Observations on the Less Developed Nation Debt Crisis

GAO discussed U.S. banking system exposure to less developed countries' (LDC) debts. GAO noted that: (1) since 1982, when U.S. bank exposure to LDC loans totalled more than 200 percent of their capital, banks have curtailed new loans to LDC and increased their regulatory capital; (2) although banks increased reserves against potential losses on LDC loans through voluntary actions and regulatory requirements, they did not have adequate reserves to reflect the diminished value of LDC loans; (3) because of their insufficient growth in exports, which LDC believed could service their debts, many nations had to reschedule their debts or undertake painful adjustment or austerity programs; (4) previous attempts to solve the LDC debt problem involved granting new loans if LDC followed austerity policies or market-oriented reform; and (5) recent proposals to solve LDC debt involved economic reform, partial debt forgiveness, and creditor concessions. GAO believes that proposals for solving the LDC debt crisis should consider such criteria as: (1) cost-burden sharing among LDC, U.S. banks, the U.S. government, foreign banks and governments, and multilateral financial institutions; (2) incentives for debtor nations that undertake economic reform; (3) a case-by-case assessment of the appropriate amount of debt relief; and (4) identification and accounting of all direct and indirect costs associated with resolving the debt crisis.