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The decision of Commonwealth Heads of Government at their New Delhi Meeting in November 1983 to establish an expert group on the debt problem was a perceptive one. There were signs of economic recovery, interest rates were coming down and, although the debt burdens of developing countries remained severe, conventional opinion was still that the problem was manageable.
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Commonwealth Heads of Government, when they met in New Delhi in November 1983, surveyed the world economic situation and expressed concern over the serious crisis confronting developing countries because of the debt problem. They therefore asked the Secretariat, with the aid of a group of experts, to examine the developing country debt problem in all its aspects and to report to the Toronto meeting of Commonwealth Finance Ministers.
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Until 1974, governments and public institutions were the main providers of foreign capital to the developing countries. It was generally accepted that finance was required on terms which explicitly recognised the special economic and political problems of the developing countries and that many of them would be unable to meet interest obligations, or repay principal, within a commercial time horizon. The increase in oil price in 1973-74, while obviously diminishing the creditworthiness of the oil-importing developing countries, produced an urgent need for increased finance.
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The immediate causes of the present debt crisis lie in the onset of the recession from 1980 onwards in the industrial countries and the associated rise in interest rates. The seeds of the problem were already present, however, in the events following the first oil price rise of 1973-4, the explosion in the current account deficits of the non-oil developing countries and the financing of these deficits by private banks. The main burden of the counterpart deficits to the surpluses of the oil-exporting countries was shifted quickly from the industrial countries which were the major oil importers, to the non-oil developing countries.
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In this chapter we review and evaluate the way in which the debt crisis has been managed so far as it affects the banks. There is a description and evaluation of the process of debt renegotiation as it has evolved in relation to the major debtors, and a discussion of various proposals for changing the procedures and terms of renegotiation. The chapter is concerned with the process by which the crisis has been handled in general, rather than with particular cases, but Appendix 2.1 gives a summary of the agreements negotiated since January 1983.
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According to the IMF, over 40 low-income developing countries have a combined debt of $88 billion, just over one-eighth of all developing country debt. Eighty per cent of it is official, owed to the governments of industrial countries and multilateral institutions, and arising from past official development assistance (ODA) and guaranteed export credits. As can be seen from Table 3.1, there is a strong correlation between the share of official debt, and per capita income.
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A view widely held in Western governments, international agencies and banks is that, while the debt crisis has assumed serious dimensions in the last few years, the policies developed in response to it—as reviewed in Chapters 2–4—coupled with economic recovery in the industrial countries, should restore the debt situation to a manageable level. This view is well articulated by the IMF. In the 1984 issue of World Economic Outlook, it said (p.68).
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