Check out this great article featured in the CQ Weekly last week.
By Joseph J. Schatz, CQ Staff
CQ WEEKLY – IN FOCUS
May 18, 2009 – Page 1139
After more than 20 years of dictatorship and civil war, the West African republic of Liberia held democratic elections in 2005. That was the good news. The bad news was that Liberia owed nearly $5 billion to foreign countries, international organizations and private creditors — an amount more than eight times greater than its gross domestic product.
Four years later, the country is still wrestling with high unemployment and a life expectancy of just 45 years. But its debt is shrinking rapidly.
In early April, with help from the Treasury Department, the World Bank and European donors, Liberia concluded a deal with a group of hedge funds and other private creditors to buy back $1.2 billion of its commercial debt at just 3 cents on the dollar. That move reduced the country’s overall debt burden from about $3 billion in 2008 to just $1.7 billion.
The deal “wipes the slate clean and allows us to look at potential new debt in a more responsible manner,” says M. Nathaniel Barnes, Liberia’s ambassador to the United States. Barnes says that Liberia’s leaders plan to use the money saved from servicing the debt to fund hospitals, clinics, road construction and schools, and ramp up security before its 2011 elections.
The country’s creditors went along with the agreement, since most of them had bought its debt on the secondary market at large discounts — meaning that even 3 cents on the dollar may have represented a profit, according to Lee Buchheit, a partner at Cleary Gottlieb Steen & Hamilton LLP, a Manhattan law firm that represented the Liberian government during the negotiations.
The forgiveness of foreign debt in the developing world has long been a celebrity cause, with figures such as U2 frontman Bono leading the charge. But more recently it has evolved into a mainstream economic and foreign assistance strategy by the world’s wealthy countries, including the United States. And with credit difficulties assailing economies across the globe, the plight of debt-ridden developing nations has taken on renewed urgency.
No one has yet authoritatively demonstrated whether debt relief programs directly improve governance and poverty rates in the developing world. But they do produce a strong and measurable impact on national budget ledgers. The United States — which administers debt programs through the Treasury Department’s Office of International Affairs and via the World Bank and other institutions — has forgiven more than $24 billion in debts since 1991, much of it recently in 20 countries in sub-Saharan Africa. Following these efforts, along with those of other wealthy countries, two-thirds of sub-Saharan African nations now have “low or moderate” debt burdens, according to the International Monetary Fund.
The issue has taken on special urgency in the global financial crisis, with contracting credit markets increasing the likelihood that countries recovering from earlier debt crises could slide back into unmanageable amounts of debt. A recent IMF report warns that for countries across the developing world, “higher borrowing to help offset the impact of the crisis could reverse these gains and pose risks, in particular in countries that are at higher risk of debt distress.”
“The financial crisis is putting a lot of pressure on poor countries everywhere,” notes Neil Watkins, executive director of Jubilee USA Network, a coalition of religious, charitable and development-oriented organizations that back debt forgiveness efforts. “It’s unfortunate because we’ve actually been making some progress. Ten or 15 years ago, our organization . . . would go lobby the U.S. government or the World Bank or the IMF and they would literally laugh.”