not a bad thing to read on a sunday morning

Deal Is Reached to Drop Debt of 18 Poor Nations
September 25, 2005
By EDMUND L. ANDREWS from NYTimes.com

WASHINGTON, Sept. 24 - Finance ministers from around the world reached agreement on Saturday on a plan to wipe out as much as $55 billion in debt owed by impoverished countries.

The deal still needs to win support from the major shareholders of the World Bank, which would forgive a large portion of the outstanding loans, but American and European officials said they were confident the plan would win approval on Sunday.

The agreement, which will initially affect about 18 countries, came after two years of grinding debate between the United States, Japan, Britain and most of the wealthy nations in Europe.

"The breakthrough is that we now have a set of proposals that are supported by the whole international community," said Gordon Brown, the chancellor of the exchequer for Britain and the chairman of the International Monetary Fund's policy-making committee.

If all goes according to plan, the 18 highly indebted low-income countries could be freed as early as the end of this year from the need to repay a total of about $1 billion a year in interest and principal.

Though the nominal amount of debt at stake is about $55 billion, the actual cost of forgiving the debt immediately is closer to about $18 billion.

Eventually, as many as 35 countries could qualify for debt relief and the total cost to wealthy countries would climb higher.

The criteria for eligibility was one of the most difficult issues, with the United States, Japan and Germany adamantly opposed to opening the door to an ever-expanding list of nations.

When the plan was first hammered out last summer by the United States and Britain, the idea was to make it available to countries that are currently categorized as "highly indebted poor countries."

But fund officials said eligibility had to be based on a specific formula that would apply the same standards to all countries.

The exact criteria remained unclear on Saturday, though Mr. Brown said it was based on a nation's per capita income. In addition to being poor, however, a government has to follow "sound" economic policies and meet standards for good governance.

The immediate goal of the plan is to give hopelessly indebted nations a chance to wipe the slate clean. The broader goal, supported by the Bush administration and a broad coalition of anti-poverty activists, is to shift future aid to outright grants and away from loans.

The biggest political obstacle to the plan stemmed from demands by some European countries, as well as by Paul Wolfowitz, the new president of the World Bank, that wealthy countries make firm commitments to pick up the full cost of debt relief.

On Friday, the Group of 8 industrial nations signed a letter explicitly promising that they would cover the cost "dollar for dollar" and that they would not reduce their regular contributions to the World Bank in order to make up for the cancelled debt repayment.

Even as they closed in on an agreement to wipe out billions of dollars in debt for poor countries, finance ministers meeting here this weekend were far more divided about the long-term roles of the World Bank and the International Monetary Fund.

American officials proposed that the fund cut back on its loans for specific projects in low-income countries while playing a more aggressive role in pressuring countries - implicitly China, though it was not cited by name - that may be manipulating their exchange rates.

The fund, he said, should have a "limited" role in providing assistance to low-income countries. But it should "not shy away from tough judgments" on a nation's exchange-rate practices.

Treasury officials are hoping that the fund could put new public pressure on China to let its currency float more freely. China has pegged its currency, the yuan, at a fixed exchange rate to the dollar for more than a decade.

Many economists say the yuan is heavily undervalued, making Chinese exports cheaper than they would be if the yuan traded at market rates.

But Rodrigo de Rato, the fund's managing director, had already cautioned Friday that it would be "unrealistic" to expect the fund to achieve much by berating countries over their exchange rates.

Instead, Mr. De Rato has focused on prodding governments to shore up their underlying policies. On Saturday, he warned that the United States needed to reduce its large budget deficits and huge foreign indebtedness.

"As the net external liabilities of the U.S. continue to rise, so do the vulnerabilities of the nation's economy," Mr. De Rato said in a speech at the annual meetings here of the fund and the World Bank.