Bush to Review 3rd World Debt Strategy : Rules Out Forgiveness in U.S. Planning to Ease $1.3-Trillion Burden

WASHINGTON —  President-elect George Bush said today he will undertake a major review of the existing U.S. strategy for tackling the Third World’s $1.3-trillion foreign debt burden but ruled out forgiving the debt.

The present U.S. debt strategy is named after former Treasury Secretary James Baker III, who will be Bush’s secretary of state.

In September, 1985, Baker unveiled a plan that called for massive new bank lending to 17 heavily indebted countries if they agreed to implement market-oriented economic reforms.

Bush said at news conference that parts of the Baker Plan had worked, noting that the private sector had been rejuvenated in many countries. But he acknowledged that commercial banks have been slow to make new loans.

“I think we should take a whole new look at it,” Bush said of the Baker Plan. “That should be subject to a major review.”

Bush said the review of the debt strategy would involve not only the Treasury Department but also national security officials “because we have got enormous problems in our own hemisphere on Third World debt.”

The Third World’s three biggest debtors are Brazil, Mexico and Argentina, together owing about $290 billion.

Baker will presumably be closely involved in the review as secretary of state in the Bush Administration, which is obliged to submit a report on Third World debt to Congress by February.

Asked whether debt forgiveness would be an option under a revised Baker Plan, Bush said, “I think you have to be very careful of forgiveness of debt if you want future loans, so I think we’ve got to find a more versatile answer than simply compelling private institutions to write off the debt.

“I think that would dry up the third part of the Baker Plan, which is more loaning from private institutions,” he added.

Bush’s comments marked the clearest admission to date by the Reagan Administration that the 3-year-old Baker Plan had been overtaken by events and that a new phase in the debt strategy is called for, analysts said.

The World Bank issued a report Sunday that called for an evolution of the plan in the direction of greater emphasis on voluntary debt reduction.

“The declining interest of commercial banks in . . . lending to highly indebted countries, coupled with the continued uncertainties arising from the debt overhang, may be a signal that it is time to rework the 1985 consensus,” the World Bank said.

The Third World debt crisis is expected to drain another $43 billion this year from nations that can least afford it, up from the $38.1 billion loss last year.

This year’s total is swollen by $31.1 billion that is leaving heavily indebted nations such as Argentina and Nigeria.

The outflow from Third World countries consists largely of debt repayments to commercial banks, the United States, other industrial countries and intergovernment lenders such as the World Bank.