Democracies to Ease Debt for Poor Nations

COLOGNE, Germany â€”  The leaders of the world’s richest democracies agreed Friday on a massive program to lighten the burden of debt on the poorest nations, raising the prospect of tearing up IOUs worth $70 billion.

British Prime Minister Tony Blair called the measure “the single biggest step forward in debt relief and help for the poorest countries that we’ve seen in the international community for many years.�

In return for escaping more than half their debts, the poverty-stricken nations would be required to spend the saved money largely on social programs for many of their 430 million citizens. The money would pay for promoting health, education, child survival, AIDS prevention and sound government financial practices.

The seven leading industrialized nations, meeting here at their 25th annual summit, also announced a plan to establish standards intended to make it more difficult for struggling economies to hide their weaknesses. The move is an effort to avert the sorts of financial crises that swept through Asia and Mexico over the past five years and sent tremors throughout the global economy.

The two steps formed the centerpiece of the international economic measures adopted by President Clinton and the leaders of Britain, Canada, France, Germany, Italy and Japan. They are meeting here in a summit that will grow to the Group of 8 when Russian President Boris N. Yeltsin joins them Sunday. The leaders are also discussing global political issues, focusing largely on Kosovo and long-range efforts to relieve tensions in the Balkans.

The 33 nations that would be eligible to take part in the debt relief owe about $127 billion, most of it to the seven richest nations and such international financial institutions as the International Monetary Fund and the World Bank. Thus, the $70-billion package equals more than half their debt.

If other wealthy nations, in Scandinavia and elsewhere in Western Europe, join the program, as much as $90 billion in debt could be forgiven, U.S. officials said.

The United States holds $3.5 billion of the debt, according to Timothy Geitner, undersecretary of the Treasury. It would be written off, at an annual loss to the Treasury of several hundred million dollars, he said.

Overall, international financial institutions are owed $48 billion and individual countries are owed $79 billion. The IMF would sell roughly 10% of its gold reserves, a step requiring congressional approval, and then invest the income and use the return on the investments to pay for its share.

At the World Bank, officials said its own cost of debt forgiveness would rise to $5.1 billion, compared to a cost of $2.4 billion under previous policies.

Under a program adopted in 1996, 27 nations were put on a track to escape $22.5 billion in debt; the new program adds six nations to the list and increases the amount of debt eligible for reduction.

Specific conditions would be applied over three years, and in some cases much less, to guarantee adherence to sound economic practices; once the standards set by the IMF have been met, participants may apply for immediate debt relief.

For example, under the 1996 program, Mozambique, now nearing eligibility, is spending approximately 30% of its resources on debt payments, said Gene Sperling, the head of Clinton’s National Economic Council. The debt-relief program would cut the African nation’s payments in half, to 15% of its resources.

“That would free up $30 million of debt service per year,� he said. “In Mozambique, that would allow their health budget to be increased by 50%�--a significant amount in a country where, the White House said, children are three times more likely to die before the age of 5 than they are to reach secondary school.

The agreement, Clinton said in a written statement, is a “historic step to help the world’s poorest nations achieve sustained growth and independence while targeting new resources for poverty reduction, education and combating AIDS. It represents a sound, humane effort to promote widely shared prosperity in the new millennium.�

Debt forgiveness has gained popularity--winning endorsements from Pope John Paul II and anti-poverty groups around the world--and policymakers in the richest nations have struggled for months to agree on the precise boundaries of such a plan.

British officials pushed hard for sweeping debt relief, while Japan took a much tougher approach toward forgiving the debts. The United States and Germany occupied a middle ground. Most, however, considered existing programs to be just the latest in a series of insufficient efforts.

Debt-relief advocates criticized the restrictions placed on the use of the saved money.

“If we had companies or municipalities subject to bankruptcy proceedings like this in the United States, we wouldn’t stand for it,� said David Bryden, a spokesman for the U.S. campaign of Jubilee 2000, a British-based group spearheading a global debt-relief movement.

Jubilee 2000, built on a religious foundation, has called for dropping the entire debt of the poorest nations, to commemorate the new millennium. But U.S. officials argue that the savings of such an approach would be lost if strict controls did not direct the money into social welfare and impose fiscal discipline on the indebted nations.

For those countries engaged in repaying their debt, the relief they will receive represents in some cases up to 40% of their annual budgets, Sperling said. For those that have ignored the debts, the relief can help restore their credit ratings--and allow them to seek new loans if they meet financial accountability provisions.

At the start of the day, Clinton met with Japanese Prime Minister Keichi Obuchi, who told Clinton that Japan would contribute $200 million to a program intended to help Russia redirect its nuclear armaments industry, said Clinton’s national security advisor, Samuel R. “Sandy� Berger.

Clinton also made clear to Obuchi that although Japanese steel exports to the United States are falling, further steps will be needed to head off legislation intended to put quotas on U.S. imports of Japanese steel.

And, Sperling said, Clinton noted the turnaround in Japan’s economy--it grew during the first quarter of 1999 at an annual rate of 7.9%.

“I was thrilled by their economic performance,� Clinton said during a picture-taking session.

The 33 countries already taking part in the debt-relief program or now eligible to seek to join it are: Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Congo, the Republic of Congo, Ethiopia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Ivory Coast, Laos, Madagascar, Malawi, Mali, Mauritania, Mozambique, Myanmar, Nicaragua, Niger, Rwanda, Sao Tome, Senegal, Sierra Leone, Tanzania, Togo, Uganda and Zambia.

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Staff writer Jonathan Peterson in Washington contributed to this report.