Proposals from rich creditor countries to ease the debt burden of countries hit by the tsunami in South Asia must be carefully engineered in order to avoid being counterproductive economically, experts said.
The Paris Club, an informal grouping of 19 creditor countries, is to meet here next week to consider measures ranging from a freeze on debt repayments to a partial cancelation of debt and other initiatives from developed countries.
The matter of debt was also to be addressed at an aid summit in Jakarta yesterday.
There are precedents for debt relief for poor countries hit by a natural disaster. For example, in 1998, Honduras benefited from the biggest Paris Club debt rescheduling ever in the wake of Hurricane Mitch.
Although economists widely agree that the economies of countries hit by the Dec. 26 tsunami are unlikely to be devastated, there is a risk that easing their debt burden could hurt their financial reputation, which some countries such as Indonesia are struggling to improve after the 1997-1998 Asian financial crisis.
"We often get the impression that the cancelation of debt is very positive," said Francoise Nicolas, an Asia expert at the French Institute of International Relations.
But she added: "If we cancel some of the debt, there is inevitably a cost and this cost can translate into a lower credit rating. That means you are put into the category of risky debtors and it will be harder to get credit in the future."
Some non-governmental organizations have been pushing for the total cancelation of debt owed by countries affected by the tsunami.
Nicolas said that a little "breathing space" made by a freeze on debt repayments would be sufficient and would help avoid the "usual unwanted effect of canceling debt."
However, a source close to creditor countries voiced scepticism about a freeze on debt repayments.
"One can question whether it is really a solution to the problem. The subject is much more about humanitarian aid than the problem of debt," the source said.
International credit rating agency Standard and Poor's has said that it would not change its rating on Indonesia if a deal were limited only to debt to other governments and not private-sector lenders as well.
But it warned it would have to declare Indonesia in default if a debt-relief scheme were forced on commercial lenders.
"While official creditors may choose to initiate debt forgiveness or restructuring, there is no obvious reason why this would flow on to commercial debt," Standard and Poor's said in a statement in Singapore.