Government creditors in the Paris Club will this week consider a debt moratorium for Sri Lanka and Indonesia, two of the countries worst affected by last month's tsunamis, although experts have questioned the usefulness to Jakarta of such a move.
While Asian and world leaders convening in Jakarta last Thursday backed a freeze on debt payments from tsunami-hit nations, only two of the 11 countries -- Sri Lanka and Indonesia -- have asked to have their financial situation reviewed by the Paris Club at a meeting here beginning on Wednesday, according to Club sources.
Another source close to the Paris Club has said the meeting would debate a debt repayment freeze but not a cancelation.
A cancelation or restructuring, of which Britain is the main proponent, could come later "in a second phase," the source said.
Suspending debt payments from countries affected by the Dec. 26 disaster won the backing on Friday of finance ministers from the Group of Seven (G7) industrialized countries.
The British government, which holds the rotating G7 presidency, said the idea would be debated by the Paris Club this week.
With an external debt of US$132 billion, of which US$70 billion is owed to public creditors or has been guaranteed by public bodies according to the World Bank, Indonesia has said it hopes debt relief will be proffered without conditions.
Brian Hammond, head of the statistics and monitoring division at the Organization for Economic Cooperation and Development, said Indonesia presents "a more difficult" case than Sri Lanka since its financial reputation on capital markets could take a greater hit.
Experts have warned that debt relief could prove to be counterproductive, causing a lowering in a country's credit rating and making it vulnerable to higher interest rates on future loans.
Lower ratings in addition threaten to leave foreign investors wary.
Indonesia has had its rating reduced by Standard and Poor's three times following a debt arrangement with the Paris Club.
"Normally the Paris Club asks for equivalent action by the private sector and that's precisely why Thailand and India and Malaysia wouldn't want to go anywhere near [debt relief]," Hammond said.
A Paris Club agreement is systematically tied to a reform program drafted by the International Monetary Fund, which many beneficiary governments and populations have found to be harsh.
Hammond said Sri Lanka is the only country that could truly benefit from a rescheduling of its debt, given that the private sector accounts for a relatively small part of external obligations.
"But for Indonesia, given the amount of the country affected, the amount of the economy affected ... and the importance of private and short-term debt, it may well be better for them to have reconstruction," he added.
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