By Ishrat Husain, Ishac Diwan
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Additional info for Dealing with the debt crisis, Part 35
Humphreys and Underwood argue that conventional rescheduling makes less sense for Sub-Saharan countries than some combination of increased concessional aid and concessional rescheduling. The paper by Cuddington sets the historical stage for the debt crisis by reconsidering the roles of debtors, creditors, and the external environment of the 1970s, when lending to developing countries changed significantly. By forming syndicates, commercial banks became the dominant source of funds to middle-income countries, intermediating the large surpluses of oil-exporting countries.
In both cases, exceptional circumstances facilitated the buybacksthe Bolivian operation had to be financed by aid agencies, and Chile had excess reserves because of unexpected increases in the price of copper (see Sachs, and Bouchet and Hay). Few countries in debt difficulties have much ready cash (without external support for such transactions, as envisioned by the Brady initiative). Exchanges of claims. The exchange of debt for another debt instrument with less principal or interest requires that the new instrument be a more secure asset and that the probability of the borrowers' fully servicing this asset is stronger than that of servicing the old debt.
Only a few years earlier, nonpayment of these debts had threatened the survival of the global financial system. Large defaults today could still bring down some of the banks, but most of them have steadily strengthened their capital base and their provisions for doubtful assets. By contrast, low-income Africa's total external debt, about $70 billion, is less than Mexico's alone, and the exposure of international banks there is less than $10 billion, with most of the rest being in loans from (or guaranteed by) official creditors.