Creditors to talk debt moratorium

Creditors to talk debt moratorium

Amelie Herenstein, Agence France-Presse/Paris

Government creditors in the Paris Club are this week to consider
a debt moratorium for Sri Lanka and Indonesia, two of the
countries worst affected by last month's tidal wave, although
experts have questioned the usefulness to Jakarta of such a move.

While Asian and world leaders convening in Jakarta last
Thursday backed a freeze on debt payments from tsunami-hit
nations, only two of the 11 countries -- Sri Lanka and Indonesia
-- have asked to have their financial situation reviewed by the
Paris Club at a meeting here beginning Wednesday, according to
Club sources.

Another source close to the Paris Club has said the meeting
would debate a debt repayment freeze but not a cancellation.

A cancellation or restructuring, of which Britain is the main
proponent, could come later "in a second phase," the source said.

Suspending debt payments from countries affected by the Dec.
26 disaster won the backing Friday of finance ministers from the
Group of Seven industrialized countries.

The British government, which holds the rotating G7
presidency, said the idea would be debated by the Paris Club this
week.

With an external debt of US$132 billion, of which $70 billion
is owed to public creditors or has been guaranteed by public
bodies according to the World Bank, Indonesia has said it hopes
debt relief will be proffered without conditions.

Brian Hammond, head of the statistics and monitoring division
at the Organization for Economic Cooperation and Development,
said Indonesia presents "a more difficult" case than Sri Lanka
since its financial reputation on capital markets could take a
greater hit.

Some experts have warned that debt relief could prove to be
counterproductive, causing a lowering in a country's credit
rating and making it vulnerable to higher interest rates on
future loans.

Lower ratings in addition threaten to leave foreign investors
wary.

Indonesia on three occasions has had its rating reduced by
Standard and Poor's following a debt arrangement with the Paris
Club.

"Normally the Paris Club asks for equivalent action by the
private sector and that's precisely why Thailand and India and
Malaysia wouldn't want to go anywhere near (debt relief),"
Hammond said.

In addition, a Paris Club agreement is systematically tied to
a reform program drafted by the International Monetary Fund,
which many beneficiary governments and populations have found to
be harsh.

Hammond said that under such circumstances Sri Lanka is the
only country that could truly benefit from a rescheduling of its
debt, given that the private sector accounts for a relatively
small part of the country's external obligations.

"But for Indonesia, given the amount of the country affected,
the amount of the economy affected ... and the importance of
private and short-term debt, it may well be better for them to
have reconstruction," he added.

Jerome Sgard, senior economist at the CEPI international
economic research institute, is of the same opinion.

"Since we don't have the sort of a shock that could
destabilize their (the affected countries') market access or
impose a financial crisis in the strict sense of the term, there
is no need for the sort of urgent response aimed at managing such
a crisis," he said.

The Paris Club comprises Austria, Australia, Belgium, Britain,
Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan,
the Netherlands, Norway, Russia, Spain, Sweden, Switzerland and
the United States.