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Debt Trouble Could Be Piling Up Overseas (especially in Asia)
NYT ^ | 09/07/03 | EDMUND L. ANDREWS

Posted on 09/07/2003 6:34:43 PM PDT by TigerLikesRooster

Debt Trouble Could Be Piling Up Overseas By EDMUND L. ANDREWS

WASHINGTON

FOR the world's poorer countries, this year has been remarkably free from financial meltdowns.

Argentina, having had one-fifth of its economy evaporate in 2001, is mending fences with international creditors and slowly putting itself back together. In Brazil, where investors seemed close to a panic last year, exports are surging and the currency remains stable. The Asian and Russian meltdowns of five years ago seem like distant memories.

But watch out. In a report that will be published this week, the International Monetary Fund warns that some Asian and Latin American governments have loaded up with much more debt than a first glance might suggest.

The total public debt of Asian governments has risen to nearly 70 percent of their gross domestic product, from less than 60 percent at the height of the Asian financial crisis in 1998. In Latin America, the debt ratio has climbed to 60 percent from about 40 percent.

By contrast, the debt ratio of industrialized countries is about 40 percent. What worries economists at the I.M.F. is that the world's poorer nations are on much shakier ground to begin with. Their tax collection systems are weaker and less reliable. Their exposure to outside shocks is larger.

Though the I.M.F.'s economists bent over backward to avoid inflammatory rhetoric, they nevertheless concluded that debt levels needed to come down drastically. For the typical emerging-market economy, a "sustainable" government debt would be about one-third its current level, the report said.

The obvious question, of course, is this: Why have debt levels increased in so many countries?

The new report shows that there has been an important new twist to the old borrowing patterns. Instead of turning first to foreign lenders, whether public institutions like the I.M.F. or the big international banks, many governments are raising money at home.

In Asia, for example, external borrowing has been virtually flat ever since the financial crises that swept from South Korea to Indonesia. But domestic government borrowing has ballooned.

In Latin America, external borrowing had been on a downward trend while domestic borrowing rose year after year.

The distinction between foreign and domestic borrowing is subtle. The "domestic" lenders can be foreign institutions, and they often are. The debt may even be denominated in dollars or euros.

The real difference is that domestic borrowing falls under the laws of the borrowing country rather than the creditor country.

But I.M.F. officials contend that the rise in domestic debt is important for several reasons. For starters, it is often more difficult for foreign investors and lenders to evaluate a government's domestic debt levels. As in the United States, governments can often push public debt off the books by setting up the loans through quasi-public corporations or private corporations supported by government loan guarantees.

Domestic debt can also be more difficult to collect. The security of a loan will depend in part on the laws of the country and the effectiveness of local courts at enforcing contract terms and adjudicating disputes.

The new report, which will be released on Thursday as part of the I.M.F.'s annual World Economic Outlook, points out some notable exceptions in the trend toward heavier indebtedness.

Chile, which is Latin America's most open economy as well as one of its most prosperous, has chopped its public debt from 54 percent of gross domestic product in 1990 to just 21 percent in 2002.

The post-Communist countries of central Europe, several of which got into trouble with overborrowing in the early 1990's, have reduced their debt levels as well.

HE report also takes note of what may be hidden time bombs. It says that one major cause of the rise in public debt has been a country's "contingent liabilities." These liabilities often come in the form of special loan conditions, like indexing loan repayments to changes in the borrowing country's exchange rate. If the country's currency plunges, as happened in Brazil last year, debt payments can soar.

Of course, poor countries are not the only ones that need to watch their debt. The United States government is by far the world's biggest government borrower, expected to run up nearly $1 trillion in new debt over this year and next.

If poorer countries need any lecturing about reining in their debts, American officials would be well advised to stay in the background.


TOPICS: Business/Economy; Foreign Affairs; Front Page News; News/Current Events
KEYWORDS: asia; contingent; domesticdebt; gdp; liabilities

1 posted on 09/07/2003 6:34:44 PM PDT by TigerLikesRooster
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To: arete; razorback-bert; Tauzero; maui_hawaii; FreepForever
Ping!
2 posted on 09/07/2003 6:35:48 PM PDT by TigerLikesRooster
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To: TigerLikesRooster
In addition to the things mentioned here, wouldn't a slump in the economy mean a lower GDP, and wouldn't a lower GDP mean the GDP to debt ratio would increase? In other words, wouldn't a slowed economy contribute to this or perhaps even cause it?
3 posted on 09/07/2003 8:51:25 PM PDT by Mind-numbed Robot (Not all things that need to be done need to be done by the government.)
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To: TigerLikesRooster
Just heard on the radio 2 hours ago saying: "The non-performance load rate of China's banking system has dropped to 45% (from 50%). Therefore, the rating institutions are not going to adjust China's credit rating this quarter."

Yeah, what a relief? 45% is good news. It won't start a run of the banks in China.
4 posted on 09/07/2003 9:20:06 PM PDT by FreepForever (ChiCom is the hub of all evil)
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To: FreepForever
Oops! non-performance-load = non-performance-loan (bad loans).
5 posted on 09/07/2003 9:21:48 PM PDT by FreepForever (ChiCom is the hub of all evil)
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