International policy for reducing developing country debt, 1990-1991

International policy on the foreign debt of developing countries has evolved dramatically since the early 1980s. At that time, policy was shaped by the fear of a major disruption of the international banking system and the hope that what was thought to be a liquidity crisis in several heavily indebted countries would be short-lived. It led to assertions that the value of the debt outstanding was not impaired and that normal debt-servicing would soon resume if current obligations were rescheduled, if new loans were extended by private creditors and official lenders, and if appropriate adjustment measures were taken in the affected economies. The underlying assumption was that the economic recession in the industrialized economies would quickly end, that they would grow by 3 per cent a year or more and that this would raise international commodity prices and the volume of world trade enough to permit the heavily indebted countries to grow out of their debt crises. The strategy was applied to all countries having debt-servicing difficulties, from low-income countries mainly indebted to Governments to middle-income countries mainly indebted to foreign commercial banks. It did not work.

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