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G-7 Suspends Debt Of Stricken Nations, Effect of Gesture May Be Slight

7 January 2005

The Group of Seven major industrial nations agreed yesterday to allow tsunami-stricken countries to defer debt payments, a largely symbolic gesture but one that could boost broader debt-relief initiatives for poor nations later this year.

"We would not expect debt payments from affected countries that request [payment deferrals]," the G-7 said in a written statement, adding that the moratorium will last at least until a "full needs assessment" can be made of the reconstruction requirements for the Indian Ocean countries hit by the Dec. 26 tsunami. The G-7 - which consists of the United States, Britain, Japan, France, Germany, Italy and Canada - said it will urge other creditor nations to grant similar concessions to the stricken countries.

The offer of the debt moratorium was the latest effort by governments in rich countries to show concern about the devastation in the region. It comes atop pledges of about $4 billion in aid for Indonesia, Sri Lanka, Thailand and other affected countries, part of an outpouring of international assistance for a humanitarian crisis.

The moratorium on as much as $3 billion a year in annual debt payments would last until the World Bank and International Monetary Fund have completed the needs assessments, probably later this month. At that time "we also stand ready to consider all appropriate measures for further assistance," the G-7 statement said.

In purely financial terms, however, its impact is likely to be limited. Because the tsunami's economic cost appears to be relatively modest - key ports and industrial centers were largely spared - most of the governments in the region are likely to pass up the opportunity to defer or cancel their debt obligations, according to international aid officials and experts. Even in Indonesia, which suffered the most loss of life, finance officials have indicated that they are concerned about undermining their country's ability to borrow in private markets. Sri Lanka officials have been more receptive to the idea.

The initiative may be expanded, however, and in the process influence debate about whether to give more extensive debt relief to the countries of sub-Saharan Africa and other poor regions of the world. The British government, especially Chancellor of the Exchequer Gordon Brown, hopes to advance an ambitious debt-relief plan when it hosts the Group of Eight summit in Perthshire, Scotland, in July.

In recent days Brown proposed writing off Sri Lanka's debt, which totals about $7.5 billion, on the grounds that a country struggling to rebuild ravaged towns and villages should not be burdened with paying international creditors. Such proposals have drawn criticism from other leaders, notably Australian Prime Minister John Howard, who has argued that debt relief for the region's countries won't necessarily get help to tsunami victims and is unfair to other indebted nations.

But whipping up support for forgiving the debts of the Indian Ocean countries may help Brown mobilize support for his broader plan, because once one country gets debt relief it is harder to refuse it to others. In a speech this week championing his plan, Brown repeatedly linked the plight of the tsunami victims and destitute people elsewhere, saying, "The urgency and scale of the agenda I am going to propose . . . is now even more pressing given the tragic events of recent days."

Many aid experts worry that the tsunami may have the opposite effect, by diverting scarce funds from other aid needs.

The Bush administration, which is weighing a different debt-relief plan from Brown's, stressed that yesterday's debt moratorium offer doesn't have implications for other countries.

"This is in response to this very unique disaster," said Tony Fratto, a Treasury Department spokesman. "No one is thinking of this as setting a precedent ... Obviously we want to help these countries deal with this in the most efficient and speedy ways that we can."

Paul Blustein

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