Organizing Debt Relief: The Need for a New Institution

Kenen, Peter B.

doi:10.1257/jep.4.1.7

Abstract

In March 1989, the new U.S. Secretary of the Treasury, Nicholas Brady, endorsed a change in strategy for dealing with developing country debt, calling for a three-year waiver of clauses in existing loan agreements that stand in the way of debt reduction "to accelerate sharply the pace of debt reduction and pass the benefits directly to the debtor nations," and called on the IMF and World Bank to use some of their policy-based lending to aid the debt-reducing process. Events moved rapidly thereafter. Is there anything left to argue about? Unhappily, yes. Advocates of debt relief, like myself, maintain that the Brady plan will not go far enough. It relies too heavily on debtors and creditors to strike mutually beneficial bargains; it does not provide enough resources to generate the deep debt reductions that debtors need to solve their problems; and it does not shift risk forthrightly enough from private lenders to official creditors. I would correct the defects of the Brady plan by creating a new international institution to manage and finance the debt-reducing process or assign the task to an existing institution but give it enough resources to get the job done.

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Journal of Economic Perspectives