Monday, September 19, 2005

Debt Solutions

Editorial : Conversion

AS IT STANDS, THE AUDACIOUS PROPOSAL TO convert as much as half of the world's external debt into equity in poverty-reduction programs still leaves some important questions unanswered. But as it stands, the proposal may be the last best hope for countries such as the Philippines to pry themselves loose, finally, from the trillion-dollar debt trap.

At the heart of the proposal-first raised by Speaker Jose de Venecia last July, and then again two weeks ago at the World Conference of Speakers of Parliament in New York City, and then reiterated by President Macapagal-Arroyo last week at the UN General Assembly-is the principle of conversion.

The proposal seeks to convert part of the debt payments of a highly or moderately indebted country into equity stakes in Millennium Development Goal-related projects. The proportional stakes will be owned by the lenders, but the projects will be located where they are most needed: inside the indebted country itself.

De Venecia told a UN forum organized to discuss the proposal: "We plead not for debt forgiveness, not for debt cancellation, not for debt moratorium, not for debt discounts. Our proposal requires no new monies from the parliaments and governments of rich nations. Nor do we envision any reduction or loss of face value in the creditors' financial assets. What we propose is a global conversion of debt for MDG projects ... a plowback of up to 50 percent of debt payments received."

The principal Millennium Development Goal is the halving of poverty levels by 2015. But countries like the Philippines set aside as much as 60 to 70 centavos of every peso of the national budget for debt payments; this leaves precious little for poverty-reduction programs.

The fundamental idea behind the conversion proposal is to free up much more of a government's budget for necessary investments, say in new school buildings, or in farm-to-market roads, or in children's nutrition programs. "We can address the problem of poverty if we have the money with which to finance anti-poverty projects," De Venecia said.

But will the lenders-such as the Paris Club, the World Bank and International Monetary Fund, the Asian Development Bank, and certain commercial banks-accept the proposal? It is easy to see what countries like the Philippines will stand to gain from conversion; in the case of the Philippines, and according to De Venecia's own computations, as much as P112.5 billion in redirected funds. But what will the lenders get for their pains?

The idea of acquiring equity or an ownership stake in certain assets may be financially appealing for some, but it is best to face up to the truth. The real benefit of the conversion proposal is longer-term, and macro-economic. The bottom-line appeal, in other words, is Kennedyesque: a rising tide, the proposal assumes, will lift all boats. A surge in funds available to reduce poverty will raise incomes and improve the quality of life. And that can only be good for everyone concerned.

The Freedom from Debt Coalition has already criticized the proposal, because instead of helping prove that much of the country's foreign debt was illegitimate and therefore condonable, the proposal fudges the issue. Clearly, the loan the country assumed to pay for the useless Bataan Nuclear Power Plant, for example, was legally defective and morally offensive. But that particular debt was securitized almost a decade ago; in other words, the original lenders had already been paid, and government has no choice but to pay the new lenders who had assumed the debt.

It is precisely this stark reality, this reminder of the brutally unforgiving nature of international finance, that recommends the conversion proposal to us. To be sure, other debt-relief initiatives must continue, including some version of the five-year moratorium outlined in the "Blueprint for a Viable Philippines." But think of it: If this conversion proposal actually results in reversing the flow of hundreds of billions of pesos out of the country and back into the countryside, we should all be glad to call ourselves converts.


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