in humanitarian cases, the PC forgives and forgets interest payments, but the principal stays (presumably any principal coming due is rescheduled). in balance sheeet sustainability cases, the PC reduces principal and also, presumably, provides a new cash flow profile? (see: Iraq) That range of options, incidentally, leaves out the PC’s bread and butter, which is just to reschedule payments coming due.

There may be one problem with that proposal from a pragmatic “how to deliver the aid” point of view. I think much of the appeal of using the PC is that “deferring scheduled payments” usually does not have a budget cost to PC creditors, unlike outright grant aid or outright debt forgiveness (including forgiving interest). If you have $1 billion for aid, and want to provide $2 billion of short-term relief, you could provide $1 billion in aid and defer $1 billion in payments (no budget cost). But if you wanted to forgive the $1 billion in payments, i think you get a budget charge that eats up a decent fraction of the $1 billion. (There are experts on this who “score” or “cost out, using US government rules” debt options for the US government, for example — I am no doubt leaving things out). I do think this causes problems: the PC often selects options that are driven more by “what costs us the least” rather than “what does this do the country’s balance sheet,” but it is also a fact of life.

Thanks for your response. Two quick points.

First, I don’t agree with those who argue that Paris Club debt relief somehow stigmatises the borrower or makes private creditors want to rush for the exits. On the contrary: if a country’s official creditors are providing debt-service relief – whether or not in PV terms – then the rational thing for private creditors is to increase their exposure, since the debt-service reduction enhances the country’s creditworthiness. The most convincing examples of this are Egypt and Poland, whose access to international capital markets was vastly expanded following substantial official debt relief in the early 1990s.

Second, I imagine the best way to give humanitarian debt relief in these cases would be to forgive (and forget) interest payments for some time. This would provide genuine PV savings and help to forge a distinction between “humanitarian” debt relief and “sustainable balance sheet” debt relief. (This assumes that the crisis caused by the Tsunami has not tipped Indonesia’s balance sheet into unsustainable territory).

Regards
David

That said, I can see some difficulties applying the “humanitarian” v. “balance sheet criteria” — both b/c a major natural disaster can create balance sheet problems, and b/c balance sheet problems can sometimes be solved by squeezing “humanitarian” spending (education, health, etc). But a carve out may be a better option than applying comparability with an unusual degree of flexibility — particularly if the “tsumami exception” can be defined and walled off and kept a one-off.

Your fungibility point is also well taken, though I would note that there is one difference between PC debt relief and cash — namely, that the PC debt deferral is in effect a loan (a new loan that is provided to pay the old loan coming due this year) while cash is cash. Both debt rescheduling and grant aid free up resources that could be used for broader purposes in the near term, but one has to be paid back (eventually).

That said, I certainly don’t think the intent of providing debt relief is to make it easier for the government of indonesia’s private creditors to cut back on their Indonesia exposure this year — even if that is sustainable in the sense that it can be financed out of the GOI’s reserves. The GOI’s public sector creditors were going to extraordinary lengths to make sure that this year, the net flow of funds to indonesia is very, very positive. The GOI presumably has a “disaster linked” need for BOP support this year — higher imports to support reconstruction/ feed survivors — etc. That financing need would go up if private creditors were pulling funds out … So, I certainly would like to see some analysis of the potential scale of private roll off on GOI and GOI guaranteed debt before automatically granting a “disaster relief is completely different” exception. The fungibility argument works both ways — the BOP impact of paying down principal owed to the GOI’s private creditors is the same as the BOP impact of paying down the GOI’s Paris Club creditors.

That said, PC comparability should not create a problem if there is no problem to begin with. If If private creditors are not likely to pull funds out (you presumably would know) over the next year, no worries. If all loans coming due are likely to be rolled over and the GOI can provide assurances to that effect, that seems more than sufficient to me. Aceh is not the heart of Indonesia’s economy.

There is another potenital issue with Indonesia. Loads of domestic GOI debt from the 97-98 crisis, lots of which has to be rolled over in the near term — debt servicing costs may be going up (most of this is in hands of the domestic banks). Lots of PC debt. Lots of overall debt. A small but growing number of international bonds. The bonds seem to trade a bit too tight for my taste, given the risks intrinsic in lending to a still very poor country with that much overall debt.

Don’t forget the fungibility of money. Debt relief for Indonesia is simply a convenient way of transfering resources to the government in Jakarta for the humanitarian objective of easing the crisis. There are plenty of ways in which a Paris Club government could transfer these resources – writing a cheque would be the obvious alternative.

Yet if a Paris Club government did write a cheque to Jakarta to help finance the aid effort you wouldn’t dream of insisting that Indonesia’s private creditors do the same. So why is humanitarian debt relief any different? (Equally, if a Paris Club government writes a cheque to Indonesia there’s nothing really stopping Indonesia from using the cash to repay its private creditors, but maybe that’s another issue).

This whole debate about Paris Club comparability for Tsunami victims misses the point that this particular round of debt relief is motivated by factors which are entirely different from those that usually drive debt relief; Tsunami-related debt relief is a humanitarian gesture from one government to another, not an attempt to address issues of balance-sheet-sustainability (where comparability is entirely appropriate). In this case the issue of private sector comparability shouldn’t even arise.

Cheers

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Alert to Gains by China, India Is Making Energy Deals
By KEITH BRADSHER

NEW DELHI – India’s prime minister warned on Sunday that China had moved ahead in securing worldwide oil and natural gas supplies, the bluntest expression yet of energy worries among Indian leaders. In the last two weeks, they have pursued a series of energy deals that have surprised global markets.

“I find China ahead of us in planning for the future in the field of energy security,” Prime Minister Manmohan Singh said in a speech here at the convention of India’s oil and gas industry. “We can no longer be complacent and must learn to think strategically, to think ahead, and to act swiftly and decisively.”

Like China, India has a fast-growing economy but stagnant domestic oil production, which has led to a rapid rise in energy imports, at a cost that has soared with high oil prices.

Indeed, India has become even more dependent than China on volatile producing countries in the Middle East, buying nearly three-quarters of its oil from them now, compared with less than half a decade ago.