Many countries hit by the tsunami would be greatly helped by debt relief measures. A moratorium on payments, for example, would mean that creditor nations would waive loan interest and repayments for a set period of time. For some countries, creditors are even considering debt cancellation.
The government creditors in the Paris Club are set to agree Wednesday on freezing debt repayments by Sri Lanka and Indonesia. The Club has indicated that this could be just the first stage in aiding countries in the catastrophe region. More substantial longer-term measures were also under consideration.
The Club is an informal, voluntary gathering of 19 large western industrialized nations. It co-ordinates solutions to the payment difficulties experienced by debtor nations, reaching its decisions on debt relief by consensus.
Debt repayment problems
Creditors are discussing postponing debt repayments by Indonesia, Sri Lanka and Somalia. But India and Thailand have indicated they would not seek repayment suspensions. These countries have enough economic power to follow through with their financial commitments despite the catastrophe and the costs of rebuilding.
However, the credit rating agency Fitch warned earlier this week that countries benefiting from a debt repayment freeze might face problems when it expired. They would then have to make regular payments in addition to the deferred ones.
The British government wants to persuade Paris Club members to go beyond a moratorium and approve debt cancellation. But it is still unclear whether all state and state-guaranteed loans would be affected or only a portion. French President Jacques Chirac has so far only endorsed a moratorium.
Rodrigo Rato, director of the International Monetary Fund (IMF), supports a debt moratorium. Countries in the catastrophe region can therefore expect relief in their debts to the IMF, too.
Indonesia hopes for more
In the case of Indonesia, German Foreign Minister Joschka Fischer said more measures than a moratorium would be considered if it became necessary.
"To my knowledge, Britain and the United States are also of this opinion," said Fischer following a meeting with Indonesian President Susilo Bambang Yudhoyono on Tuesday (photo).
Indonesia has been hardest-hit by the catastrophe and is highly in debt. Economics Minister Aburizal Bakrie said he expected western creditors to allow it to freeze $3.2 billion in debt repayments through 2006 to help it cope with the tsunami disaster.
"I hope that we can resume debt repayments in 2007," said Aburizal.
However, debt relief measures would afflict Germany's budget. Development Minister Heidemarie Wieczorek-Zeul has suggested debt cancellation for Sri Lanka, which owes foreign creditors some $7 billion.
The bilateral debts to Germany from development and state-guaranteed loans total €344 million. If Sri Lanka's debts were cancelled, this amount would be missing in Germany's budget at a time when Berlin is struggling with a fiscal deficit and record borrowing.