Ex-IMF Director admits creditors refuse to acknowledge bad lending

Debt reduction has been delayed for many years because governments have been unwilling to admit they have made bad loans, and it is only pressure by Jubilee 2000 and other groups that has made the difference, admits a former IMF and British Treasury insider in a candid article in the prestigious journal Development Policy Review (September 1999).

Huw Evans was the UK's Executive Director at the IMF and World Bank 1994-97 and before that had been an international finance official in the UK Treasury. His article “Debt relief for the poorest countries: why did it take so long?” confirms many of the worst suspicions of campaigners.

He notes that it has taken 17 years since the Mexican default of 1982 “to achieve a modest and sensible series of reforms.” A big cause of the delay “was the reluctance of governments to acknowledge losses on past debts”.

“Loans that turn out badly mean poor decisions by both lenders and borrowers,” Evans writes. “Much of the lending to poor counties which became the excessive debt burdens of the 1980s and 1990s stemmed from exports by OECD countries of capital goods and (to a much lesser extent) arms: finance was provided by banks against explicit guarantees by the export credit agencies (ECGD of Britain, Coface of France, Hermes of Germany, ExIm of the US, etc)”.

Throughout the 1980s, creditors pretended that countries would eventually pay their debts, because banks, governments, export credit agencies, and the IMF and development banks were incapable of “admitting to themselves and the world that the debts were no longer worth their face value.”

“The reality was, of course, that the bad loans had been made years ago and should have had provisions made against them at the time, as supervisory agencies encourage banks to do,” Evans notes. Genuine debt cancellation “required governments (and their export credit agencies) to admit past mistakes,” which they refused to do; the US and Japan, in particular, showed “an unwillingness to own up to past mistakes.”

The United States was a consistent problem. US initiatives “usually went through [the IMF and World Bank] quickly; other countries' initiatives, if not supported by the US, failed or, as in the case of the UK debt initiative, took a very long time. Over time, the attitude of the US on debt shifted, first with the Brady plan and then with the overwhelming political needs to write down the debt in Poland and Egypt,” Evans writes.

The first debt relief packages were designed “because of the dangers to many of the world's largest banks, and the banking system. Exposure to the debtors by many banks, especially in the United States, but also to a lesser extent in the UK and the rest of Europe, was several times total bank capital. The debt strategy in the 1980s bought time for the banks to rebuild their capital,” Evans notes.

In 1989 the US Treasury Secretary Nicholas Brady launched “an initiative to help Latin American countries (and US banks) with their still serious debt problems” by repaying part of the debt to private banks with IMF and World Bank loans. Evans continues that “the plan was agreed within a few months and then put into practice the same year – a sharp contrast with the slow progress on relieving the debts of the poorest countries. It was clear that the driving force behind the Brady plan was US national interests in Latin America and domestically, and had nothing to do with the principle of debt relief.”

Evans, a former IMF Executive Director, goes on to note that the IMF's Enhanced Structural Adjustment Facility (ESAF) was “in reality ... aimed at ensuring that existing IMF loans to these countries – arrears on which were beginning to mount – could be refinanced over longer periods. ... This initiative confirmed the need for action to reduce debt, but postponed until the mid-1990s the pressure on the IMF to join in effective and comprehensive debt relief.”

Evans also stresses that many of the common arguments against debt cancellation are “at odds with the practice of domestic bankruptcy courts and, at the international level, with a few post-war debt writedowns, notably that in Indonesia in 1970.”

Debt cancellation has been achieved by political pressure and took so long in part because NGOs and pressure groups were not effective enough previously. Evans notes that all of the key debt decisions have been taken by G7 leaders, and this is because “the political arguments impinged more on prime ministers and presidents, who felt increasingly uncomfortable defending their finance ministries' and central banks' negative views towards debt relief.”

“The Jubilee 2000 campaign has reached out very successfully in many countries, and it was an important factor in the widespread government initiatives in the run-up to Cologne,” Evans stresses.

Development Policy Review is the journal of the Overseas Development Institute (ODI) in London (dpi@odi.org.uk ) and is published by Blackwells (jnlinfo@blackwellspublishers.co.uk ). It is not available on the web, but single copies can be purchased. Many university libraries subscribe to the journal.