Japanese Prime Minister Junichiro Koizumi told the one-day gathering on Thursday that Tokyo, one of the biggest lenders to the Asian countries hit by the disaster, was willing to grant them a debt moratorium – the freezing of debt repayments for a certain time.
“The affected nations were hit by a huge disaster which may strike only once in 100 years,” Koizumi said.
“I think a debt moratorium for a certain period is necessary and I would like to urge other nations to do so.”
In Edinburgh, British finance minister Chancellor of the Exchequer Gordon Brown said Britain and other governments were proposing an immediate debt moratorium to tsunami-hit countries that asked for it.
The 26 December tsunami that swept through the Indian Ocean has left nearly 150,000 dead and 1.5 million struggling to survive.
“We must ensure that countries affected by the tsunami are not prevented from paying for essential reconstruction because they have to fund the servicing of their debts,” Brown said.
“We must ensure that countries affected by the tsunami are not prevented from paying for essential reconstruction because they have to fund the servicing of their debts”
“So, for afflicted countries that request it, we and other governments are proposing an immediate moratorium on debt repayments,” he added.
Asian countries affected have a total of roughly $272 billion in external debt, with Indonesia owing around $48 billion to the Paris Club group of creditors which would this year generate more than $3 billion in principal repayments.
Brown said the G7 and the Paris Club of creditor nations must be ready to consider all options for helping the countries hit by the disaster.
A meeting of G7 finance ministers – chaired by Britain – is due to take place in London in early February; while the Paris Club, which reaches its decisions on debt relief by consensus, is due to meet on 12 January.
Moratorium or write-off?
The declaration wrapping up the Jakarta meeting said the delegates from the 26 nations and groups “welcome the initiative of several countries on the moratorium of payments of the external debt burden of the affected countries”.
The tsunami has left 150,000
While a consensus appeared to be building towards a debt moratorium, some countries, including Belgium, have gone further, suggesting the cancelling of debts of the hardest hit nations.
Japanese officials said the moratorium was better suited to the needs of the debtor countries than writing off part or all of their debt.
Forgiving debt could work against the debtor nations as it might lead rating agencies to downgrade the countries’ credit ratings, which would in turn raise future borrowing costs, the officials said.
Such concerns have been expressed by officials of the affected nations, and ratings agency Standard & Poor’s said this week that the offer of a moratorium was unlikely to have an impact on Indonesia’s sovereign ratings.
Indonesian officials have expressed fears debt proposals might be tied to certain conditions that could be politically unpopular, such as cutting the national budget.
But the International Monetary Fund has not received any requests from the Paris Club to tie a moratorium to IMF conditions such as tighter fiscal policies, its director Rodrigo Rato said on Thursday.
He added: “There has been a growing consensus in the Paris Club to offer a moratorium. Of course, that can be very useful because that will allow governments affected by that moratorium to use those resources in short-term financing.”