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Gold''s rise in euro terms may signal broader rally
The Blair Debt Project
An Editorial
The Wall Street Journal
Tuesday, June7,2005
Prime Minister Tony Blair visits President Bush today to make his
case for new G-7 aid to the world's poor, particularly Africa.
Headlines notwithstanding, the disagreement between the two men is
not about whether rich countries ought to help the poor but rather
how.
The U.S. is already the world's most generous donor to the global
development cause. According to the OECD, total U.S. official
assistance in 2004 was almost $19 billion, nearly twice that of the
next biggest givers, Japan and France. And for those who talk
about "aid per capita," keep in mind that U.S. military spending
that defends freedom is also a kind of development aid.
As for the Blair-Bush meeting, both leaders agree that forgiving the
bad debts of the world's poorest countries is the place to start.
But Mr. Blair's proposal, backed by Bono of U-2 fame, amounts to a
mulligan for borrowers and the multilateral institutions (such as
the World Bank) that lent money so wrecklessly. This do-over is not
just debt "forgiveness." It also seeks huge amounts of new capital
to continue business as usual. The Bush Administration is right to
want to try something new.
Some 38 nations qualify as "highly indebted poor countries," or
HIPCs. Despite $144 billion in bad loans, mostly from official
lenders, their average per-capita income is more than 25 percent
below where it was in 1980. Ending this misery starts with
diagnosing the problem. And to that end, the British claim
that "many countries have to choose between servicing their debt and
investing in health, education, infrastructure, and other areas"
isn't helpful -- because it isn't true.
Lenders stopped expecting repayment on this money years ago. In
fact, since 1985 the HIPCs have been regular recipients of new funds
to cover their debt service, as Carnegie Mellon economist Adam
Lerrick shows in a new paper out from Congress's Joint Economic
Committee. This has put the HIPCs further into debt. But the process
continues so the World Bank and International Monetary Fund can
boast -- preposterously -- that they've never made a bad loan.
These lenders have also figured out that they can wring more foreign
aid out of donor countries if they call this process "debt relief."
So rather than writing down their worthless assets the way normal
banks do with their bad commercial loans, these government lenders
now want the G-7 to cover their losses, including interest due. Mr.
Lerrick calculates that this means that the banks would get $130 for
every $100 of nominal debt. Add in the British desire to forgive the
debt of other poor countries that have behaved more responsibly, and
Mr. Lerrick figures the total bill will be more than $400 billion.
No free lunch.
As a down payment for this, Britain is proposing to tap the IMF's
gold deposits, which have a market value of some $45 billion. The
pretense here is that this gold is merely collecting dust somewhere
and is thus free money to distribute, like finding $20 on the
sidewalk. But there is no such thing as "IMF gold." That gold
belongs to 128 member countries, and 25 percent of it belongs to
developing countries. India, which has more poor people than all 38
HIPC nations combined, owns more than $1 billion. So selling
something the banks and IMF don't own is not an option.
Instead, the free-money crowd has come up with an accounting scheme
worthy of Enron. The idea is for the IMF to "sell" the gold --
currently on its books at $52 per ounce -- in an "off-market
transaction" for its market value of about $430 dollars an ounce,
and then immediately buy it back at the same price. This legerdemain
will allow the IMF to book a "profit" and suddenly look rich.
The trouble is, there really is no "new money," merely a paper
profit. To actually generate funds, the IMF will itself have to
borrow; and to pay for the cost of this borrowing it will have to
lower the interest rate it pays to lenders while raising the rate it
charges poor-country borrowers. In other words, the cost of the new
money will be shared 50-50 between IMF debtor (developing) and
creditor countries. We apologize for taking readers through this
detail, but someone has to show what a scam this is.
There is a better way, as the U.S. is signaling. First, force the
World Bank and its cousins to write down their bad loans and
acknowledge their failures. Second, move to a model of performance-
based grants that will raise accountability. Mr. Lerrick adds that
the IMF ought to return the gold at the IMF to its owners;
developing countries would get back about $10 billion, and even the
HIPCs would receive $1 billion -- all of which could finance
development.
Rich countries could then use their $30 billion in returned gold
profits to create an endowment to fund grants based on a country's
performance in meeting certain policy and development targets.
Imagine: Poor-country politicians would suddenly be accountable for
aid they receive, and the rest of us wouldn't have to repeat
this "debt forgiveness" fiasco 20 years from now.
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