Struggling Third World countries are prisoners of the immense debt they have run up in the form of money borrowed from U.S. banks and others. The poor nations are paying all they have to the rich ones.
Just the interest payments keep many poorer nations from having any cash to invest in their own economies. As a result, they stay poor, often borrowing more to help pay the interest on old loans. But that can continue only so long."It's like a patient in a hospital giving a blood transfusion to the doctor," as one economist describes it.
The total debt run up by developing nations amounts to $410 billion, much of it in Latin America. Commercial U.S. banks hold about a third of all this outstanding debt. A number of leaders in these countries have called on the United States to ease their burden by accepting a temporary moratorium on payments, a lowering of interest rates, or even a forgiveness of some loans.
All of these proposals have been opposed in the past, partly because U.S. banks have not been in any condition to write off billions in loans.
But President Bush reversed that stand a few days ago by endorsing a proposal from Treasury Secretary Nicholas Brady, who called for banks to forgive part of the outstanding debt. The plan also calls for lower interest rates and swapping part of the debt for bonds of lower face value.
The relief plan would cut the debt by $70 billion over three years. In addition, lower interest rates would save another $20 billion in the same time span.
None of this will be easy. Participation from the World Bank and the International Monetary Fund, as well as large-scale financing by Japan in the form of aid to developing nations, will be necessary.
Without concerted action by the industrial nations, there will be more of the unrest that rocked Venezuela this month. Riots were aggravated by austerity programs forced by that country's debt burden. Similar problems have occurred in other Latin countries. Some debt-ridden countries, faced with near bankruptcy, have simply threatened not to pay at all.
There are other consequences, including the uprooting of lives. Tens of thousands of illegal Latin aliens are pouring across the U.S. border because their own countries are in economic and political shambles.
At bottom, it is really a matter of national security. A peaceful, prosperous world is a safer world for all.
American banks must not be forced to write off debt, but those that can afford it would be wise to do so.