Two general approaches have been suggested for dealing with the developing country debt crisis continued reliance on case-by-case negotiation, and global plans for fundamentally restructuring the terms of international lending and repayment. Both approaches have precedents in earlier historical periods: in the 1930s, for instance, when some two-thirds of foreign dollar bonds lapsed into default, several global schemes for resolving the crisis were under consideration even while individual debtor-creditor negotiations were in progress. In the end no global plan was adopted and the debt crisis of the 1930s was resolved by the `muddling-through' approach of bilateral negotiations. It is often suggested that, compared to today's gigantic bank syndicates and lengthy loan contracts, rescheduling in the 1930s was straightforward. The era of bond finance is portrayed as a simpler era, when negotiations had to surmount only the `large number problem' created by the multitude of small creditors.
The historical analysis reported in Discussion Paper No. 239 by Research Fellow Barry Eichengreen suggests precisely the opposite. Progress in debt renegotiation in the 1930s was impeded by interlocking creditor-debtor relationships and by the proliferation of debt instruments, ranging from short-term acceptances to long-term bonds, from war debts to reparations, from foreign commercial deposits to foreign exchange reserves. Negotiators found it difficult to free one thread from this tapestry without unravelling the entire fabric.
Eichengreen examines how debtor and creditor strategies evolved so as to permit the crisis to be resolved through bilateral negotiation. Solutions negotiated on a case-by-case basis, he notes, often required many years to achieve. That the bond market never recovered fully from the defaults of the 1930s and that large-scale foreign lending through other channels only reappeared 40 years after the interwar defaults must be attributed in large part to the difficulty of negotiating cooperative solutions to those defaults. Ultimately, agreements were concluded through the gradual convergence of debtor and creditor demands. Both sides offered concessions as time dragged on: after having received nothing for years the bondholders grew increasingly willing to accept any reasonable offer, while foreign governments grew increasingly anxious to settle in anticipation of the prospect of renewed international lending. But the protracted process was extremely costly.
What stumbling blocks stand in the way of global schemes? The interwar experience is directly relevant, according to Eichengreen: current proposals for a global solution to the LDC debt crisis are not novel, and each has its counterpart in the interwar years. Theoretical examination of the interwar period underscores the difficulties in adopting global plans and hence offers little encouragement to current advocates of global solutions.
Eichengreen draws some lessons from these earlier failures. Bankers will actively resist any global proposal that limits their control over negotiations or commits them to a specific course of action: effective moral suasion by governments will therefore be necessary to elicit the cooperation of banks. For their part, governments must be exceptionally enlightened to recognize the benefits of global plans. Debt relief or new money at concessionary terms benefit the creditor countries largely in the form of a more stable world economy, but these gains are diffuse relative to their cost, be they capital losses on existing loans or the budgetary cost of new ones. Government officials are more inclined to pursue other issues, whose pay-off is more straightforward, Eichengreen concludes

Resolving Debt Crises: An Historical Perspective
Barry Eichengreen

Discussion Paper No. 239, June 1988 (IM)