefitted: regardless of their diligence, they have not been able to raise much capital at favorable rates….

…Banks have been engaging in narrow calculations of interest for over two centuries. In the past, they have left economic disaster in their wake. At this point, the debt crisis is too important to be left to bankers….

 

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