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Innovative Debt Settlement

June 26, 1988

There are many reasons to welcome the tentative agreement between the banks and Brazil that eases the crisis over servicing and repaying Brazil's enormous debt.

Brazil, with the largest debt of all developing nations, has posed complex problems. Its debt of $122 billion weighs heavily on the ability of that enormously important nation to continue its economic expansion and to achieve self-perpetuating growth. Now the burden of the debt has been relieved by reduced interest rates and extended repayment schedules, and new capital--more than $5 billion--has been assured to facilitate debt service and accelerated economic expansion. Furthermore, highly innovative arrangements have been drawn up to let the 700 banks holding the debt develop a variety of measures to ease their problems as well as those of Brazil.

Beyond Brazil, the arrangements provide encouragement to the search for a resolution of other major bank debts, which are concentrated in Latin America, and debts to governments, which are concentrated in sub-Sahara Africa. This agreement should inspire new steps in dealing with the No. 2 debtor of the Third World, Mexico, where progress already had been made. But the greatest effect may be on the negotiations with Argentina, No. 3 on the debt list, which--like Brazil--owes most of its debt to banks rather than to other governments.

There is one risk in the Brazilian settlement that could prove troublesome. The banks have softened their initial demand that the debt settlement be closely tied to implementation of the economic reforms prposed by the International Monetary Fund. The IMF demands have been politically difficult for all indebted nations--so difficult that some, like Zambia, have chosen to reject them. And yet without the structural changes required by the IMF the debt settlements will be, at best, short-term palliatives, inviting only a fresh cycle of debt and probable economic depression.

The coincidence of the Brazilian settlement with the conclusion of the Toronto summit meeting of the seven principal industrial nations is important. The Toronto summit, like the Venice summit a year ago, reaffirmed the importance of initiatives to resolve the debt crisis. Banks are the key players in Latin America, but governments are the key players in resolving the African debt problem. One can hope that the bankers have set an example of innovation that governments will quickly follow.

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