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Debt and Danger : THE WORLD FINANCIAL CRISIS by Harold Lever and Christopher Huhne (Atlantic Monthly: $16.95, paperback; 160 pp.)

April 27, 1986|Roger E. Shields | Shields is chief international economist at Chemical Bank, New York. and

At the end of 1972, the external debt of the non-oil developing countries totaled just under $100 billion, of which only one-third was held by commercial banks. By 1982, that debt had risen to $480 billion, and the share held by the banks had increased to a little more than 50%. This huge debt increase--about 19% per year--allowed these countries to avoid for a time the effects of massive and rising trade deficits caused by sharp increases in the costs of energy imports. Thus, from 1973 to 1984, the non-oil developing countries grew at the rapid rate of 5.4% per year. But by 1982, the weight of rapidly rising amortization and interest payments in a difficult global economic environment had brought the growth of many of the most heavily indebted developing countries to a virtual halt. Mexico's announcement in the summer of 1982 that it would no longer be able to service its external debt without special assistance was quickly followed by similar announcements in other countries. The debt crisis involving these countries and their commercial bank creditors had begun.

Harold Lever and Christopher Huhne have produced in "Debt and Danger" a well-written and highly informative book, documenting the scope and origins of the debt crisis. But the primary purpose of the authors is not to recite history. They see in the present debt a serious threat to the entire world economy. They believe that the measures currently being used to deal with these problems are woefully insufficient, and that unless new measures are taken involving a much more active role by governments and official lending institutions, then far more serious consequences are in store for the developing country borrowers, their commercial bank creditors and ultimately the industrial nations than we have seen thus far. The purpose of the authors in writing "Debt and Danger" then is ". . . to get congresses, parliaments and governments to understand the problem, to assess the costs and dangers and to develop the political courage to act."

Although its purpose is to stimulate action, the book is at its best, and its best is very good indeed, in describing the origins of the debt crisis. With the events so recent, it is easy to overlook the extraordinary and inherently unforecastable conditions--two massive oil shocks, record-high interest rates followed by the deepest world recession since the 1930s--that by 1982 had turned debt burdens which seemed easily supportable in 1980 into a problem of crisis proportions that continues today. The authors also remind us that whatever the motives of the commercial banks may have been in taking on the major intermediary role in petrodollar recycling, their accelerated lending to the developing countries was undertaken with explicit encouragement from industrial country governments and official lending institutions.

They also make a highly persuasive case for their view of the grave consequences which would follow a failure to relieve the present pressures on the borrowing countries and the international financial system, although in supporting their argument, they make some points that seem dubious. They link Peru and South Africa together, for example, in illustrating their point that, in contrast to the views of the Walter Wriston school, defaults on the part of the borrowers are not at all unlikely. In the case of Peru, a limit on debt service was declared in order to divert scarce foreign exchange to support of the domestic economy. In the case of South Africa, a limit was declared in order to avoid conditions that would prevent the full servicing of debt.

Central to the authors' case is the argument that the present net flow of funds from the developing countries to the advanced nations is an unprecedented and devastating reversal of the expected relationship. Whether a failure to restore the normal net flow of resources to the developing countries would result in widespread defaults by the borrowers and insolvency for their commercial bank lenders, as the authors fear, is problematical. It is beyond dispute, though, that the situation is serious and poses dangers for the developing countries and industrial countries alike.

The case for the solution to the debt problem proposed by "Debt and Danger" is not as persuasive. It is apparent throughout the book that the specter of the Great Depression is never far from the authors' minds, and it is especially obvious as they consider possible solutions to the debt crisis. IMF programs, lower interest rates, more rapid world growth--none of these are likely to resolve the problem. Instead, the authors' contend, the key to any proposed solution lies in reversing the present transfer of funds from the borrowing nations to their creditors. And that can only be done by coordinated action on the part of Western governments. The centerpiece of the measures favored by the authors is a system of government guarantees on new bank loans to the developing nations.

Why banks would provide new money to the troubled borrowers, even with guarantees, when nothing has happened to make the borrowers more creditworthy, or why the advanced nations would provide guarantees for fundamentally unsound loans, the authors do not say. They do, though, argue convincingly that the solution will require an active role and close cooperation by industrial country governments, official lending institutions, the banks and the borrower countries.

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