The initiative is lacking

The great triumph of last year’s IMF/World Bank meeting was the unveiling of an agreement on debt relief for heavily indebted poor countries. But now that the promises are coming due, the international financial institutions are claiming poverty. This is special pleading - they have more than enough resources to cover the entire $45 billion multilateral share of the debt. The familiar cycle of debt and default will repeat itself, Adam Lerrick argues, unless the reform required of borrowing nations is matched by reform in the agencies themselves.

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As 2000 drew near, luminaries including president Bill Clinton, bishop Desmond Tutu and pope John Paul II pressed the overfed First world to liberate a group of starving nations from what one of their number, Jesse Jackson, called the new economy's chains of slavery. Their gift was the forgiveness of all that these countries had borrowed and, for years, had been clearly unable to repay.
Now that the rosy glow has dissipated and the reckoning is due, debt relief in its entirety continues to make sound economic sense. This was the message, passed with a unanimous voice, when the Meltzer Commission sent down its report on international Financial institutions (IFIs) to the US Congress.

Charity aside, idealism aside, the debt is uncollectable, the money is long gone, and lenders must move on from denial to a new life as donors.

The 42 HIPCs (heavily indebted poor countries), concentrated in sub-Saharan Africa, are indeed desperately poor and growing poorer. Average per capita real income for their 700 million citizens is $300 a year, down from $400 in 1980, and populations are projected to double within three decades.
Their unhealthy 255% ratio of net present value of debt to exports is matched by an unhealthy life expectancy of 51 years.
Not now, not us
Collective HIPC debt has now spiralled to more than $200 billion in nominal terms, but the cost of a write-off is far less demanding than it appears. Because the preponderance of the loans carry concessionary interest rates of 0.5% to 2%, a cash offset equal to the effective present value of the debt is all that is required, or roughly 70% of the nominal amount. Thus the nominal $176 billion of official loans, which represents 82% of the total due, translates into some $80 billion in effective bilateral obligations and $45 billion owed to the 27 multilateral agencies, of which the Five largest hold a dominant 85% share.
The G7 creditor nations have stepped up handsomely to promise a total write-off of their massive individual debts. But now it seems that those who sought the spotlight while lending are retreating to the end of the queue when the consequences are at hand. The IFIs are saying: not relief for all 42 countries, not total relief for any country, not now, and, certainly, not us.

Pleading poverty, they plan to write off a niggardly $14 billion, less than one-third of their irresponsible lending decisions, but only after every other avenue has been exhausted, and even then with funds mostly found in other people's pockets - those of the taxpayers of the industrialized world. From these donors, they are now seeking $2.5 billion, which is being presented as all that is needed. This is, in fact, only an initial down-payment, for the IFIs already know that funds will be exhausted by 2005. As old loans come due, $700 million more will be required annually for almost two decades to fulfil projected relief commitments to 32 nations.
The illusion of equal burden-sharing among creditors, the centrepiece of the HIPC initiative, has been abandoned, setting a bad precedent for the private sector, which holds the remaining $27.5 billion of HIPC debt.
Show us the money
In truth, the Five major IFIs hold a wealth of resources on their own balance sheets - $633 billion in effective capital and $60 billion in provisions for loan losses and reserves.
Except for the African Development Bank, they can muster internal funding to fulfil what was clearly the spirit of all that millennial rhetoric. The cost of wiping out the entire $32 billion of effective debt held by the IMF, World Bank, Inter-American Development Bank and Asian Development Bank represents just 5% of their effective capital and 54% of provisions for losses and reserves. In the real world, these last are accumulated for the day when borrowers cannot pay. And in the real world, no bank would be disabled by a less than 10% drop in equity. The viability and intervention capabilities of the IFIs are not, as they pretend, threatened.

For years, the IFIs have written a Fictional history of never making a bad loan by never recognizing a formal loss. Instead, an entrenched system of concealing default by rolling over uncollectable debt each year, with enough added to cover new interest costs, and by accruing unpaid interest on loans in protracted arrears, has been a prime cause of mounting HIPC insolvency. These are unsound practices that would invite regulatory censure in a private-sector environment.
Happily, while HIPC debt has been accumulating, so have multilateral reserves.
These are a gift from the donor nations who have endowed the IFIs with the ample capital and credit guarantees that have enabled them to reinvest and grow. The World Bank alone generates $2.5 billion each year by investing its zero-cost equity capital and in the arbitrage between the favorable rates it enjoys, based on the guarantees of its industrialized members, and the higher yields on the market instruments in which it reinvests. At the IMF, there is $11.9 billion in reserves versus $6.2 billion in effective HIPC debt. At the World Bank, $29.8 billion versus $21.9 billion. At the Asian Development Bank, $8.4 billion versus $0.9 billion. At the Inter-American Development Bank, $8.2 billion versus $2.5 billion.
Reserves that will be depleted by wholesale debt forgiveness, might be rapidly rebuilt if nations that have long benefited in their growing stages from IFI lending were to accept a smaller interest subsidy to aid their needier neighbours. Adding just 2% to 3% to lending rates on new loans would still provide a cost of funds well below what the private sector proffers, and an extra $500 million to $700 million annually would accrue to multilateral balance sheets.
An immediate write-off would trigger temporary cashflow imbalances that might hamper the IFIs in their continuing mission. These could be addressed by the treasuries of the US and the other G7 members without cost or risk. Bridge Financing when requisite resources are in illiquid form would be needed. No Fiscal impact for the participating governments would occur because the loans will be in the form of exchanges of assets between AAA rated entities, repayment schedules and dates would be Fixed, and lending rates would exactly match Financing costs.
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Cash management poll 2008:

No. 6: If you don’t give it to me you’ll only lend it to someone else and look where that got us

The initiative is lacking

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