¹ From the late 1960s until 1983, the less developed countries consistently grew faster than the industrial countries. The biggest contrast was in 1975, when O.E.C.D. economies actually contracted slightly while those of less developed countries grew by approximately 4%. Between 1973 and 1979, Gross Domestic Product (GDP) in LDCs rose by 5.2% annually, and even faster (5.6%) among so-called middle-income oil importers. Advanced countries, by contrast, adjusted much more rapidly to the new factor prices and grew by only 2.8% annually. World Bank, World Development Report 1984 (New York: Oxford University Press, for the World Bank, 1984), 11–12CrossRefGoogle Scholar, Table 2.1, Figure 2.1.

² Cohen, Benjamin J., “Balance of Payments Financing: Evolution of a Regime,” in Krasner, Stephen D., ed., International Regimes (Ithaca, NY: Cornell University Press, 1983), 315Google Scholar–36; Cohen, in collaboration with Fabio Basagni, Banks and the Balance of Payments (Montclair, NJ: Allanheld, Osmun, 1981Google Scholar).

³ Frieden, Jeff, “Third World Indebted Industrialization: International Finance and State Capitalism in Mexico, Brazil, Algeria, and South Korea,” International Organization 35 (Summer 1981), 407CrossRefGoogle Scholar–31.

⁴ In 1977, the developing countries paid nearly $40 billion in interest and principal. By 1984, that figure had quadrupled. Interest payments by the 25 largest borrowers rose from 10% of export earnings to 25%. Another 11% of export earnings went to repay principal, so that by 1984 debt-service represented well over one-third of total export earnings. The rise in this debt-service ratio was most marked between 1980 and 1982. IMF Survey, January 7, 1985, p. 3 (table); International Monetary Fund, World Economic Outlook (September 1984), revised projections by I.M.F. staff, Tables 35–36.

⁵ On these critical attitudes toward direct foreign investment, see Biersteker, Thomas J., Distortion or Development? Contending Perspectives on the Multinational Corporation (Cambridge: MIT Press, 1981Google Scholar), chap. 1.

⁶ Negotiations between Argentina and its major creditors demonstrated that the banks require fully approved stabilization programs, not simply statements about “significant agreement with the I.M.F.” or substantial progress in negotiations. Wall Street Journal, August 16, 1984, p. 27, and August 17, 1984, p. 16.

⁷ Obviously, this informal requirement can apply only to member countries of the I.M.F. Since most states of Eastern Europe are not members, the creditors' oversight of economic programs there is inevitably weaker and less institutionalized. Commercial lenders have understandably sought to widen I.M.F. membership to include these states.

⁸ See, for example, Williamson, John, ed., IMF Conditionality (Washington, DC: Institute for International Economics, 1983Google Scholar); Cline, Willaim and Weintraub, Sidney, eds., Economic Stabilization in Developing Countries (Washington, DC: Brookings Institution, 1981Google Scholar); Killick, Tony, ed., The Questfor Economic Stabilization: The IMF and the Third World (New York: New St. Martin's, 1984Google Scholar); and Killick, , ed., The IMF and Stabilization: Developing Country Experiences (New York: St. Martin's, 1984Google Scholar).

⁹ Numerous reform plans have been suggested, but none has garnered much political support. Among the best-known plans are those by Bailey, Norman A., Luft, R. David, and Robinson, Roger W., “Exchange Participation Notes: An Approach to the International Financial Crisis,” in Phalle, Thibaut de Saint, ed., The International Financial Crisis: An Opportunity for Constructive Action (Washington, DC: Georgetown University, Center for Strategic and International Studies, 1983), 27–36Google Scholar; Kenen, Peter B., “A Bailout Plan for the Banks,” New York Times (national ed.), March 6, 1983Google Scholar, sec. 3, p. 3; and Rohatyn, Felix G., “A Plan for Stretching Out Global Debt,” Business Week, February 28, 1983, pp. 15–18Google Scholar. These plans and many others are examined critically in Dale, Richard S. and Mattione, Richard P., Managing Global Debt (Washington, DC: Brookings Institution, 1983Google Scholar), esp. 46–47, and in Cline, William R., International Debt and the Stability of the World Economy (Washington, DC: Institute for International Economic Policy, Analyses in International Economics, No. 4, 1983Google Scholar).

¹⁰ Lipson, Charles, Standing Guard: Protecting Foreign Capital in the Nineteenth and Twen tieth Centuries (Berkeley and Los Angeles: University of California Press, 1985Google Scholar).

¹¹ My analysis of debt rescheduling is based on extensive confidential interviews with bankers and public officials from the United States, Western Europe, and Latin America.

¹² These so-called smaller banks vary widely, ranging from regional American banks with extensive international interests to local institutions that only rarely have contact with the international capital market. A descriptively richer, less stylized account would capture this variety. My point here is to differentiate the large banks, which become intimately involved in debt crises, from the hundreds of banks with lesser stakes and little choice in final arrangements other than to ratify or reject them.

¹³ Debtors have sometimes urged the establishment of a permanent forum to deal with debt problems, and have raised the issue as part of the North-South dialogue. Creditors have always rejected this demand, fearing that debtors might control the institution, and that its presence would only encourage more pleas for rescheduling. Mendelsohn, M. S., Commercial Banks and the Restructuring of Cross-Border Debt (New York: Group of Thirty, 1983), 14Google Scholar.

¹⁴ Bahram Nowzad, Richard C. Williams, and other I. M. F. staff, External Indebtedness Developing Countries, Occasional Paper No. 3 (Washington, DC: International Monetary Fund, May 1981), 30–40; Richard Huff, “The Rescheduling of Country Debt: Is a More Formalized Process Necessary?” in Group of Thirty, Risks in International Bank Lending (New York: Group of Thirty, 1982Google Scholar), Appendix B.

¹⁵ That, at least, is the typical sequence. There are variations, however. In 1982, Mexico approached the U.S. Treasury, the Federal Reserve, and the I.M.F. before going to private bankers. Its reserves had declined so precipitously that a large credit was necessary immediately—and only the U.S. government could arrange a multi-billion dollar loan so quickly. More commonly, debtors work simultaneously with official and private creditors to arrange two separate rescheduling packages.

¹⁶ A debtor's best information about its total obligations probably comes from its regulation of foreign exchange. Local borrowers have to register their foreign debts with the exchange-control authority in order to repay them with hard currencies.

Not all countries have such controls, however, and those that do may not adequately cover short-term trade obligations. Terry Karl's analysis of oil-rich borrowers concluded that their “controls over foreign debt were generally weak; accountability for short-term loans was virtually non-existent.” She argues that in many cases foreign borrowing was simply a “mechanism to disguise the mismanagement, misallocation, or self-serving utilization of public monies.” Karl, “The Paradox of the Rich Debtor: The Foreign Borrowing of Oil-Exporting Countries,” unpub., American Political Science Association Convention (Chicago, 1983), 32.

¹⁷ The debtor may, on its own, hire an investment bank to collect such data and to advise it in negotiations with commercial banks. The best-known of these advisors is actually a troika of investment and merchant banks acting jointly: Warburg's, Lazard Freres, and Lehman Brothers Kuhn Loeb.

¹⁸ Kraft, Joseph, The Mexican Rescue (New York: Group of Thirty, 1984), 44Google Scholar.

¹⁹ The bond question also suggests just how difficult it is to establish a common baseline to calculate new, involuntary commitments. In the major Mexican rescheduling, creditors finally agreed to increase their outstanding commitments by 7%. But according to Kraft, the entire banking systems of Japan, France, and Switzerland objected to the proposed baseline. “The Japanese claimed they had not made loans to Mexico but [had] acquired promissory notes from US banks. The Swiss said the Mexican numbers included many sales of bonds which were supposed to be excluded from the rescue operation.” Ibid., 52.

²⁰ Huff (fn. 14), 51–52.

²¹ Some Europeans have asked, in exasperation, why the U.S. regulators do not change the 90-day rule on overdue foreign loans. In fact, the Comptroller of the Currency has been flexible on loan classification where the law allows. The Federal Reserve Board has supported this posture. They do not want to impede reschedulings. But they would face an uproar if overdue loans from Argentina or Mexico were treated differently from overdue loans to local factories or farms. There is, quite understandably, an equity issue here. Moreover, no regulator would want to introduce different accounting principles to handle foreign and domestic assets, performing or nonperforming.

²² This role of large creditors in managing debt problems is not new. Armando Sapori, in his analysis of medieval Italian merchant-bankers, concludes that “their solidarity is shown by their behavior when their debtors went bankrupt. The best-established business house in the city assumed the handling of the bankruptcy for all the other companies without charge, whether they had business ties with them or not. It managed the case in court, dealt with the trustees, signed the agreement, and then divided the expenses pro rata among the creditors, giving each the net sum obtained.” Armando Sapori, The Italian Merchant in the Middle Ages, trans. Patricia Ann Kennen (New York: W. W. Norton, 1970), 15.

²³ While all holdouts want to reduce their exposure without cost, some are especially insistent. Typically, these are banks with already-weak balance sheets and few international ties. To book additional low-quality, illiquid assets is relatively expensive and risky for them and contributes little to their main business. That is why the toughest battles over new Mexican credits have been with banks in the southwestern United States. Already saddled with bad energy debts, their loans to Mexico were usually undertaken to support local trade and were never intended to be long-term assets.

²⁴ Huff (fn. 14), 51.

²⁵ Ibid.

²⁶ I am indebted to Douglas Baird, James Fooreman, and Cynthia Lichtenstein for their discussions of the legal issues. See “Symposium on Default by Foreign Government Debtors.” in The University of Illinois Law Review (No. 1, 1982), particularly articles by Reade H. Ryan, Jr., “Defaults and Remedies Under International Bank Loan Agreements with Foreign Sovereign Borrowers—A New York Lawyer's Perspective,” pp. 89–132; Bruce W. Nichols, “The Impact of the Foreign Sovereign Immunities Act on the Enforcement of Lenders' Remedies,” pp. 251–64; and Frank D. Mayer, Jr., and Michele Odorrizi, “Foreign Government Deposits: Attachment and Set-Off,” pp. 289–304.

²⁷ Sampson, Anthony, The Money Lenders (Harmondsworth, U.K.: Penguin, 1983), 312Google Scholar.

²⁸ On the disorderly process of attachments, where the first creditor to the courthouse ends up with the assets, see Steele, Robert D., ed., The Iranian Crisis and International Law (Charlottesville, VA: John Bassett Moore Society of International Law, 1981Google Scholar), Panel II: “Commercial Aspects of the Iran Crisis: The Asset Freeze.”

²⁹ Leslie, Peter, “Techniques of Rescheduling: The Latest Lessons,” Banker (April 1983), 26Google Scholar.

³⁰ Kraft (fn. 18), 26–27. The role of large regional banks in reschedulings has gradually increased. They typically serve as conduits of communication between the largest international banks and smaller regional banks. This role, which does not entail sanctioning the smaller banks, gives the large regional banks an opportunity to voice their own concerns.

³¹ On rare occasions, a banker will object to a deal on principle. Such a stand is not easily overturned by the usual economic pressures on outliers. One domestic example is a small bank that objected to the U.S. government's effort to bail out Chrysler. The rescue package required 100% creditor participation, and this bank held out for days against the pleadings of the highest U.S. officials.

³² Nevertheless, there are occasional rumors of such buy-outs, and they cannot be ruled out entirely. What is clear is that any such arrangements must have been minor and highly confidential. They have not led to any significant erosion of the norm of uniform treatment for creditors.

³³ Kraft (fn. 18), 53.

³⁴ Spindler, Andrew, The Politics of International Credit: Private Finance and Foreign Policy in Germany and Japan (Washington, DC: Brookings Institution, 1984Google Scholar).

³⁵ Lipson, Charles, “International Debt and International Institutions,” in Kahler, Miles, ed., The Politics of International Debt (Cornell University Press, forthcoming 1986Google Scholar).

³⁶ New York Times (national ed.), February 4, 1985, pp. 21, 25; Wall Street Journal, Ap 1, 1985, p. 26; Euromoney (March 1985), 164.

³⁷ Other small changes could also be cited. Consultation between the creditor committee and the large regional banks has been improved and formalized. Moreover, all banks have used the economic recovery to write-down some bad debts and provide more reserves for future losses. The stronger balance sheets undoubtedly add to their leverage in negotiating with sovereign debtors.