57. Weak Argument For Reverse Foreign Debt

Weak Argument For Reverse Foreign Debt
Bob Komives
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Despite some superficial differences, loans between national governments are reversible. I have tried to argue myself out of this conclusion, but I cannot. I find it difficulty to distinguish borrower from the lender in international loans to national governments -- that is in economic terms. Though common wisdom and common prejudice see them as very different, borrower is lender; lender is borrower. If you have trouble seeing the similarity, try to imagine a loan in the reverse direction.

I have a weak argument for reverse loans to support a troubled country. In a reverse loan, the helping country accepts a loan from the troubled one in the troubled country's currency. The loans have no true economic justification. However, they might have financial justification and could make a great topic to help you survive a dull cocktail party.

A reverse loan could grease international financial machinery for a troubled nation. The reverse-loan agreement gives the troubled lender an immediate asset with which to guarantee international purchases. Also, troubled currency that flows out as loan must come home to be cashed in.

If international lending were reversed, richer borrowing nations would have to buy goods and services from the poorer lending nation using the lender's troubled currency. Since rich nations tend to influence trends and styles, their purchases from a poor nation might foster international interest in the poor nation's goods and services. At least, international markets would have to grow accustomed to dealing in the troubled country's currency.

How would a reverse loan be set up? Instead of U.S. America lending Guatemala one million dollars, Guatemala could lend U.S. America an equal value in quetzales. In return for the loan, the USA will sign an agreement with Guatemala in which it promises that after it spends the quetzales it will forego domestic use of enough USA resources to round up the quetzales it will need to pay back the loan plus interest.

Once it receives borrowed quetzales, the USA can spend them to buy the same coffee, sesame seed, beef, and ornamental plants that Guatemala would have had to export to pay off a loan had it borrowed from the USA. Alternately, the USA could exchange the quetzales for Japanese radios so that Japan could buy the sesame seed.

So, Guatemala can finance the same project as lender that it could as borrower. The quetzales that it lends out are not lost. They will return directly or indirectly to Guatemala as the USA spends them. The loan agreement is an asset. It can serve as collateral to finance purchases or to issue new quetzales pending repayment by the USA of those that were lent out.

My strong argument is that a loan from Guatemala to the USA is fundamentally the same as a loan from the USA to Guatemala. Therefore, each is useless in economic terms. If Guatemala could just as well lend quetzales as borrow dollars it might as well lend the quetzales to itself.

My weak argument is that if international markets are sticky due to bad habits and irrational prejudice a reverse loan in quetzales from Guatemala to the USA might inject the needed grease. With well greased wheels, a caravan of reverse loans will parade brilliantly compared to the overheated squeak-buckets going in the traditional direction.

:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 57.Weak Argument For Reverse Foreign Debt ::
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