Big debtors in trouble

The debt crisis which has had a devastating impact on the world's poorest countries over the last decade, is threatening now to undermine the economies of middle income countries. Three of the world's five biggest debtors are in new trouble. Meanwhile the Ukraine has defaulted and the US has lifted sanctions against Pakistan to prevent it from defaulting. In stark contrast to the treatment of indebted countries in the HIPC debt initiative, considerable volumes of resources have been mobilised to bail countries out. In the case of the 5 largest debtors, at least $150 billion has been raised in the bailouts.

The world's five biggest debtors (excluding the G7 themselves) are Brazil ($179 billion), Mexico ($157 bn), Indonesia ($129 bn), China ($129 bn) and Russia ($125 bn). Of these, three have been in particular trouble recently:

Brazil: In November the IMF agreed a $41 billion support package with Brazil which was required to prevent it defaulting on its debt or imposing restrictions on the flight of capital. A condition of the package is an austerity programme which has drawn opposition from the Brazilian congress. The package involves cuts in many of programmes to protect the rainforest, which were only recently agreed under pressure from environmentalists. The Financial Times (16 December 1998) argued that the new policy will mean continued high interest rates and "it is hard to see the economy returning to growth".

Indonesia: After defaulting on debt repayments, Indonesia was able to negotiate a $49 billion rescue package with the IMF in October. Part of the package included a rescheduling of payments on $3.2 billion of export credits, which will now be extended over 11 years with a three year grace period. The International Herald Tribune (17 October 1998) said that "the IMF has abandoned its normal gospel of budget austerity so Indonesia can continue subsidised food" and has allowed a budget deficit of 8.5%, "far above the usual IMF prescription".

Russia: With $19 billion outstanding, Russia is the biggest debtor to the IMF -- accounting for one-fifth of all outstanding IMF loans -- and it cannot pay. In August, Russia froze repayments on $40 billion of other loans. This month (December) it also defaulted $28 billion on commercial credits from the Soviet era. And Russia has also defaulted on its domestic debt. Estimates vary, but it appears that Russian debt service in 1999 should be at least $24 billion. In fact, little of this will be paid. The IMF had agreed a further $22 billion loan to Russia, but this was stopped when Russia defaulted in August; negotiations with the IMF continue.

An editorial in Business Week (7 December 1998) commented that "both sides were done in by greed. Western banks made the same mistakes in Russia that they made in Asia. Russian companies thought they could get easy money without any accountability. ... Now, both sides must take a hit."

Two other debtors have faced crises:

Pakistan: With $32 billion of foreign debt, Pakistan threatened to default when the United States imposed sanctions after Pakistan carried out nuclear weapons tests in May. In the end, the US decided default was a worse sin than nuclear testing, and in November it agreed to a $5.5 billion IMF rescue package to allow Pakistan to keep up with its debt service.

Ukraine: With foreign debt of $13 billion, the Ukraine defaulted on $2 billion in Treasury-bill and foreign currency debts in October. Lenders have been forced to accept new bonds with a value less than half that of the debt they replace. Ironically, it was IMF conditions as part of an earlier $4.7 billion rescue package which require Ukraine to maintain hard currency reserves that forced the country to default.