Closer Encounters with International Banking Defaults
Anis Haffar
"How can it be that the price of coffee or a bar of chocolate is increasing constantly while the price to producers is falling?"...the Peruvian economist Pedro Kuczynski coined the phrase "price scissors" to describe the phenomenon..."A recent editorial "Putting the Nigerian House in Order" hinged on the "negotiations with the Inter- national Monetary Fund (IMF) to borrow the necessary funds." There was the question of a $2 billion loan to pay the currently due and back instalments of interests. The Nigerian house could be in financial disorder sooner than later despite President Shagari's "team of experts to define areas of priority and make recommendations on how (to) run a more efficient government." The rhetoric is out-moded.
Escalating debts will addictand jeopardize the lives of the 80 or so million nationals with huge interest burdens. With the drastic fall in oil purchase from $22.4 billion in 1980 to an estimated $9.6 billion in 1983 - the issue rested with alternative methods for generating additional re; venues. Surely, there existed ingenuities from within.
In the first place, Nigeria's economic planners needed to initiate a solid industry for various tropical agricultural produce. Apart from the internal consumption, the worldwide export markets were relatively untapped. Secondly, it is possible to attract capital by offering Nigerian stocks and bonds including other marketable securities guaranteed by the government.
As long as transactions were handled professionally, considerable amounts of capital could be generated from the international community including Nigerian residents at home and abroad. Thirdly, it is good to negotiate the return of Nigerian monies held in Swiss banks and others into the national central bank in their existing currencies. The government could borrow from these sources and pay interest on them. The wealth of nations need not be tied indiscriminately to international banks: that function rested solidly with an efficient central banking structure.
Among the African nations, it is absurd to believe that Nigeria, Ghana, Zaire, Sudan and the others will ever catch up on the inflated arrears of debt. But Nigeria was well placed to implement a balanced approach with economic initiatives from the offices of Victor Masi and Abubakar Alhaji.
Haphazard economic dependence on Wall Street, West European and Japanese banking centres have en- meshed the developing nations in a mountain of super charged interest bearing debts. When the banks re- scheduled payments, they earned huge fees by just turning over existing loans. Third World debts increased from less than $100 billion in 1972 to more than $700 billion today. The interest burden multiplied 15 to 20 times. A study by the Amex Bank in London revealed that "since 1978, developing countries repaid $126 billion in interest payments (italics mine) of the total $140 billion lent to them."
Anger was on the rise: In Mexico, that has meant grips and warnings according to the Wall Street Journal. In Argentia, it was threatening to propel the country to default. Nation- alist politicians have been attacking bankers and the IMF as "stealing the country's sovereignty." The Brazilian congress was waging a battle to maintain the country's standard of living as workers and students protested in Sao Paulo and Rio de Janeiro. Brazil's interest payment on its external debts came to be 79 percent of export sales in 1982, (source: New York Times).
In India, Indira Gandhi expressed disappointment and said at a recent non-aligned summit that international financial institutions needed to be more effective in meeting the needs of developing nations. In Tanzania, President Julius Nyerere repeated that the Bretton Woods conference after World War II was not responding to the dynamics of the world economy.
To be realistic, the international lending institutions ought to nullify significant portions of the inflated interests they happen to be ridiculously high. Moreover, the developing economies have not the wherewithal to pay. The downward pricing of natural resources needed to have some honest relationship with the interest rates of international loans. The Ivoirian President Houphouet-Boigny was to ask in bewilderment: "How can it be that the price of coffee or a bar of chocolate is increasing constantly, while the price to producers is falling?" For one, the evenhanded regulation of interest rates (as far as the developing economies were concerned) would eliminate the compensation of export earning losses, and at the same time void the disputed Stabex handouts now in force with the African Caribbean and Pacific states. The Peruvian economist Pedro Pablo Kuczynski coined the phrase "price scissors” to describe the phenomenon. The shake-up should deal a blow to international inflationary forces, and boost trade favourably.
There are some prominent Wall Street bankers like Felix Rohatyn who have warned of the impending closer encounters with banking defaults en masse: They recommend that governments of international lending institutions pay off the banks with guaranteed long term bonds. The banks would be asked to accept a 19 percent write-down on their loans in effect, two thirds of a year's interest. A New York Times article cautioned: "Some cynical bankers have the attitude: wring all you can from the Third World now, and if a new crisis comes, the government will at last bail you out."
In the final analysis, the bankers will not only accept, but demand a government bailout to save their financial skins from the fallout of international debt defaults, or from unnecessary, but preventable, chaotic revolutions from some quarters. It will be unwise to think that the inflated arrears of debt could ever be repaid. In numerous resolutions, the United Nations general assembly declared the existing financial system bankrupt. The international body recommended positive changes. The economic and political environment was ripe for introducing novel ideas to eliminate the impending calamity. A satisfying global economy will also serve to benefit business interests of international bankers. Indeed, peace and prosperity come hand in hand.
