Friendship is born at that moment when one person says to another: What! You too? I thought I was the only one.

-C.S. Lewis

Sunday, June 12, 2005

Third World Debt

Glad to see some progress being made on forgiving third world debt. Check out this blurb from the article vis-a-vis eligibility:

Under the agreement, 18 countries would receive immediate forgiveness on more than $40 billion that they owe in coming years, a combined savings for those countries estimated at $1.5 billion a year.

Most are in Africa: Benin, Burkina Faso, Ethiopia, Ghana, Madagascar, Mali, Mauritania, Mozambique, Niger, Rwanda, Senegal, Tanzania, Uganda and Zambia. Four others -- Bolivia, Guyana, Honduras and Nicaragua -- are in Latin America. Another nine African nations are likely to qualify soon, once they satisfy IMF and World Bank requirements for improving their governance and economic policies. Another 11 countries could also benefit eventually.

So it seems the debt service of the countries not eligible for relief have effectively become economic sanctions. I've never really understood the thought process behind these kinds of penalties. Sort of like telling the playground bully that you're going to beat the living hell out of all the geeks if he doesn't stop stealing the geeks' lunch money. I'm sure the bully thinks to himself, "Great, now when I steal their money, they get beat up too! How could life be any better?"

I suppose you can't just write off debt without demanding something in return, but these criteria seem awfully "inside the box" to me. How about this as a "punishment" for defaulting: not lending them any more money! Just write off the entire debt, tell them they're on their own, and leave it at that. Would it have that large an negative impact on the world economy? That could not possibly be a worse situation for them than the present one. Right now, they have negative foreign aid. Getting back to no foreign aid at all would be an improvement. Plus, it's not like once they're back at zero, they're going to steal the IMF's Banana Republic store card and buy new uniforms for the army.

Unless someone blatanly has the money and the wherewithal and just doesn't pay, my sympathies in loan default situations lie mostly with the lendee. If the lender writes a bad loan, shame on him! Lenders already have their risk/reward scenarios embedded in the interest rates. Since that natural market balance (free market you stupid Republican hypocrites!!!) is already in place, bankruptcy laws that favor the lender don't make too much sense. Essentially, you preserve all the benefits of the reward scenario while hedging most of the lender's risk. Pretty good deal for the lender! And a perfect environment in which to write knowingly bad, predatory loans! Good work, MBNA! Anyway, it would probably be tougher to get a loan in my world, since bankruptcy laws would favor the lendee so much, but on the whole, I have to believe that widespread loansharking is much worse than tougher requirements to get your hands on capital.

This blog is based on a true story.