As the finishing touches were applied yesterday to a debt-cancellation plan for poor nations such as Zambia and Honduras, participants in international financial meetings were voicing alarm that reckless lending may be leading other countries down the path to insolvency.
The warnings came both from economic officials and private bankers attending the annual meetings of the International Monetary Fund and World Bank. At a news conference, William R. Rhodes, senior vice chairman of Citigroup, cited ominous parallels to the period immediately before the Asian financial crisis of the 1990s.
And a senior U.S. Treasury official said that at a meeting Friday of finance ministers and central bank governors from the Group of Seven major industrial nations, much time was spent discussing whether incautious lending at low interest rates may be setting the stage for "discontinuities" -- economists' jargon for sudden changes in condition that can include crises or near-crises. The G-7 includes the United States, Japan, Britain, France, Germany, Canada and Italy.
The worries concerned the long term rather than the near term, but they cast a pall over meetings that in general have featured sanguine forecasts about the global economy. The IMF's latest prediction is that despite the recent surge in energy costs, world economic growth will be 4.3 percent in 2005 and 2006. That forecast is almost unchanged from its forecast six months ago.
The fretting about excessive borrowing and lending came as the IMF and World Bank finalized details of an agreement that will grant 100 percent forgiveness of the debts owed to those two institutions by the world's poorest nations.
Debt relief was one of the prime demands of the activists who organized the "Live 8" concerts before the July summit in Scotland of the Group of Eight leaders. The G-8, which includes Russia, agreed that the IMF and World Bank should cancel about $40 billion owed by 18 countries, mostly in sub-Saharan Africa, with possible additional forgiveness for 20 other countries.
But the accord ran into objections from officials of the World Bank and from other countries such as the Netherlands, whose opposition threatened to keep the plan from getting the necessary 85 percent vote on the World Bank's board. The critics feared that the lost repayments of principal and interest would undermine the bank's finances and impair its ability to provide new aid.
To assuage those fears, the finance ministers of the G-8 countries, including Treasury Secretary John W. Snow, took the unusual step of signing a letter to World Bank President Paul D. Wolfowitz pledging that future contributions would make up for debt-relief losses suffered by the International Development Association, the World Bank agency that lends to poor nations. A similar pledge was offered at the Scotland summit, but the letter, released late Friday, contained additional details about how the extra contributions would be calculated.
"The rest of the international community are satisfied," said Gordon Brown, the British chancellor of the exchequer and one of the main architects of the debt-relief plan, at a news conference late yesterday. "We now have agreement reached on all the elements" of how the debt relief would be financed and on other disputes that arose. The matter will be approved by the boards of the IMF and World Bank shortly, he said.
Concerns that other, richer countries might fall into debt woes were expressed by Rhodes and other officials of the Institute of International Finance, an organization representing private financial institutions that lend and invest in "emerging market" countries -- nations such as Brazil, Turkey and Malaysia.
The institute issued a forecast that private capital flowing to emerging markets will total $345 billion this year, a record. These loans are generous, as measured by "spreads" -- the difference between the interest on the loans to emerging markets and those on U.S. Treasury bonds, which are considered the world's safest investment.
Noting that the previous record of $323 billion was set in 1996, Rhodes, who is the institute's first vice chairman, said: "You remember what happened after 1996. We had 1997. We had 1998" -- a reference to the crises that struck the once-thriving economies of Thailand, Indonesia and South Korea. "We had the default by Russia, and we had Long-Term Capital Management" -- a hedge fund whose collapse triggered a serious nosedive in U.S. stock and bond markets.
"I am not predicting that; I am just saying that when we talk about the need to be cautious, we very much keep that in mind," Rhodes said. "Confidence can erode rapidly and easily." Although one reason for lenders' enthusiasm is improved policies by emerging market countries, he said, another crucial factor is the low interest rates in the United States and other rich countries that impel lenders and investors to search in riskier places to gain extra yield.
The discussion among G-7 economic policymakers, according to a senior Treasury official, also focused on the questions of "Do interest rates appropriately reflect the risks? Is risk being priced appropriately?" Lending to emerging markets were not the only area in which spreads are extremely narrow, he noted; the same applies to lending to corporations.
"We're not saying [spreads] are too narrow; we're noting that they're narrow," said the official, who spoke on the condition of anonymity about the confidential G-7 discussions. "Most of us in that group are great believers in markets. But low interest rates create all sorts of behavior that you've got to watch."