Orders of the Day — International Monetary Arrangements Bill

Part of the debate – in the House of Commons at 3:35 pm on 11th July 1983.

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Photo of Mr John Moore Mr John Moore , Croydon Central 3:35 pm, 11th July 1983

I beg to move, That the Bill be now read a Second time.

The problem of sovereign debt, which underlies the Bill, is of great concern to all Members of the House. It has been the subject of a recent report by the Treasury and Civil Service Select Committee which I warmly commend. That report reflected what, I think it is fair to say, is a great deal of common ground between the parties. We are all agreed on the need to support the international financial institutions in their crucial role in maintaining the international financial system. We all agree that United Kingdom jobs and prosperity would suffer were that system to be seriously damaged. We are all committed to assisting developing countries by providing finance and in other ways. More generally, we are all committed to work through increased economic and financial links to improve not only the economic performance of developing countries, but indirecty their democratic and political institutions.

In its report the Treasury and Civil Service Select Committee also endorsed recent international agreements to increase the resources of the International Monetary Fund. The Committee said in para 5.11 on pages 36 and 37: We would support the speedy passage of the legislation laid before Parliament to give effect to these agreements". The Bill and the order which I hope to introduce later today embody that legislation.

It will perhaps assist the House if I begin by setting out in broad terms how the debt problem originated. Throughout the 1970s, and particularly following the fundamental shift in the world economy after the 1973 oil crisis, the newly industrialised countries financed development by borrowing, and increasingly that borrowing was from the private sector. The authorities of the lending countries offered no discouragement to this process — indeed, rather the reverse — and it became fashionable to talk about recycling oil revenues.

Of course, the truth was that oil revenues were not being recycled—whatever that might mean. They were being on-lent, and, as time went by, that lending was increasingly short term, or at floating rates of interest. Thus, the newly industrialising countries became more and more vulnerable. Just how vulnerable became clear when, following the second oil crisis in 1979, the world entered the recession. Few people were prescient enough during the 1970s and early 1980s to sound a warning about what was happening.

The main sovereign borrowers now facing difficulties are, after all, countries with considerable underlying economic strengths. They are mostly countries endowed with natural resources, like Mexico and Brazil; or with proven resources in terms of the skills, ingenuity and application of their industries, like some in the Far East.

As the Treasury and Civil Service Select Committee pointed out in its report, just like the United States in the 19th century, it is entirely natural for such countries to finance the process of development by importing savings and capital from abroad, and for the private sector banks to play a part in that. The position that most of those countries are now faced with is not a permanent loss of credit-worthiness, but rather a temporary, if acute, problem of adjustment, exacerbated by world recession. They have been caught by a combination of overambitious borrowing, development programmes, higher than anticipated dollar interest rates and lower than anticipated commodity prices.

By 1981 the nature of the problem had crystallised. A number of economies in Eastern Europe, Africa and Central America had recourse to the rescheduling of debt, both private and public, in conjunction with IMF adjustment programmes. However, the real jolt to confidence came when Mexico's liquidity difficulties came to a head in August 1982. That greatly changed perceptions of sovereign credit-worthiness.

It is, of course, easily possible to overstate the dangers involved. As the Select Committee's excellent report points out in paragraph 4.4, only a small number of countries are sufficiently large borrowers to represent a major problem to the lending banks. Nevertheless, the debt position in total is sufficiently serious to merit very careful concerted remedial action.

We can take a good deal of comfort from the speed and flexibility with which the international community responded to the problems that then arose. The measures taken to cope in the Mexican case provided an important precedent. Short-term bridging finance was quickly provided by the Bank for International Settlements and the Federal Reserve. The many creditor banks formed an advisory committee to simplify matters by representing their interest. The IMF was able to use the time gained by the bridging finance to negotiate the terms of standby finance with the Mexican Government, while making it clear to the banks that the facility also depended on their co-operation in easing the immediate liquidity problem and helping to finance the adjustment process.

Other recent IMF-backed debt-rescheduling has invariably followed a similar pattern. Debtor countries have negotiated with the IMF economic measures which they believe will steadily improve their fundamental positions. To allow time for the necessary adjustments the IMF has been prepared to offer loans, but only on the basis that creditor banks agree to reschedule outstanding debt and contribute net new lending.

The Treasury and Civil Service Select Committee, in paragraphs 4.10 and 4.11, rightly stressed that all three elements were necessary and that, without any of them, rescheduling packages were just not negotiable. The three essential ingredients, to quote the Committee's words are:

  1. "(a) the commercial banks agree to reschedule their outstanding debt, and to make a modest contribution of net new lending;
  2. (b) their lending is supplemented by a loan from the IMF;
  3. (c) the IMF's contribution is conditional on the borrower undertaking an austerity programme of the type that we have labelled `traditional IMF medicine."
The Committee put a good deal of emphasis on the role of the private banks in all that, and perhaps I could touch on that in a little more detail. There is, of course, nothing unusual in banks seeing corporate customers through temporary patches of difficulty, so long as they are taking steps to put their business in order. In the same way, it is quite natural for commercial lenders to be prepared to continue to lend money to their major country customers —provided they have the assurance that the borrower concerned is taking action, agreed with the IMF, to put its economy in better order, and that the other main lenders will not precipitate a short-term liquidity crisis by refusing to reschedule existing debts or join in a programme of additional lending.

So, seen from a straightforward commercial point of view, what has been happening is not exceptional; it is a perfectly normal commercial process. It is, of course, also in our wider national interest that those countries should now succeed in making adjustments in an orderly way. A disorderly or disruptive process would be bound to do damage both to the economies of the borrowing countries themselves, and in some circumstances also to the international financial system as a whole. It could set back the process of world recovery that is now under way, with all that would mean for United Kingdom exports and jobs.

Such packages will inevitably be subject to difficulties from time to time. Nevertheless, the debt problem is slowly responding to treatment. Over-borrowing is being tackled by the adjustment measures undertaken by the debtor countries. As confidence returns, the private sector, while obviously reassessing its exposure in relation to its capital base, is also able to face its full and continuing role in financing adjustment. Recent experiences have stimulated valuable reviews of supervisory practice, of the adequacy of information about banking exposure and of the analysis of country risk.

The basic need, however, is for a sustainable recovery in world activity that will ease that part of the problem that derives from the recession. I did of course say sustainable recovery, not international reflation; and it was sustainable recovery that the Treasury and Civil Service Select Committee said in paragraph 5.2 was needed and must be achieved without a resurgence of underlying inflation, and that the solution to the problem of over-borrowing is most unlikely to lie with more of the same.

Having looked briefly at the global issues involved, let me now say a little more about the role of two of the central institutions in all this, the IMF and the world's central banks operating through the Bank for International Settlements. First, I shall deal with the central banks and the BIS. Their role has been to act quickly to provide temporary bridging finance in cases where there was a general threat to banking confidence. It is right in such situations that immediate arrangements should be made by central banks, operating in conjunction with national political authorities, until longer-term adjustments can be negotiated by the IMF.

Such BIS bridging loans are subject to adequate collateral, either from the borrower or from other central banks. Once an IMF adjustment programme has been agreed, the countries involved have been able to use part of their new credit to finance repayment of the BIS loan when due. In two cases—emergency credits afforded to Mexico in August 1982, and to Brazil in December 1982 —the Bank of England received indemnities from the Treasury in respect of its share of those loans, and details of the arrangements were published in Cmnd. 8651 and Cmnd. 8779.