Some Aspects of the Debt Crisis in South-East Europe
by Dragan Stojović
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Introductory remarks
The present moment in some countries of South-East Europe, apart from the evident political implications (war, the potential war and crises areas, political conflicts) is also characterized by some economic problems. Mostly as an inheritance of the past, the problem of debts has some specific characteristics, causes, trends and ways of overcoming. The reasons that cause the permanent debt growth might be located on three areas.
First, decrease of market demand in developed economies, reduced export from the developing countries, the problem of balance of payment together with the pressure on import of necessary capital.
Second, particularly bad structure of debtors, which were not able to adapt themselves fast enough to the changes at the world monetary and financial markets and structural changes of the world economy in general. The reduction of export earnings was compensated with the borrowing of cheaper capital and more favorable rate of exchange of dollar at the world market. But these countries did not duly use that capital for a rise in their production accumulation and economic restructuring.
Third, the conditions of raising loans interests and terms. In connection with it, it is necessary to point out that the current debts in some cases do not correspond with debts from the past. Former debts were incurred mostly as a demand for making up the deficit in balance of payment in capital importing countries, while, current debts are mostly due to the crisis in international economic relations and also to local development and general position of big debtors.
The most important causes of the exaggerated indebtedness are:
- bad running of economy
- exaggerated borrowing of external financial assets, usually very expensive ones
- ineffective usage of foreign capital resulting in inadequate income and accumulation
- slow or pure reacting to external shocks (oil prices, interests, credit conditions etc...)
- ineffective usage of export opportunities reducing foreign debts.
Examples of some countries allow some answers and questions concerning the debt crisis, to be considered from a specific point of view.
Albania
Albanian current external debt is about 1,04 billion dollars. The largest portion of Albanian debt refers to outstanding debts from short term credits, which Albania raised from 30 European banks. But Albania continued talks with creditors (mostly with commercial banks) and meanwhile it also signed new bilateral agreements about rescheduling debts.
The example of Albania shows that it is possible to realize some negative aspects of international long-term financial policy as it may either prolong or put an end to agony of all debtors. International long-term financial policy is not the only factor which has to cover deficit in the balance of payment in an indebted country, but is not the factor which may compensate for the insufficient domestic accumulation. Public loans granted one to a special importance as they offer wide opportunities for their use in internal economic development. These loans are not strictly liable to demands for profitability, and they are usually used for solving the basic development problems or more exactly for financing the economic and social infrastructure. But it does not mean that demand for the most rational investment is unimportant, because they have to be repaid with interest. It is necessary for foreign assets to be used for economic development, for supplementing the national resources and for raising the internal rate of accumulation but not for the increasing of national consumption. International financing leads to real production raise, only if country has other important factors of economic development, as economic development can not be "on imported basis" it may only be used to supplement and stimulate internal efforts.
Bulgaria
In Bulgaria despite the modest improvement of some of the macro-economic indicators, the economic situation is still extremely unstable. This year (1996) debt-servicing amounts to 1,25 billion dollars. The sum is equivalent to the current Bulgarian international reserves.
Romania
The growth of the Romanian economy has speeded up in the course of 1995. Very important results have been achieved in the curbing of inflation. Capital influx slowed down as compared to 1994; less than 400 million dollars entered the country in 1995. The short- and long-term external debt stock grew from 4,44 billion at end of 1994 to 4,8 billion by end of 1995.
The Former Yugoslavia
Civil war in former Yugoslavia opened at first place the problem of succession and division of total external debt. Former Yugoslavia was indebted with commercial banks in the amount of 4,3 billion dollars. That amount now belongs to former Yugoslav republics and it is not worth more than one third of its nominal value.
After declaring independence in Croatia and Slovenia, these former Yugoslav republics started economic transformation towards market economy, by passing the basic legislation and by introducing some other measures. Croatian external debt in the middle of 1995 rose to 3 billion dollars. Having in mind that Croatian foreign exchange reserves from 1991 are very low, it becomes clear why Croatia stopped repayment of its debt. In accordance with gradual normalization of its relations with international financial institutions (Croatia became a member of The World Bank in 1993) this former Yugoslav republic will have to continue repayment of debts. In connection with this, there is also a contract with The Club of Paris from march 1995, which enables Croatia to reschedule its debt in the period of 14 years and to declare two-year moratorium on debt repayment. Of course, there is also a substantial support from the IMF and the World Bank aimed at overcoming the negative economic trends in Croatia. In Slovenia at the end of 1995 total external debt amounted to 2,9 billion dollars, 700 million more than a year earlier.
IMF insist on several restrictive measures of monetary and fiscal policy, which in most cases leads to reduction of economic rate of growth, difficulties in restructuring of economy, reduction of real investments and to global uncertainty (speaking about indebted countries). The request that investments ought to be effective and productive is justified, but it is hardly possible to realize it in economies affected by numerous shortages and limitations. There are very few examples of countries that in a run have succeeded to recover their economies so as to make a base for credit worthiness and for an access to worlds financial market. Credit worthiness and liquidity in meeting the obligations is possible only with faster economic progress and faster elimination of large number of financial and economic disbalances./p>
Final comments
Any approach to solving of debt crisis depends at the first place on its participants: creditors and debtors. But their arguments are mostly extended from the politicizing of problems to the pointing out strictly financial aspects of the crisis. It is hardly to claim that representatives of indebted countries are those, who mostly insist on politicizing of the problem, while the representatives of creditor countries are those who insist on solving the problem only within the financial field. No matter how much we can disagree with such attitudes, those relations are the reality of the world economy. Rescheduling of debts, which characterizes current international relations and the position of indebted countries does not reduce the debt. Long-term rescheduling is the only way (including the reduction of interest rates and payments) which may help indebted countries to get out of stagnation.
Agreements for reorganizations of debts which are being practiced do not solve the problems of indebted countries. International community does not treat the problem in a realistic and systematic way. Negotiations for the reorganization of debts are not always conducted without problems. The main causality in fact is that the global scheme of negotiations is already known, but there is no officially defined process which may be used as a guide through for them. Even if IMF takes part in negotiations for the reorganization of debts, there are demands for its more intensive engagement as the Fond will always be interested in the state of external debts of its members which should also be treated as a priority in contacts with all other members. It might reduce future growth of debts (that would be a problem for all parties concerned). The Club of Paris protects the interests of creditors while for IMF might be said to stand somewhere between despite some recent statements that IMF is a direct representative of international private banking.
For a large number of overburdened countries, a return to an efficient economy calls for creating conditions for development of private sector. Decreasing a debt should be an instrument of economic development rather than commitments. Indebted countries can not pay debts from issuing, but from foreign exchange earnings gained by export of goods and services. The solutions should primarily be sought in acceleration of economic growth and increase of export.
