This of course was not the case. There was no “Phoenix miracle” in low- and middle-income countries; instead, there was a lost decade. Not only were emerging markets unable to repay; because their debts had not been restructured, they also were unable to borrow.
The creditors’ commitment to put in new money was particularly problematic. In practice, each bank preferred that other banks contribute new finance – a free-rider problem if ever there was one.
By 1989, seven unproductive years after the onset of the crisis, the Baker Plan finally was superseded by the Brady Plan, named after a subsequent US Treasury secretary, Nicholas Brady. Debts were written down. Bank loans were converted into bonds – often a menu of securities from which investors selected their preferred terms and maturities. Advanced-economy governments facilitated the transaction by providing “sweeteners” – subsidies that collateralized the new securities and enhanced their liquidity.
Today’s crisis is also being treated as temporary, with a moratorium on interest payments and a promise of commercial credits remaining valid only through the end of the year. The reality is different. Weak global growth and depressed primary commodity prices will persist. Supply chains will be reorganized and shortened, auguring further disruptions of trade. Receipts from tourism and remittances will not pick up anytime soon. And unless the debt overhang is addressed, capital flows will not resume.
Now – and not seven years from now – is the time for a new Brady Plan, in which debts rendered unsustainable through no fault of the borrowers are written down and converted into new instruments. This can be done without destabilizing the banks, because emerging-market bonds are held mainly outside the banking system. A large-scale conversion would also be an occasion for many countries to issue innovative instruments with stabilizing properties, such as GDP-indexed and commodity-price-indexed bonds, without requiring them to pay a novelty premium.
This debt crisis is also a humanitarian crisis and a global public-policy crisis. The appropriate entity to organize the response is therefore the International Monetary Fund, not the Institute of International Finance, the house organ of the creditors (as recommended by the G20). As a United Nations organization, the IMF could request that Chapter VII of the UN Charter be invoked to shield debtors from disruptive legal action by opportunistic investors. A crisis of this magnitude warrants no less.
Barry Eichengreen is professor of economics at the University of California, Berkeley; Pitt Professor of American History and Institutions at the University of Cambridge; and a former senior policy advisor at the International Monetary Fund. His latest book is "Hall of Mirrors: The Great Depression, the Great Recession, and the Uses – and Misuses – of History."