O'Neill: World Bank opponents ignorant
Europeans and others who oppose US plans to reform the World Bank's aid program for the world's poorest countries are ignorant of basic finance principles, said US Treasury Secretary Paul O'Neill.
"I think the grant opponents do not understand the first principles of capital markets," O'Neill said in a keynote speech on globalisation ahead of this weekend's G7 meeting.
The Bush administration has proposed transforming World Bank aid for the poorest countries into grants, from their current status as loans. Under the US plan, half of all aid to least-developed countries would be in the form of grants.
This plan has been criticised by the UK, France, and other countries, who want to limit the grant proportion in order to maximise future lending capacity.
Such opponents "certainly have not learned a lesson from the current experience of having to write off loans for the heavily indebted poor countries," O'Neill said.
Last week, O'Neill said the G7 were "very close" to an agreement on the issue, which would outline types of aid that would qualify for loans, after meeting with G7 deputy finance ministers in London.
The G7 finance ministers and central bank governors are set to address the topic in Saturday's meeting here ahead of the spring IMF/World Bank meetings.
A senior Canadian Finance Ministry official said yesterday that Canada favors shifting 20-25% of World Bank aid to the poorest to loans over a "number of years," while European countries have stuck with percentages below that.
O'Neill claimed the US has shown "a high degree of flexibility" on the issue, while opponents appear to "remain staunch advocates for preserving the practices of the past 50 years."
These countries "continue to encourage developing nations to take on loans from the multilateral development banks," he said, without regard to the fact this raises their debt levels.
"This issue should be closed," he stressed.
Separately, O'Neill said the US proposal on establishing a formal debt workout process for over-indebted emerging market countries that run the risk of default holds promise of being enacted.
The Bush administration has favored altering bond contracts to insert "collective action clauses" that would lay out rules for negotiating a debt restructuring between creditors and a sovereign debtor.
The rules would include binding minority creditors to any agreement reached between a large majority (perhaps three-quarters, for example) of creditors and the sovereign issuer.
The clauses would include a temporary freeze on debt servicing while talks were under way.
O'Neill said "while approaches similar to this have been discussed in the past, I am sure that this time there will be results."
He claimed that the effort will be successful this time because "we are exploring ways the official sector can support its implementation in the markets."
John Taylor, Treasury Undersecretary for international affairs, suggested that any country receiving financing from the IMF could be required to have such clauses in their debt contracts with private sector creditors. The IMF could also reward these countries by charging them lower interest rates, he said.
IMF Deputy Managing Director Anne Krueger has proposed an alternative process, which would have the IMF be the body that declares a debt payment freeze.
The IMF plan would involve altering the IMF's charter articles, thereby giving the debt workout process legal force around the world.
O'Neill said he supports the IMF's work on such an approach, but "since these changes would take time, this work should not delay the expeditious implementation of the market-based approach" floated by the US.
Yesterday, IMF managing director Horst Koehler called for consensus to be reached on the subject by the time of the fall IMF/World Bank spring meetings.
