The Paris Club of rich creditor governments will discuss an immediate moratorium on debt payments by nations affected by the tsunamis when it meets next week. The idea, which originated with the Canadian and German governments, has broad international backing.
But another idea floated by Gordon Brown, Britain's chancellor of the exchequer, actually to write off debt for those countries, faces higher obstacles. One could well be reluctance from affected countries themselves to incur the costs of a debt relief deal.
A suspension of debt payments could make sense in giving governments fiscal breathing space, particularly for Indonesia. Of the total of $5bn (€3.7bn, £2.6bn) in repayments from affected countries to Paris Club members coming due in 2005, it owes $3bn ironically because of a previous Paris Club deal in 2002 which rescheduled debt coming due over the next two years. Postponing repayments would free money in Indonesia's budget for relief and reconstruction.
Paris Club deals are also a relatively cheap way for some rich donor countries to contribute. Although some, like the UK, require provision to be made out of current budgets, other members do not.
Sri Lanka, a poor country with a large public debt, could also benefit from permanently writing off debt, as Mr Brown suggests. But for other countries, debt relief could well be counter-productive. Thailand, Malaysia and India all have good access to international private capital markets. Debt relief could damage their creditworthiness, not least since the Paris Club demands that private creditors also write down their debt. “These countries have never come to the Paris Club, even during the Asian [financial] crisis,” says one official involved. “We need first to see if they are actually interested.”
Even Indonesia, whose public debt equals nearly 70 per cent of gross domestic product, is looking Mr Brown's gift horse in the mouth. Jusuf Anwar, Indonesia's finance minister, said yesterday: “We didn't ask for a debt moratorium they offered it to us . . . If there are any [conditions] we would have to study them first.”
In any case, after painfully paying off foreign loans, more than half Indonesia's debt is now owed to domestic private creditors rather than the Paris Club. And while a moratorium on debt service can probably be arranged swiftly and informally, a full Paris Club relief deal requires recipients to be under an International Monetary Fund lending programme, something Indonesia is likely to resist.
The controversial IMF rescue package for Indonesia agreed during the 1997-8 Asian financial crisis, famous for imposing a laundry list of conditions right down to abolishing the country's clove marketing board, expired in 2003.
It could also raise questions why middle-income Indonesia, even after being racked by the tsunami, is a more deserving case for debt relief than, say, Nigeria. Some official creditors are also wary. Indonesia's largest external creditor is Japan, which holds $30bn debt. But Japan has been reluctant to write off debts to developing countries, because its fiscal rules then prevent fresh lending. The UK Treasury is confident a moratorium can be agreed. But it accepts it will have to wait and see between now and the Group of Seven finance ministers' meeting in February which countries are interested. This could be one aid package that countries mark “return to sender”.