§ Order for Second Reading read.3.35 pm
§ The Economic Secretary to the Treasury (Mr. John Moore)
I beg to move, That the Bill be now read a Second time.
The problem of sovereign debt, which underlies the Bill, is of great concern to all Members of the House. It has been the subject of a recent report by the Treasury and Civil Service Select Committee which I warmly commend. That report reflected what, I think it is fair to say, is a great deal of common ground between the parties. We are all agreed on the need to support the international financial institutions in their crucial role in maintaining the international financial system. We all agree that United Kingdom jobs and prosperity would suffer were that system to be seriously damaged. We are all committed to assisting developing countries by providing finance and in other ways. More generally, we are all committed to work through increased economic and financial links to improve not only the economic performance of developing countries, but indirecty their democratic and political institutions.
In its report the Treasury and Civil Service Select Committee also endorsed recent international agreements to increase the resources of the International Monetary Fund. The Committee said in para 5.11 on pages 36 and 37:We would support the speedy passage of the legislation laid before Parliament to give effect to these agreements".The Bill and the order which I hope to introduce later today embody that legislation.
It will perhaps assist the House if I begin by setting out in broad terms how the debt problem originated. Throughout the 1970s, and particularly following the fundamental shift in the world economy after the 1973 oil crisis, the newly industrialised countries financed development by borrowing, and increasingly that borrowing was from the private sector. The authorities of the lending countries offered no discouragement to this process — indeed, rather the reverse — and it became fashionable to talk about recycling oil revenues.
Of course, the truth was that oil revenues were not being recycled—whatever that might mean. They were being on-lent, and, as time went by, that lending was increasingly short term, or at floating rates of interest. Thus, the newly industrialising countries became more and more vulnerable. Just how vulnerable became clear when, following the second oil crisis in 1979, the world entered the recession. Few people were prescient enough during the 1970s and early 1980s to sound a warning about what was happening.
The main sovereign borrowers now facing difficulties are, after all, countries with considerable underlying economic strengths. They are mostly countries endowed 604 with natural resources, like Mexico and Brazil; or with proven resources in terms of the skills, ingenuity and application of their industries, like some in the Far East.
As the Treasury and Civil Service Select Committee pointed out in its report, just like the United States in the 19th century, it is entirely natural for such countries to finance the process of development by importing savings and capital from abroad, and for the private sector banks to play a part in that. The position that most of those countries are now faced with is not a permanent loss of credit-worthiness, but rather a temporary, if acute, problem of adjustment, exacerbated by world recession. They have been caught by a combination of overambitious borrowing, development programmes, higher than anticipated dollar interest rates and lower than anticipated commodity prices.
By 1981 the nature of the problem had crystallised. A number of economies in Eastern Europe, Africa and Central America had recourse to the rescheduling of debt, both private and public, in conjunction with IMF adjustment programmes. However, the real jolt to confidence came when Mexico's liquidity difficulties came to a head in August 1982. That greatly changed perceptions of sovereign credit-worthiness.
It is, of course, easily possible to overstate the dangers involved. As the Select Committee's excellent report points out in paragraph 4.4, only a small number of countries are sufficiently large borrowers to represent a major problem to the lending banks. Nevertheless, the debt position in total is sufficiently serious to merit very careful concerted remedial action.
We can take a good deal of comfort from the speed and flexibility with which the international community responded to the problems that then arose. The measures taken to cope in the Mexican case provided an important precedent. Short-term bridging finance was quickly provided by the Bank for International Settlements and the Federal Reserve. The many creditor banks formed an advisory committee to simplify matters by representing their interest. The IMF was able to use the time gained by the bridging finance to negotiate the terms of standby finance with the Mexican Government, while making it clear to the banks that the facility also depended on their co-operation in easing the immediate liquidity problem and helping to finance the adjustment process.
Other recent IMF-backed debt-rescheduling has invariably followed a similar pattern. Debtor countries have negotiated with the IMF economic measures which they believe will steadily improve their fundamental positions. To allow time for the necessary adjustments the IMF has been prepared to offer loans, but only on the basis that creditor banks agree to reschedule outstanding debt and contribute net new lending.
The Treasury and Civil Service Select Committee, in paragraphs 4.10 and 4.11, rightly stressed that all three elements were necessary and that, without any of them, rescheduling packages were just not negotiable. The three essential ingredients, to quote the Committee's words are:
The Committee put a good deal of emphasis on the role of the private banks in all that, and perhaps I could touch 605 on that in a little more detail. There is, of course, nothing unusual in banks seeing corporate customers through temporary patches of difficulty, so long as they are taking steps to put their business in order. In the same way, it is quite natural for commercial lenders to be prepared to continue to lend money to their major country customers —provided they have the assurance that the borrower concerned is taking action, agreed with the IMF, to put its economy in better order, and that the other main lenders will not precipitate a short-term liquidity crisis by refusing to reschedule existing debts or join in a programme of additional lending.
- "(a) the commercial banks agree to reschedule their outstanding debt, and to make a modest contribution of net new lending;
- (b) their lending is supplemented by a loan from the IMF;
- (c) the IMF's contribution is conditional on the borrower undertaking an austerity programme of the type that we have labelled `traditional IMF medicine."
So, seen from a straightforward commercial point of view, what has been happening is not exceptional; it is a perfectly normal commercial process. It is, of course, also in our wider national interest that those countries should now succeed in making adjustments in an orderly way. A disorderly or disruptive process would be bound to do damage both to the economies of the borrowing countries themselves, and in some circumstances also to the international financial system as a whole. It could set back the process of world recovery that is now under way, with all that would mean for United Kingdom exports and jobs.
Such packages will inevitably be subject to difficulties from time to time. Nevertheless, the debt problem is slowly responding to treatment. Over-borrowing is being tackled by the adjustment measures undertaken by the debtor countries. As confidence returns, the private sector, while obviously reassessing its exposure in relation to its capital base, is also able to face its full and continuing role in financing adjustment. Recent experiences have stimulated valuable reviews of supervisory practice, of the adequacy of information about banking exposure and of the analysis of country risk.
The basic need, however, is for a sustainable recovery in world activity that will ease that part of the problem that derives from the recession. I did of course say sustainable recovery, not international reflation; and it was sustainable recovery that the Treasury and Civil Service Select Committee said in paragraph 5.2 was needed and must be achieved without a resurgence of underlying inflation, and that the solution to the problem of over-borrowing is most unlikely to lie with more of the same.
Having looked briefly at the global issues involved, let me now say a little more about the role of two of the central institutions in all this, the IMF and the world's central banks operating through the Bank for International Settlements. First, I shall deal with the central banks and the BIS. Their role has been to act quickly to provide temporary bridging finance in cases where there was a general threat to banking confidence. It is right in such situations that immediate arrangements should be made by central banks, operating in conjunction with national political authorities, until longer-term adjustments can be negotiated by the IMF.
Such BIS bridging loans are subject to adequate collateral, either from the borrower or from other central banks. Once an IMF adjustment programme has been agreed, the countries involved have been able to use part of their new credit to finance repayment of the BIS loan when due. In two cases—emergency credits afforded to Mexico in August 1982, and to Brazil in December 1982 —the Bank of England received indemnities from the 606 Treasury in respect of its share of those loans, and details of the arrangements were published in Cmnd. 8651 and Cmnd. 8779.
§ Mr. J. Enoch Powell (Down, South)
The Minister referred to collateral that was available in connection with the loans. Could he give further particulars about the nature of the collateral?
§ Mr. Moore
There are many forms of collateral. I should prefer to return to the matter at the conclusion of the debate. The right hon. Gentleman makes a legitimate point, and this is a legitimate debate, as it has always been, about the nature of collateral for loans.
The president of the board of directors of the BIS has expressed his hope that there will be no further need for emergency credits of that kind, while recognising that the possibility cannot be ruled out. Nevertheless, the Government feel it right, as a matter of propriety, to seek specific statutory authority to cover any such future indemnities because of the contingent risk to public expenditure and the fact that potential liability can extend beyond a given financial year. That is the purpose of clause 2.
I come now to the role of the IMF. The fund has resources of two kinds — those based on quotas subscribed by members, and those borrowed from member Governments. There is widespread agreement that the fund's resources need to be increased. At the recent IMF interim committee meeting in February, which was chaired by my right hon. and learned Friend the present Foreign Secretary, it was agreed that quotas should increase by 47.5 per cent. As the House knows, subscriptions are for each member country equal to its quota, and must therefore rise accordingly. The draft order before the House facilitates that increase for the United Kingdom.
Finance Ministers and central bank governors of the Group of Ten countries have also agreed to increase the resources that the fund may borrow from member countries under the general arrangements to borrow. The original purpose of that facility, established in 1962, was to cope with prospective drawing of G 10 countries. For example, a significant element of the 1976 United Kingdom standby arrangement was financed with GAB resources. After the Mexican liquidity crisis, however, the GAB was also considered as a possible resource of conditional finance for other countries in extreme circumstances. Following G10 ministerial agreement in January 1983, the fund's executive board approved amendments to the GAB that would accommodate such a development.
Under these amendments the total commitment under the GAB is increased from 6.4 billion SDRs to 17 billion SDRs. The United Kingdom's share remains at 10 per cent. The "second window" for finance for members outside the G10 can be opened only when a proposal from the fund's managing director to use the GAB to cope with impairment of the international monetary system is accepted by participants and then approved by the executive board. Loans by participants will attract interest at market rates.
The new GAB will become effective when all the participants have notified the fund of their concurrence, and the deadline for notification is 31 December. Clause 1 embodies those proposals as they affect the United Kingdom.
607 Under the Bill, the limit on powers to lend to the IMF under its borrowing arrangements will be re-expressed in special drawing rights. It will also increase from its present level of approximately £350 million to 1,700 million SDRs, or about £1,200 million.
§ Mr. Robert Sheldon (Ashton-under-Lyne)
The Minister said that the debt problem was responding to treatment, yet the total debt continues to increase. Will he justify his statement that the debt problem is responding to treatment?
§ Mr. Moore
I said that the debt problem for the specific crises that were occurring was slowly responding to treatment. The Bill seeks to extend additional resources to the fund to enable that process to continue. I do not doubt the difficulties that world banking and the developed world face over the problems of the nations of the underdeveloped world. I stressed, as carefully as I could the words "slowly responding".
§ Mr. James Callaghan (Cardiff, South and Penarth)
Has the Minister seen newpaper reports that, because of the increase in the IMF quota, Third world countries may not now be expected to use the facilities under the general arrangements to borrow? Will he assure us that that is not the case and that the new proposals for including Third world countries will enable them to borrow through the GAB and use their extended quota?
§ Mr. Moore
As the right hon. Gentleman knows from experience, more than I do, I shall not comment specifically on that. However, within the Bill and the money order arrangements relating to it, not only is there an increase of 47.5 per cent. in the quotas, but there is a sizeable increase in the resources to the GAB, which effectively will double the overall resources of the fund. To that extent the problems that he mentioned will be more easily solved. I shall return specifically to the point about giving a commitment.
§ Dr. Jeremy Bray (Motherwell, South)
Did the United Kingdom representatives at the G10 meeting last Friday support or oppose the proposal of the IMF's managing director to increase the borrowing facilities by the date of the IMF's annual general meeting in September? The reports are that Germany and the United States opposed the proposal. What did the United Kingdom do?
§ Mr. Bowen Wells (Hertford and Stortford)
Will my hon. Friend tell the House how he arrived at the increases in both the quotas and the SDRs? Many countries asked for double the amount that he has announced today.
§ Mr. Moore
Hon. Members, and especially the right hon. Member for Cardiff, South and Penarth (Mr. Callaghan) may wish to be reminded of the increases to which we are referring specifically today. The meeting agreed to nearly a doubling of resources in usable currencies, which is more than twice the increase that was agreed last time. We start from a fund of 61 billion SDRs, of which 30 billion SDRs is in usable currencies, and that, as the right hon. Gentleman knows, is the key.
608 The meeting agreed a quota increase of 30 billion SDRs, or 15 billion SDRs in usable currencies. The GAB was increased by 10 5 billion SDRs, plus a sizeable, but so far undecided, additional contribution from Saudi Arabia. We believe that most of that sum will he usable, so we are talking about an increase of 25 billion SDRs of usable resources, which will compare favourably with previous increases.
Several right hon. and hon. Members have tabled observations about the provision of assistance to Argentina. I well understand the anxieties on this matter. Argentina's invasion of the Falkland Islands was am, act of unprovoked aggression, and its ejection from the islands cost British lives and hostilities have yet to be formally ended. Yet we, through the IMF and through the United Kingdom banking sector, are involved in the international effort to facilitate the resolution of Argentina's debt problems.
I cannot hide fro n the House my distaste, and the distaste of my right hon. and hon. Friends, that this should be necessary. But the House should not deceive itself. It is necessary, and it is very much in the interests of 13ritain and the world economy, that Argentina should be put back into a position from which it can repay its overseas debts. Default by Argentina would not be in our interests. It would be inimical to the whole financial system upon which we, as a major trading nation, depend more than most. It would damage our prosperity and destroy British jobs. I know that the Opposition will understand that.
It is also in our interests that the IMF's adjustment programmes should be negotiated in a political way. Their purpose is to stabilise the international financial system to the greater good of all. An attempt to grade access to IMF support according to the political complexion of a member country would be wholly damaging, counter-productive and without precedent.
That does not, however, mean that the performance targets do not bite, is was evident in 1976. The IMF programme agreed in January gives us the central elements of the international package. It is based on a thorough economic assessment. Disbursement is in five quarterly instalments subject to fulfilment of performance criteria covering balance of payments deficits, public sector domestic and external borrowing, domestic credit expansion, the elimination of external arrears and the removal of exchange restrictions. The United Kingdom is represented on the executive board of the fund, which is responsible for reviewing the progress of the programme and ensuring that the criteria are met before advances are made. We are playing our full part in that process.
Perhaps I could remind right hon. and hon. Members of the historical sequence. At the beginning of the Falklands conflict the previous Government took action, with the full support of the House, to freeze all Argentine assets in the United Kingdom by means of directions made under the Emergency Laws (Re-enactments and Repeals) Act 1964. In an attempt to improve the long-term position and to facilitate an agreement between the fund and the Argentine authorities, the Government acted on 14 September last year to begin to remove those restrictions on a reciprocal basis We did that without in any way compromising our position on the Falklands. We have always said—both sides of the House accept this—that we wish stability to be restored to Argentina's economic and financial system.
609 Much progress has been made. The Argentines have removed many of the financial restrictions that they imposed last year on British companies. The fund programme built in a specific condition that any remaining Argentine discriminatory financial restrictions would be lifted. A time scale for the removal of exchange restrictions was not, as I have already made clear, the only condition of the fund programme. Nor would it have been appropriate for the United Kingdom to design or to dictate such general conditions, which would need to be consistent with the fund's normal practice and cover the whole spectrum of economic policy. The removal of discriminatory restrictions, although a matter of keen interest to us, is a matter between the fund as a whole and an assisted member, since discrimination is offensive to fund practice. Argentina has the right to apply for a waiver of any conditions imposed, but such matters, especially matters of principle, are taken seriously by the board. My expectation is that any such application would be refused.
I should add that the commercial bank loans are contingent on satisfactory performance of the IMF programme. The first was limited in time. Drawings on the medium-term loan, still to be signed, would depend on provision of a certificate from the fund that the IMF programme was on track. That requirement is consistent with the normal pattern of relationships about which I spoke earlier.
§ Mr. Tam Dalyell (Linlithgow)
Is it an unfair synopsis of what the Economic Secretary is saying that the overwhelming British national interest is that Argentina should be solvent, even if that means that it can buy hideous weapons, such as Telemine and Otomat missiles, which are far more formidable than Exocets, and that there is nothing we can do about it? In that case, to be fair to our service men, is not the logical conclusion to what he is saying that we must negotiate?
§ Mr. Moore
That is not a specific synopsis of what I have been endeavouring to say. As for IMF conditionality and the details that I have described, it seems to most of us who look at international organisations such as the IMF that it is less likely that nations such as Argentina will purchase the kind of weaponry to which my hon. Friend was referring. I am not for one moment suggesting that it is not possible, but it would seem to be less likely. That is what I am seeking to suggest about the conditionality relating to the IMF.
§ Mr. D. N. Campbell-Savours (Workington)
Is it also correct that, within the arrangements that govern the advance of IMF funds to the Argentine, under paragraph 11, the chairman of the interim committee can request a review of the terms of conditionality in the event that the Argentines in any way defaults on the terms of the unpublished letter of intent? Do the Government intend to press ahead with that review in the event that there is the slighest variation?
§ Mr. Moore
The hon. Gentleman is extremely well informed of the details. He is correct to inform every one that the Government's attitudes on the actual conditions are clear. As I said, my expectation is that if there were any such application for a waiver it would be refused.
I have set out the position in some detail because I am not clear that it has been fully understood by Opposition 610 Members. It therefore seems useful to clarify the matter. I do not recall exception being taken by Opposition Members to the decision to move away from bilateral United Kingdom restrictions on the basis that I have described. I trust that they are not saying that it would be wrong for conditions to be laid down by the IMF; conditions incorporating understandings about the removal of restrictions and other matters. I cannot imagine that they would have preferred such questions to be decided between the United Kingdom and Argentina alone. I do not seriously believe that that could have been in their minds.
In short, therefore, this is a conditional pattern of support. I accept of course that programmes have been known to break down. Our hope must be that Argentina satisfies all the performance criteria and so makes manifest a return to normality. To the extent that Argentina is forced to give priority—this is the point that the hon. Member for Workington (Mr. Campbell-Savours) correctly raised —to paying its debts, controlling its public expenditure and its further domestic and external borrowing, its ability to buy arms is restrained.
It is to the credit of both sides of the House that they have made clear their concern for the developing world, the health of the international institutions and the maintenance and strengthening of capital flows to the Third world. It is to their credit also that they wish to see Argentina brought back, if that can properly be done, into normal economic and political circles and that they recognise, when the question is put in that way, that any other approach would have less positive implications for United Kingdom employment and the world financial system.
I conclude on the main thrust of today's Bill and debate. The House is asked to give its assent to legislation that will allow the United Kingdom to continue to play its full part in international efforts to stabilise the sovereign debt problem. I pay tribute to the full part which, in particular, my right hon. and learned Friend the Secretary of State for Foreign and Commonwealth Affairs has played in these matters. With wise counsel such as his and continued partnership and good will among all those affected, none of the problems that we face need defeat us. I commend the Bill to the House.
§ 4.4 pm
§ Mr. Peter Shore (Bethnal Green and Stepney)
I beg to move, to leave out from "That" to the end of the Question and to add instead thereof:this House declines to give a Second Reading to the International Monetary Arrangements Bill which fails to impose conditions on United Kingdom financial assistance to the Argentine while the present state of hostilities continues.I want, at the start, to make our position plain. The Opposition are strong advocates and supporters of international co-operative measures designed to help deal with the great menace that the massive indebtedness of so many non-oil developing countries poses, not just for their own peoples, but for the world economy. That is why we shall not oppose the International Monetary Fund (Increase in Subscription) Order 1983 when it comes before the House a little later. That order authorises a basic 25 per cent. increase in the United Kingdom quota to the IMF. Our criticism, if we have any, is not that it is too much, but, on the contrary, that it is too little. Nor do we oppose, I must make this clear, the general intention behind the two clauses of this short Bill.
611 The increase in the sums that the Treasury will be able to make available to the IMF under the general arrangements to borrow from the present £350 million to £1,200 million is welcome, as is the arrangement in clause 2 for the Treasury to indemnify the Bank of England in respect of its participation with other central banks and the Bank of International Settlement, in supporting rescue operations aimed at avoiding financial collapse.
I must focus now upon our amendment. I congratulate the Economic Secretary on making his first speech from the Dispatch Box. Although he put forward a reasoned and plausible case, it is not one, I regret to say, that I found wholly convincing in two major respects. Like my right hon. Friend the Member for Cardiff, South and Penarth (Mr. Callaghan), who intervened, I found the Economic Secretary altogether too optimistic in his general judgment that the debt problem was responding slowly to treatment.
I looked, unusually, at page 2 of The Daily Telegraph today. There was a report by Sir Gordon Borrie from the Office of Fair Trading highlighting an example of indebtedness upon which I am sure many hon. Members will wish to comment. It contained a story about a married couple who, 25 years ago, borrowed £50 and entered into an arrangement to repay it. Unfortunately, they fell short of the terminal date of repayment and, therefore, were driven into a rescheduling arrangement. That rescheduling arrangement again fell short of the terminal date of repayment. So it continued: 25 years later, they are in debt to the extent of £2,500 from the original £50 that they borrowed.
I have a horrible feeling that that is a minute example of what is happening on the world stage today as a result of the mammoth indebtedness that is afflicting so many countries.
My second criticism is of the Economic Secretary's attempt to persuade us that the Government's approach to Argentina and the refinancing of its economy is somehow in our national interest. It is a matter with which I shall have to deal at some length.
Our amendment appears to be well timed because today, if I am correctly informed, representatives of the leading commercial banks are meeting in New York to sign a five-year agreement with Argentina to provide that country with a medium-term loan of $1.5 billion of which approximately 10 per cent. — $150 million or £100 million—will be subscribed by British banks. Today's signing in New York marks the completion of a whole series of financial measures that began nearly a year ago designed to assist the Argentine economy.
The truth is that Argentina has an overseas debt of about $38 billion—a vast sum which it lacks the capacity to repay or even to service. The package of international assistance comprises three main linked elements. The first is IMF standby credit of $2.2 billion, formally agreed on 24 January. Secondly, there are two bridging loans—$500 million from the Bank of International Settlements and $1.1 billion from the commercial banks. The third element is the medium-term loan for $1.5 billion, which I assume replaces the bridging money. That is to be signed in New York today.
§ Mr. Shore
I thank the Economic Secretary for that information.
Whether those funds will be sufficient to enable Argentina to cope with its present difficulties and, if so, 612 for how long are open questions. What the Opposition find extraordinary and unacceptable, in the light of the seizure of the Falkland Islands by the Argentines last year and their subsequent liberation by the British task force, is that the British Government and British commercial banks have contributed at every stage to the refinancing of the Argentine economy, while the Argentine Government have refused to terminate the state of hostilities between them and us.
That is far from a formality. The continued threat to the Falklands by the Argentines has driven Britain into major and continuing expenditure on garrisoning, supplying and defending those islands. The latest development, announced only 10 days ago, is the decision to build an international runway at a cost of over £200 million to enable us rapidly to reinforce our garrison in the face of a resumed Argentine threat.
That is not all. The Argentine Government have embarked on a major programme of rebuilding and extending their armed forces. Last November they purchased from France nine super Etendard strike aircraft equipped with Exocet missiles. In February they took delivery of the first of four frigates, with British Rolls-Royce engines, now being completed in the great shipyard of Blohm and Voss Two sophisticated submarines are under construction in other German shipyards. There are six MEKO type 1400 Corvettes, and in the Bazan shipyard of El Ferrol in Spain five 900-ton Halcon class fast patrol boats are being fitted out with sonar and radar equipment and with an Alouette helicopter, not to mention the even more deadly rocket weapons to which my hon. Friend the Member for Linlithgow (Mr. Dalyell) referred a few moments ago. Virtually all that equipment, costing about £2 billion, will be delivered in the next 12 months.
The background is one of invasion and aggression, armed conflict at hem y cost in human life and equipment incurred in the liberation of the islands, the heavy further cost to Britain of ensuring that our arm's length defence remains a sufficient deterrent, and the Argentine purchase of an armada of new ships from European countries and of planes and missiles from France, Brazil and Israel.
Why on earth, against such a background, are Her Majesty's Government and British banks lending money to Argentina today? The question became all the more pertinent last Thursday, when the Chancellor announced a cut of £1,000 million at home, including a reduction of £230 million in Britain's defence budget and £130 million in expenditure on the National Health Service.
We are talking, not simply about the rollover of old British credits to the Argentine, but about the provision of new money. The Government have not, to my knowledge, clearly revealed how much money is involved. I did not ascertain that from the Economic Secretary's speech. If, however, we assume that Britain's share of the $.2billion IMF loan is the same as our quota of the IMF, Britain's contribution in that form will be roughly £100 million. If reports of today's meeting in New York are correct, British banks will be providing a further injection of £100 million.
Right hon. and hon. Members on both sides of the House have asked how that expenditure can be justified and we have had a range of unconvincing and embarrassed answers from the Prime Minister, the Secretary of State for Defence, the Chancellor of the Exchequer and, with respect, from the Economic Secretary as well, although he has been able to address the matter more seriously in the course of a speech rather than in answer to questions.
613 In a written answer given on 20 December last year, the Prime Minister gave the excuse that lies at the heart of the Economic Secretary's defence today. She said:These loans are not for arms purchase, but are to help Argentina to continue paying its debts, many of which are to residents of this country. We support the IMF in its efforts to maintain the stability of the international financial system."—[Official Report, 20 December 1982; Vol. 34, c. 352.]The Prime Minister's unease with that excuse surfaced during Prime Minister's Question Time on 27 January, when she was asked a direct question by the then hon. Member for Harlow. He asked whether she approved of the involvement of British banks in making loans to Argentina, and she replied:Will the hon. Gentleman please understand that I understand why he is worried, and so am I?On the same occasion the Leader of the Opposition asked the Prime Minister to halt loans from this country until hostilities had ceased. She began her reply by saying:I share such feelings". — [Official Report, 27 January 1983; Vol. 35, c. 1060.]Echoing that view today, the Economic Secretary spoke of his distaste for the whole refinancing operation. Like the Prime Minister on the earlier occasion, he sought to justify the Government's failure to act by saying that it was not in the interests of the financial system of this country or of the West that there should be a default on either interest or capital, because the consequences would be very serious.
The Government's case has been fairly put this afternoon. It gives rise to three questions. First, it may indeed not be in the interests of the financial system of this country to increase the risk of an Argentine default, but how is that risk to be weighed? That was at the heart of the question put by my hon. Friend the Member for Linlithgow. How is that risk to be weighed against the defence risk to this country—which also involves heavy financial cost—and against the interest of the Falkland Islanders in continuing their freedom from Argentine molestation and occupation, not to mention the cost in British lives of maintaining that freedom?
Secondly, why did the Prime Minister not insist that any British financial assistance should be conditional upon either the acceptance of a formal end to hostilities or, better still, an agreement that the money should not be used for rearmament or warlike preparations?
Thirdly, is it true that British non-participation would have led to an Argentine default on all its debts to the Western world?
The first question— concerning the relative human and financial cost to Britain of a rearmed junta able to resume hostilities against the cost of non-payment to British banks—has received no answer at all from the Government. However, the scale of the expenditures is clear. Britain's capital and running costs for the defence of the Falklands were, last September, officially estimated at £1,600 million. That figure does not take account of the £200 million additional capital expenditure on the new Falklands airstrips, or the annual costs of maintaining, servicing and supplying our garrison. British banks have a total of £2,200 billion in various forms of credit to the Argentine. Simply as a financial equation, the cost of maintaining and defending the Falkland Islands, especially 614 if there were to be another assault upon them, is greater than the amount of British money involved in the Argentine.
The second question concerns making money conditional upon a proper end to hostilities and the abandonment of the major rearmament programme. My hon. Friend the Member for Workington (Mr. Campbell-Savours) has been very assiduous in asking questions, both last year and this, and on 31 January the Prime Minister gave him the following reply:The rules of the IMF do not allow such restrictions to be placed on its loans."—[Official Report, 31 January 1983; Vol. 35, c. 8.]The Prime Minister sought to bolster that by reference to the decisions adopted by the IMF in 1979, which are published on pages 20 to 22 of its document,Selected Decisions of the Executive Board".I have inspected that document, and, hardly surprisingly, it has nothing to say about the almost unique situation of a country seeking IMF support while in a state of continuing armed hostility with another IMF member state, and whose whole economy is distorted precisely by the massive arms programme of its military leaders, who purport at any rate to be the lawful Government of the country. However, paragraph 4 states thatin helping members to devise adjustment programmes the Fund will pay due regard to the domestic social and political objectives, the economic priorities and the circumstances of members, including the causes of their balance of payments problems.That is, as I am sure it was designed to be, a catch-all clause. It certainly allows for the most searching examination of the social and political objectives of the Argentine, including the seizure and attempted colonisation of the Falklands, and the massive rearmament programme now being undertaken by the Argentine Government. Therefore, I do not understand why we should now suddenly say that conditionality—which lies at the very heart of the IMF operation—should not be applied rigorously to the Argentine.
I well understand that to use conditionality to achieve specific political objectives opens up possibilities of action that may not be entirely welcome to many hon. Members, particularly Conservative Members. However, in my view, we must, in the period ahead, consider the politicisation of conditionality by the IMF and the open criteria that should be adopted. I have in mind not only the Argentine but the great controversy that followed the very easy extension of an IMF loan to South Africa, without any reference to its internal policies or its heavy commitment to defence programmes. That went unchallenged only a few months ago.
§ Mr. Campbell-Savours
Will my right hon. Friend also note that he is supported by two senior counsellors to the IMF? Mr. Manuel Guitian and Mr. Joseph Gold have written several tracts on this issue and they both accept that there are greater powers and responsibilities available to the IMF, to the chairman of the committee and to the executive directors of the board.
§ Mr. Shore
I am grateful to my hon. Friend for that point. I have long felt that the practices, rules and modus operandi of the IMF needed the most searching scrutiny and discussion in the House.
However, today we want to know whether the IMF looked at the Argentine military budget and the more than £2,000 million purchase of foreign arms. What was the 615 attitude of the United Kingdom's representative on the executive board? The Economic Secretary did not answer those questions. When the Prime Minister was asked about them, she argued that the normal conditionality clauses of the IMF would exert pressure, to beneficial effect, on the Argentine Government's spending programmes. However, the last item of Government expenditure to be cut in a country that is run by a junta composed of army generals, navy admirals and air force marshals is the budget of the armed forces. Therefore, I am not impressed by that argument.
The third question that I put, and which I now seek to answer, was whether British withdrawal from further financial aid, if collective action could not be agreed, would lead to an Argentine default. That is difficult to believe. Although our contribution is substantial, 93 per cent. of the IMF loan and 90 per cent. of the commercial bank loan come from non-British sources. Therefore, the argument that if Britain had taken a stand it would have brought down the whole Argentine house of cards cannot be sustained. If that is the overriding fear, it takes all the strength from what the Economic Secretary had to say about the invigilation of the Argentine economy, the quarterly examination of its performance and the strength of performance targets, because those performance targets would never be insisted on if the danger of default was always judged to be greater than the difficulties resulting from insisting on their adequate performance.
§ Mr. J. Enoch Powell
As the right Gentleman is anxious that the United Kingdom should not participate in these arrangements, will he explain why he is not equally anxious the the "whole house of cards" should be pulled down? The right hon. Gentleman seems to dislike the whole arrangement. Why should he worry about the notion that our non-participation would prevent its taking place? Surely he wants it not to take place.
§ Mr. Shore
I am certainly opposed to Britain making new moneys available to the Argentine while it remains in a state of hostility with us, maintains an active threat to the Falkland Islands and remains under a military junta. That seems a perfectly straightforward position, and I should be surprised if the right hon. Gentleman dissented from it. He is simply asking me whether I actively wish to see the collapse of the Argentine economy. My reply to that is no. I do not want to bring down the whole Argentine economy, because I think—this is where the Government's case must be taken seriously—that that would have repercussions throughout the world which would affect friends and allies, although not necessarily Britain to the extent mentioned by the Economic Secretary.
§ Mr. Powell
So the right hon. Gentleman is perfectly happy for the Argentine economy to be sustained by international action, provided that we do not have a finger in the pie. Is that his case?
§ Mr. Shore
The international community is not in a state of hostility with the Argentine. However, the burden of my case is that I would certainly wish to have the full co-operation of the IMF and other institutions in putting pressure and imposing proper conditionality on the Argentine. If that can be done collectively it will be far stronger and more effective. That is my answer to the right hon. Gentleman. However, if I could not achieve that, I 616 would not go ahead easily with the unconditional British advance of money to the Argentine at a time when we —unlike the rest of the international community—are in a state of hostility and contention with the Argentine. I hope that I have made my point clear.
Prior to the debate I thought about the various arguments that might be put forward to justify British involvement in the refinancing of the Argentine. I have also listened to the additional arguments put forward by the Economic Secretary, but I have not been convinced and shall not be deflected from my course in recommending that my right hon. and hon. Friends should vote against the Bill'S Second Reading.
The Government are not acting correctly, and are pursuing a double policy with double standards: one of strong military defence, but at an economic cost that is enormous; the other of financial and economic appeasement that can only increase our own burdens, assist our enemies to re-equip and embolden them for further adventures. Many of us find that hypocritical and disgraceful. It is an insult to our armed forces, to the Falkland Islanders, and to the people of Britain. It is the supreme triumph of the values of money and the interests of finance over the values of freedom and independence and the interests of our country.
I want to say a few words about the larger questions of lending and borrowing and the threat to the world economic and financial system that now clearly exists. I mentioned earlier the enormous $38 billion debt that Argentina had accumulated. We know only too well that she is not alone in her predicament. The accumulation of debt by developing countries in the years since the OPEC cartel quadrupled the price of oil in 1974, and redoubled it in 1979, has been staggering. It has risen from some $100 billion to over $600 billion today, of which well over $200 billion is represented by the loans of commercial banks.
Given the vast surpluses that the oil rich countries accumulated, recycling—if that is the right word; I am pondering it, after what the Economic Secretary said—was essential if world trade was not to be disrupted by balance of payments crises of the most serious kind. However, that recycling, was not carried out to any serious extent, either by the international institutions—the IMF and the World Bank—or under the discipline of national banks, supervising and regulating their own commercial banks. So recycling was undertaken, with astonishing recklessness, by the commercial banks of the West. While the oil surpluses continued, and while the rate of inflation exceeded the costs of servicing the loans, world trade continued, in spite of setbacks, to expand, and debtor countries were able to service their increased borrowings.
Inevitably, as debts accumulated, and as the Western countries, led by the United States and the United Kingdom, pursued sharply deflationary policies after 1979, the bubble burst Recession in the West brought about a fall in both the volume and price of Third world exports. The servicing c f existing loans mounted steadily as a proportion of their external earnings. The Treasury and Civil Service Select Committee's report on international monetary arrangements, published on 15 March this year, documents the effects on individual countries. It is well worth perusal by any hon. Gentlemen who have not already done so.
No less than 59 per cent. of Mexico's exports are absorbed in the servicing, of debt. It is no less than 67 per 617 cent. in the case of Brazil, and no less than 88 per cent. in the case of Argentina, with other countries across the world with far lower per capita incomes than those two countries having to pay between 20 per cent. and 50 per cent. of their export earnings in debt reservicing. This great problem will increase rather than diminish. The Arab oil surpluses are no longer available. The commercial banks are already over-lent, but the needs of the developing countries to borrow more, both for development purposes and to finance their current accounts, remain.
The increase in IMF quotas, the increase in the resources available, under the general agreements to borrow, are almost trivial in relation to the magnitude of the debt problem. The packages arranged, of which Argentina is only one, are temporary and fragile. Only today we learn that the second tranche of the IMF loan to Brazil is unlikely to be paid, as that country, with strikes and riots spreading through its industrial areas, is unable to carry through the harsh conditionality that has been imposed.
The truth is that irresponsible borrowing and lending have created a situation in which the orthodox remedies of the IMF are almost irrelevant, and the whole problem has been immensely compounded by the deflationary policies which the major countries of the West have pursued and which they again reaffirmed as recently as Williamsburg.
§ Mr. Nicholas Baker (Dorset, North)
The right hon. Gentleman has said some severe things about the commercial banks. In so far as commercial banks went into lending to Third world countries under the umbrella of Western Governments, surely the Governments of Western countries have a great responsibility for the problems that now exist.
§ Mr. Shore
Yes, they have that responsibility. I do not seek to put the whole responsibility on commercial banks. Frankly, the greatest responsibility has been the deliberate option at the highest level by the leading countries of the West for policies of international deflation.
Unless the Western world is able, once again, to resume its own expansion, the whole problem will become insoluble. The corrective measures imposed on the debt-ridden developing countries can work only if they reduce their imports from the West and expand their exports to it. That can happen only if the economies of the West are themselves expanding. If the economies of the West continue to stagnate, the forces of protectionism will become irresistible.
I conclude with the following three points. First, we should now be giving absolute priority to measures in the United Kingdom, and in co-operation with our Western partners, to expand our economies and world trade. Secondly, we should seek to work out new proposals to enable the IMF to perform its essential role and to deal with the massive problem of world indebtedness. Thirdly, we should join others in finding ways of lowering interest rates, which bear so cruelly on those who are already laden with debt.
The Bill and the order that follows later today will need to be followed, in my judgment, by far more substantial 618 measures during the life of this Parliament. Meanwhile, we shall vote against this measure, for the reasons stated in our amendment.
§ Mr. James Callaghan (Cardiff, South and Penarth)
I echo the latter words of my right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore). I am sure that we shall come back to this subject many times. Dry as dust though it is, and difficult to comprehend, it is nevertheless one of the most important topics that the world and the country have to face, and it is for politicians to try to translate the problems into simple and understandable terms and explain why they vitally affect the ordinary citizen of this country and of so many other countries.
My right hon. Friend introduced a most important element into the consideration of the role of the International Monetary Fund. I have watched it over 20 years, and although the central bankers—and, indeed, financial Ministers — believed that they were being politically neutral and were trying to exclude politics from their consideration, in fact politics has been growing more and more important in the work of the IMF. Indeed, I believe that it will grow more than it has done so far.
My right hon. Friend moved the amendment about Argentina, which I well understand. However, I think we shall need to look at the problem because of the growing politicisation—if I may use that awful word—of the IMF in relation to much wider problems. There is the whole question of human rights and the terms on which loans are made. If it is thought right to impose austere rigid economic conditions on a country, which may, as my right hon. Friend said in his closing remarks, lead to riots, a coup, or loss of office by the existing Government, is that not a very political act? There is also the question that my right hon. Friend raised indirectly of the financing of arms programmes. We cannot act simply in relation to Argentina, but I think that countries will move more and more into greater political oversight of the work of the IMF. We shall have to be careful how that is done, but I believe that more thought should be given to the matter than has been given so far.
For 10 years I have listened to reassuring, bland statements—if the Economic Secretary will forgive me for saying so—to the effect that the debt problem is serious, that it is well understood, that it is under control, and that it is slowly improving. This afternoon we heard another such statement. However, 10 years later, the problem is still here, and I am bound to say that it will be here, unless the fundamental restructuring to which my right hon. Friend referred takes place, in 10 years' time. We are tinkering with the problem. That is not to say that I despise this Bill or its proposals. They are a solarium for a dangerous disease, but they will not cure the disease and nor will the disease be cured by the free market system which we have lived through and in which the banks have been encouraged.
I agree with the Economic Secretary that the banks were encouraged during the 1970s to take over the role of Governments. Governments were ready to step out of the arena and allow the commercial banks to step in and take over the responsibility that Governments were not willing to shoulder.
We thought—no, many of us did not; Lord Lever did not think and he had an interesting article in The Economist on the matter this week. He has written more 619 persuasively and perhaps with more foresight about this than most people. Not everybody thought that it would be possible successfully to recycle those petro-dollars. It was claimed as a success when the petro-dollars flowed from the OPEC countries into Wall street and the City of London and were then sent to Third world countries which, momentarily, were able to finance their exports with ease. It was said to be a great success, but it was an illusion that was built up that it was possible to have a fivefold increase in world oil prices without a long-term economic cost.
The Bill destroys that illusion and pretence. It says that it is not possible to continue along those lines. The banks have found themselves in great trouble and Governments have now had to step in, despite the prejudices and ideologies of some of the leaders of the Western world. President Reagan came to power on a programme of withdrawing support from the IMF, curtailing its arrangements and reducing the facilities that it might employ. Three years too late, he has learnt the facts of life and he and the United States Treasury have had to come round because there is no other way.
I am looking forward to hearing the right hon. Member for Down. South (Mr. Powell) — he dissented audibly when the Economic Secretary was putting his conditions earlier—try to defend the case for commercial banks lending at high rates of interest under a free market system, piling the unpaid interest on top of the exisiting debt, finding themselves ensnared in their difficulties, and eventually having to step out and refuse to lend until forced to do so by the IMF. I always value the right hon. Gentleman's contributions on these matters.
What would be the position of small countries? I do not mean Brazil. Brazil is big enough to look after itself and will get its money. I am told the Prime Minister is opposed to that—if I may say so by way of interpolation—but it would be short-sighted of her if she were, considering her priorities in the south Atlantic. But what will be said to those countries—there are several of them—who are unable to provide a supply of clean water, elementary housing and the very elements of health for their people? Will it be said that they must adopt a free market philosophy and that if they cannot borrow from the commercial banks on commercial terms there is no international institution to take their place? If that is the right hon. Gentleman's case, it may appeal to his head but thank God there are occasions when his heart will overrule his head. I hope that this will be one of them.
The conditions that have been imposed upon some of the smaller countries have made it impossible for them to fulfil the conditions from either the banks or the IMF. I shall not name any country today because I do not want to make any invidious comparisons. However, I have spoken to our officials who serve in some of those countries and they tell me that the conditions that the IMF is attempting to impose are impossible to achieve. If that is the position, where will it put us?
I want to return to the kind of proposals that were suggested by my right hon. Friend the Member for Bethnal Green and Stepney. We need many changes, not only the exposure of the banks. Mr. Tom Causen, the president of the World Bank—a hard-nosed banker if ever there was one—said recently in his report that some of the smaller Third world countries are having to abandon projects that are economically sound, that would aid economic growth and that, at the same time, would increase their export 620 potential and capacity, because of the failure of the United States, among other to fulfil its replenishment of the International Development Association funds, the projects of which have been guaranteed. They are now having to be put aside.
A further effect is the regional impact. Many countries, because of their shortage of foreign exchange—some of them have no access to foreign exchange and no reserves other than what they obtain from the IMF—have had to embark on what is almost a bilateral barter arrangement with their neighbours in Africa, parts of Asia and South America. They are trying to arrange between each other that at the end of the year neither will owe the other anything but that everything will be balanced out. That is because they will not have any foreign exchange to pay each other, anyway. The IMF will not give them any and the commercial banks are unable to provide any more. That is silting up the channels of trade. It means that trade is being conducted an a lower level that it need or should be between these countries.
The Bill will provide some help in such circumstances. I particularly welcome the fact that, under the general arrangements to borrow for the first time, what are called Third world countries — non-member countries of the Group of Ten—will be empowered to borrow through those arrangements. That is a sensible step forward. I hope, in view of some reports in the newspapers, that I understood the Economic Secretary rightly and that he will give me an assurance that the extension of this arrangement will not be curtailed because of the proposed increase in the IMF quotas. That would be to rob Peter to pay Paul. I hope that there is no such suggestion and that Britain will not support any arrangement under which access to the genera] arrangements to borrow would be denied to Third world countries.
It is said—the Economic Secretary got close to it this afternoon — that the present economic recovery will make matters manageable. I do not believe it. First, we do not know how long the present world economic recovery will continue. I have a feeling that it will continue until President Reagan is re-elected. Unless the American economic recovery is more deeply seated than it is at present, based as it is on domestic consumption, construction and the rebuilding of inventories, until we see new capital investment, the American recovery, with all its implications for European recovery, is not likely to persist for longer than 18 months at the outside. Even if it does, on the best estimates that can be made, the rate of growth of the Third world countries will still be only half what it was five years ago.
That being so, there is no way in which those countries can use their export earnings. Even if the price of primary commodities and metals goes up—metals are going up now, but primary products are not moving much—the additional export earnings will not be sufficient to do more than service a large part of the loan, with little left over for purchasing Western industrialised countries' exports. Therefore, there is little prospect of the debt problem going away.
I have come to the conclusion that we now need a fundamental restructuring of world debt. Lord Lever said:The West needs to teal with particular emergencies within a comprehensive and durable system.We do not have such a system at present. We have been living from hand to mouth ever since the crisis in oil prices. We have staggered from one crisis to another. The 621 crises have not affected us too much, although they have had an impact on this country, but they have affected dramatically and seriously the countries of the Third world.
§ Mr. Nicholas Baker
What the right hon. Gentleman said about the responsibilities of Western Governments is interesting. Should commercial banks pay part of the price for the general irresponsibility? Will it be left to banks or Governments to do the restructuring?
§ Mr. Callaghan
There are a number of ways in which the matter can be considered. It is not my task to give a solution. One solution, which has been hotly criticised, is for the World Bank, or the IMF, or a combination of the two, to take over some of the liabilities. That is regarded as bailing out the banks, but the position of the Third world is more important than not bailing out the banks. Another solution is that the commercial banks should be required to lend further sums, either with or without additional guarantees, at a penal rate of interest. Therefore, those banks would have to subsidise the rate of interest that they charged on new loans, having built up tremendous loan charges during the past. I shall not propose either of those solutions or any other.
However, the matter has been partly taken out of the hands of the banks, which still have severe exposure. If Brazil were to default, there is no doubt that a large slice of the capital of one internationally known bank would go and several smaller banks would suffer. That would be injurious to the prospects of world expansion, however much there is. Therefore, I shall content myself with saying that I shall not attach myself to any solution. Solutions can easily be worked out by the expert technicians from whom I have had the most profound professional advice, but I am not necessarily so keen on their political judgment.
We need to restructure the Third world debt, lengthen it, make maturities longer and make the interest rates less. My right hon. Friend the Member for Bethnal Green and Stepney referred to this. We need to reconsider the rates of interest that are being charged. What we need is an international interest rate disarmament conference. I might go further than START has done. I say that because I know of no rule under which it is necessary for real interest rates to be so much higher than the rate of inflation. They used not to be. Some 20 years ago, in the bad old days when I was Chancellor of the Exchequer and we had only 350,000 unemployed, a growth rate of 3 per cent. or 4 per cent. a year and all the rest of the evils from which we have now escaped, we had some international arrangements on interest rates. I put it strongly to the politicians and statesmen who lead us today that there is a case for them all to get together and to ask how far it is necessary to relate the real rate of interest to the level of inflation. Why was it possible for the world to have a lower rate of interest than today in the 1960s, which was not too bad in retrospect, however much Reggie Maudling and I have been criticised since? It is not enough to say that one has to finance the American debt and that it is forcing up the rates of interest. If there were general agreement, it would be possible to reduce interest rates.
Means should be found to prevent a worsening of the terms of trade against the Third world. They have moved badly against those countries since the oil price crisis. I 622 have already referred to the need for a comprehensive and durable world payments system. It is the sort of thing that Lord Lever has argued for on many occasions. He and I often hunted together on that matter. I became convinced of its necessity many years ago. We must go on preaching it. I hope that it will be taken up by Governments.
Finally, there should be more political oversight of the IMF. I have already referred to that matter and shall not go further into detail today. As I have said, the technicians at the IMF do a first-class job and try to do so internationally in a way that satisfies the needs of the statutes under which they operate. Those statutes are 40 years old. If one reads them carefully, one sees that they contain the material for extending the operations of the IMF. It is necessary to extend those operations. Just as we are becoming one world in so many ways, in our economic, financial and monetary policies we have to move nearer to that end. I am by no means an idealist. No one has ever called me that. However, I can see the practical necessity for us to co-ordinate our arrangements in all those affairs much more than we have done so far if we are to make the fullest use of the wealth of natural resources that the world possesses to meet the basic needs of men and women throughout the world.
§ Mr. Geoffrey Rippon (Hexham)
I congratulate my hon. Friend the Economic Secretary on the assumption of his new and important responsibilities. I express my gratitude and, I am sure, that of the House for the way in which he introduced the Bill. I share some of the feelings expressed in the debate that it was an over-optimistic assessment of the situation. I apprehend, however, that the voice of Jacob and the hand of Esau are being represented on the Treasury Bench.
I entirely agree with the right hon. Member for Cardiff, South and Penarth (Mr. Callaghan) that this is one of the most important, if not the most important, issues that face the House and the free world. It is extraordinary that we should pay so much attention to the Chancellor of the Exchequer's statement last week, yet regard this as an unimportant debate that might end conveniently at 7 o'clock. The Chancellor's statement pales into insignificance besides the international debt crisis. Everything that he proposed, except possibly the useful reform of one of the more stupid Treasury budgetary procedures, was entirely at the margin of events.
It is rather strange that not one representative of the Social Democratic party or the Liberal party has been present at any stage of the debate. I suppose that they are busy in their constituencies, telling their supporters that they will clean the streets for them or get them a council house, and attending to their grass roots. Their proper place is here in a debate of this nature.
The crisis that we face today might be likened to a series of time bombs, ticking away under our hopes of economic recovery. We do not know exactly where the time bombs will go off—it may be in Argentina or Brazil or, as the right hon. Member for Cardiff, South and Penarth said, the crisis might affect first some of the smaller countries whose problems are desperate. All we know is that the Governments who are responsible simply send out the fire engines each time and react to each explosion as it takes place. They are experts in crisis management and so must always have some crisis or other to manage.
623 I welcome the Bill in so far as it increases from £350 million to £1,200 million the Treasury's power to lend to the IMF. Some hon. Members would regard that as quite a lot of public money to be dispensed, so the Government should be concerned about it. I agree with those who suggest that, far from it being too much, it is, as the right hon. Member for Bethnal Green and Stepney (Mr. Shore) suggested, too little. It is only a temporary palliative and we can be sure that, in the course of this Parliament, other measures to deal with the international debt crisis will be brought forward. It is a part, and only a small part, of what is proving to be a slowly developing international operation.
That international operation has become necessary in order to rescue hapless debtor nations from not only financial but economic disaster. In the process of rescuing them we are having to rescue ourselves. We have to rescue those who have lent so much and have lent it so unwisely and at such crippling interest rates. Lord Lever —although not so much when he was in Government—and many others have argued for a long time that one cannot sustain economic recovery or prosperity on the basis of high interest rates of the type that exist today.
Before the right hon. Member for Down, South (Mr. Powell) leaves the Chamber, I should like to pay him a warm tribute, as I have done on other occasions, for the notable speech that he made to the junior chamber of commerce in Bangor in the late 1960s when he said that no country could prosper or perhaps even survive with interest rates at 10 per cent. In the speech that the right hon. Gentleman intends to make, I hope that he will agree that high interest rates fuel inflation until the point when they bring about economic depression and disaster.
Like the right hon. Member for Bethnal Green and Stepney, I, too, read the newspapers. I read The Times rather than The Daily Telegraph this morning. I noticed the headlineCurbs sought on loan sharks".My first impression was that the headline related to our debate this afternoon. It can be profitable to be a loan shark, but it is essential to have enforcers. Anyone at the lowest level of the Mafia could tell us that. We cannot go out and break the leg of the President of Brazil. We cannot put outside the presidential palace a van labelled "debt collector" so that he would be shamed into paying. We must tackle that problem in a different way.
I should like to ask the Government several questions. I will not attempt, as the right hon. Member for Bethnal Green and Stepney did, to ask questions and then to provide the answers. I want the Government to provide the answers. Will my hon. Friend make clear what similar action is now being taken by other Governments to increase their contributions to the IMF? Will he say a little more about how he envisages debtor nations such as Brazil ever being able to repay their IMF loans if they are still subject to existing interest rates? Perhaps he will clarify Brazil's position. The right hon. Member for Cardiff, South and Penarth said that Brazil must get its money—and I have no doubt that it will—but we have, in effect, to give Brazil the money to pay the interest on the debt and then to pay a tip so that Brazil will not embarrass us by defaulting altogether. What will Brazil receive? Will we be contributing and, if so, on what basis and to what extent? Do the Government feel that Brazil or any other country is likely to default, and, if so, what will we do in those circumstances?
624 My hon. Friend said that the basis of rescheduling was subject to conditions including austerity programmes. It makes more sense to have conditions such as compliance with human rights, which do not involve disastrous financial consequences. Countries that are on the floor and are using a high proportion of their national income to try to pay their debts—they are doing rather well and have done their best not to join the defaulters club — are being crippled by interest rates which mean that they can not buy from us. That leads to a downward spiral in international trade that must be halted.
My hon. Friend said that the world debt problems are slowly responding to treatment. That is not merely nonsense but nonsense on stilts and, if I may say so, on shaky stilts. I did not sense from my hon. Friend's speech that the Government are fully aware that not only the debtor nations but the whole of the world banking system is continuing to roam around the rim of chaos. I felt that there was no sense of urgency about the problem.
Clause 2 provides for the Treasury to indemnify the Bank of England in respect of its participation in international support operations—so far so good; I do not complain about that—but have the Government any further plans to extend such an indemnity to private banks and institutions? It has been said that the banks were pushed into lending, but some of them were willingly pushed and were a little greedy.
Over the past few years the Western world has had a licence to make money provided it made nothing else. After the 1979 budget I said that if I charge a man these rates of interest I do so partly because I never expect him to pay or that I expect the whole of the principal to be repaid in interest during the first few years. They were unwise loans and, when the time came for recycling, the Arabs, like a good many other sensible people, lent their money to safe countries and safe institutions in order that they should pass it on to unsafe ones. The difficulties have been compounded. The commercial banks will not be tempted to do it again. In that case, what will the Government do to insure them against loss? In the United States, the Hanover Manufacturers Trust has made proposals for official loan guarantees. Reference has been made to Lord Lever's admirable article in The Economist of this week, which again puts the case for which many of us have argued for so long for collective action to support the overstrained international banking system. What is interesting is that Lord Lever puts forward suggestions not only for a new look IMF system but for the development of export credit agencies. What is the Government's attitude to the proposal that we should extend the power of the export credit gruarantee agencies to ensure some exports of capital as well as of goods?
What action is being taken on the various pledges given at the Williamsburg summit at the end of May? I know that it is said that those are vague communiqués. I have always thought that if one took six communiqués and, with the aid of a word processor, shuffled the phrases around, one could produce another communiqué just about as useful. But we must not insult the intelligence and integrity of Heads of State and Government by believing that they are unable to read or do not understand what they have solemenly signed in our name.
However, we all know what the United States has been doing about steel imports in contradiction to all the fine talk about resisting protection. Last week, the Prime Minister said that she deplored that action and she rightly 625 accords importance to the Williamsburg declaration. She will recall that at Williamsburg, the Heads of State and Governments invitedministers of finance, in consultation with the managing director of the IMF to define the conditions for improving the international monetary system and to consider the part which might, in due course, be played in this process by a high level international monetary conference.That is a little lukewarm, but it is a recognition of the problem. What initiative are the Government taking in that regard? I am not suggesting calling a high-level conference without adequate preparation through official channels. Before there is a high-level conference there must be meetings of the relevant civil servants. I have always taken the view that, if it is expedient that one man should die for the people, it should be a civil servant, not a Minister. They are the people who must get down to the nitty gritty discussions. We hope that when they have prepared the ground sufficiently the Heads of State and Government will appear with golden pens, knowing for once what they will use them for.
I fear that, in spite of the limited rescue operation that the Bill represents, there is likely to be a continuing wave of international financial crises, perhaps culminating in considerable debt repudiation, if we do not take urgent action to deal with the problem. In that process, the developed and the developing countries suffer equally. The rich will not be able to sell and the poor will not be able to buy. That is the classic recipe for economic depression and disaster. I do not underestimate the difficulties associated with reaching international agreement, but we would all like some assurance that the Government are willing to take a lead to secure an effective overhaul of our international monetary system before it is too late.
§ Mr. J. Enoch Powell (Down, South)
It is one of the most difficult and disarming moments when a Minister introduces a Bill with the assertion that everybody agrees with and approves of the objects to which it is directed. One is embarrassed, amid the approving murmur that follows such declarations, to punctuate his speech with a series of negatives, as, taught by experience not to keep my month shut, I did not refrain from doing this afternoon.
Judge, then, how grateful I am to the official Opposition for having tabled a reasoned amendment to the motion for Second Reading. It is not that they are serious about it. It became clear during the speech of the right hon. Member for Bethnal Green and Stepney (Mr. Shore) that, in general, they agree with the nonsense with which the Bill is concerned. The whole contraption is not merely familiar but congenial to them. Nevertheless, thanks to the form of the motion that they have tabled they will vote against the proposition that the Bill be read a Second time.
§ Mr. Powell
The right hon. Gentleman misunderstands. Of course the Opposition are serious about their amendment, but they are not serious about the subject. Hence the contradictions in which the right hon. Gentleman involved himself. I am much relieved that the right hon. Gentleman has not disavowed his intention to 626 vote against the Question, That the Bill be now read a Second time. [Interruption.] There seems to be some disagreement in the ranks around me—not for the first time. I live in hope that, when the Question is put, there will be a sufficient cry from the Opposition Benches as will enable me to record my vote against the Bill being read a Second time. If that is so, I shall allow the order which the House will consider later—against which it will be impossible to find Tellers—duly to pass.
As I listened to the Minister, I noticed him referring to what he called the "fashionable" notions that were in circulation when the problem to which the Bill directs itself was building up. I could not help thinking what a fashionable speech it was that the Minister read to the House, and how replete with sentiments and notions from which, at the moment, it is impossible in polite society or the economic journals to dissent.
I should make it clear at the outset that I consider the international organisations with which the Bill is concerned to have two aims which are equally absurd and damaging, though the debate has principally directed itself only to the second. The first aim is to bring about stable, or as nearly as possible stable, exchange rates through the nations and central banks lending one another money to fudge the rates. The second is to lend money to those who are bankrupt, so that those who have lent to them shall, nevertheless, make their profits and get their interest. I consider both operations to be self-evidently absurd and arguably —I shall not argue it in too much length—damaging to both sides of the transactions.
It is clearly absurd to attempt to stabilise exchange rates. They express economic circumstances which, by their nature, are changeable and unforeseeably changeable. The respective supply and demand of the various currencies, which is what is expressed by the ruling exchange rates, are the response to real economic changes of which it is profoundly important those concerned should remain aware as they are spelt out to them by the movements of that price system. It is, therefore, something foredoomed to failure and inherently undesirable that what by its nature is unstable, needs to change, and is bound to change, should be sought to be restrained and stabilised by borrowing or printing money which may be then lent across the exchanges.
Although, however, that purpose is implicit in and served by the extensions which the Bill creates, it has not been the main topic of today's debate. The main topic of the debate has been the necessity to lend huge sums of money to those who, in private life, would already be bankrupt—in other words lend further huge sums of money to nations which are unable to repay and service the loans they have already contracted and which are determined that in no circumstances will they be found doing so.
The underlying proposition is that, faced with those debtors, we ought to lend them more money. Two reasons for doing so are given. The first is that if we do not lend more money they will not be able to buy our goods—the argument is usually wrapped up a little, but that is what it amounts to. Now, it is one thing to be told to sell all one's goods and give to the poor. It is quite another to be told that we should buy our own goods and then give them away. That is the activity to which we are to be stimulated by this type of proposition.
There is no possible benefit to be gained from buying our own exports and giving them away. The resources we 627 apply in that way would be more usefully, agreeably and advantageously applied inside this economy in all kinds of ways which hon. Members on both sides of the House on other occasions are ready enough to propose. I dismiss, then, as self-evidently vacuous the proposition that we ought to lend to the bankrupt so that they may continue to buy from us.
The other argument, however, the central argument, is that if we lend them some more they will become good boys instead of bad boys; that a reformation will, or at any rate can, be achieved in their economies and even their moral behaviour. The key to that transformation is found in what the right hon. Member for Bethnal Green and Stepney — I am grateful to him for the expression—called the politicisation of conditionality. That was a splendid phrase: it goes to the heart of the matter and sheds illumination on the whole great scene.
The "politicisation of conditionality" was what Chinese Customs was about. It was what we did to the Khedive Ismail, when we said, "A lot of our people have lent you a lot of money, and by Jove we shall get the principal and the interest on it out of the backs of your fellahin, O Khedive." That is exactly the proposition, not put in such brutal terms, that lies behind the plea to lend to the bankrupt—that we shall put them back into a condition in which they will be able to service the principal and interest on the existing debt as well as the new debt.
However, one necessary piece of mechanism of the "politicisation of conditionality" was omitted by the right hon. Member for Bethnal Green and Stepney and by the right hon. Member for Cardiff, South and Penarth (Mr. Callaghan). To make sure that our debtors behave, we must exercise some power of compulsion over them. We must be able to collect the Chinese Customs; we must occupy Egypt and see that, while the Khedive enjoys his operas, we run his country. The argument would be sound enough if we were saying, "Let us go and occupy these countries," — I hope not with an international body — "because we know how to run an economy." Such countries might raise their eyebrows at being told that. Still, we could say, "Let us show them how to do what we know so well. Let us march in and take control of the police and the administration. Then we can see that the loans are serviced and the principal repaid."
Make no mistake, it is not through ignorance that the debtors have got into this mess. It is not because they are benighted, stupid people. It was in obedience to tremendous political forces, and therefore it is nonsense to talk about "politicising the conditionality" of these loans unless we strike down those political forces.
I shall be interested to see the IMF setting about that task by the remote persuasion of an international body. There is indeed one threat that the IMF dare not utter. The right hon. Member for Bethnal Green and Stepney got very near to it, but he saw the gulf before his feet and stepped back just in time. The IMF cannot say, "Do this or we shall not lend you any more money" — [Interruption.] Someone says it can, but what have we been hearing about?
§ Mr. Powell
Not at the moment. We have been hearing that we must go on lending them money in order to sell them our exports and so that our own banking system may 628 not be disrupted. A fine threat the debtors will think it when, having used those arguments, the IMF itself attempts to threaten them with ceasing to supply loans.
The word "bankrupt" applied to them is deeply fallacious. We are talking about the problem of sovereign debt, and that which is sovereign is not made bankrupt. What we are really saying is that we would like to undermine, deny or withdraw the sovereignty of debtors who, if they were not sovereign, would be bankrupt.
An absentee from the debate who, without disrespect to the distinguished contributions of the right hon. Member for Cardiff, South and Penarth and the right hon. and learned Member for Hexham (Mr. Rippon), is its true hero is the hon. Member for Bolsover (Mr. Skinner). What a pity that activities elsewhere—it cannot surely be the eve of the Twelfth of July?—have prevented the hon. Gentleman from attending, for the hon. Gentleman has seen further and deeper into this matter than most, certainly than the Prime Minister, whose position was substantially undermined by her junior Minister this afternoon, when he withdrew her argument that after accepting another loan the Argentine would not be able to continue buying weapons—he only said that it was "less likely to be able to buy weapons", a substantial modification.
It is a pity, I say, that the hon. Member for Bolsover is not here to behold his triumph and the validation of what he has said on this subject; for one puzzle was left unexplained in the speeches of the right hon. Members for Bethnal Green and Stepney and for Cardiff, South and Penarth. The right hon. Member for Bethnal Green and Stepney referred to the "astonishing recklessness" of the lenders who have brought things to the pass with which we are now confronted. The right hon. Gentleman said that this huge volume of debt—these billions of debt—had been piled up with "astonishing recklessness". In the motives that we impute to others, we often reveal something of our own character. Something of the sterling honesty and simplicity of the right hon. Gentleman is revealed by the fact that he thought it "reckless" to lend these sums of money to Brazil, the Argentine and other countries.
The right hon. Gentleman said the bankers were taking a reckless risk. But what is the Bill about? It is a Bill to indemnify those who lend. We ought to ask why they were so certain that in due course this indemnity would be forthcoming, and why they were taking what they considered to be justifiable risks.
I will explain something else to the right hon. Member for Cardiff, South and Penarth in the context in which he challenged me. He referred to the large loans that had been made to enable countries to purchase oil at enhanced prices. That was slightly corrected later by the right hon. and learned Member for Hexham, who said that the loans were made in the first place to countries that could purchase the oil so that they could then pass it on to countries that could not purchase it. Now, the loans are the counterpart of the oil exports—no loans, no oil exports—and had it not been possible to make these loans, it would not have been possible to hoist the price of oil. The problem of sovereign debt itself is the relic of the mechanism by which the price of oil was able to be pushed up. If those loans had not been forthcoming, the bottom would have tumbled out of the oil market faster than the sheikhs could put it back.
§ Mr. Rippon
I was also saying that, when the price of oil had risen, the Arabs were wise enough to lend their money to British banks and institutions, which passed it on to unsafe countries.
§ Mr. Powell
I appreciate that. I am only disagreeing with the right hon. and learned Gentleman about his tense—when the price of oil "had" risen. The rise in the price of oil was made possible by the simultaneous increase in the volume of debt, direct and indirect—the recycling as it was called. No recycling, no price hike—as the Americans, I gather, call it.
When the right hon. Member for Cardiff, South and Penarth, appealing to my better nature as he sometimes does, asks me to contemplate the situation of a country where perfectly good commercial operations require to be financed, I do not shrink back in the least. First, it was these very loans, these very institutions, this very assumption of do-gooding on the part of some of the greediest and wickedest forces in the world, which were the initial cause of the misery and difficulties of the developing countries. Secondly, if there is a genuine commercial proposition anywhere in the world, be it in the poorest country, that proposition will be properly and commercially funded. The embarrassments of the developing countries are the fruit of what has been done by the international organisations.
I conclude with an obeisance, which is only due, to the hon. Member for Bolsover. He is fundamentally right when he says that this is a bankers' ramp. The private bankers in the various nations extended these loans—unjustifiable commercially and politically, which financed among other things the weapons used against this country—in the confidence that they would be seen all right when there was trouble by talking about the world financial system and our economic and commercial interests. Why were they so sure that this would be done? They were sure because these organisations are themselves the creatures of the banks. This is the connection which the right hon. Member for Cardiff, South and Penarth apprehended well in his references to President Reagan. They are not erected—that is only the blurb—to enable people to do good to their fellow men. They are erected to see that the major commercial interests are sustained — more than that, can engage in uncommercial operations to make interest and profits upon operations which will yield those interests and profits only if they are sustained internationally.
Even that word "internationally" is a fallacy, because in the end the burden comes back on to the backs of the people of each country concerned. There is a giveaway phrase in the explanatory memorandum on clauses with which we were provided. In paragraph 5 on clause 1 it says:The GAB provisions have no direct expenditure implications.When we come to clause 2, however, it says:In view of the contingent risk to public expenditure, the Treasury seeksand so on. It is in part out of the taxpayers of this country and out of their work and production that this vast bankers' ramp, presented as if it were a worldwide benevolent enterprise, will be financed in the end. That is why, with great delight, I shall take the opportunity vouchsafed to me by Her Majesty's Opposition of voting tonight against the proposition that the Bill be read a Second time.
§ Mr. Bowen Wells (Hertford and Stortford)
I start by discharging two pleasant duties. First, I welcome you, Mr. Deputy Speaker, to your Chair. This is the first time that I have had the opportunity to speak under your chairmanship. Secondly, I welcome the new Economic Secretary to his post in the Government, upon which I congratulate him.
It is always a great honour to speak after the right hon. Member for Down, South (Mr. Powell). His logic is, as always, impeccable, as his training, education and experience in the House always lead us to expect. I have always found with the right hon. Gentleman that he proceeds from an unsound assumption for his argument to an unsound conclusion. I shall point out where his unfounded and illogical assumption has been made.
The right hon. Gentleman has stated that exchange rates are a reflection of the economic circumstances of a country and that the lessons learnt from the exchange rate need to be applied to the economy of that country. Is that a sound assumption from which to proceed? It is clearly not, because we can manipulate exchange rates. Exchange rates are manipulated, and are in the process of being manipulated now. They are manipulated at the moment by the use of interest charges in the domestic economies of the United States and this country. We saw it apply in the domestic economy of Great Britain in 1979, when the economic theorists' idea was that one controls money supply by putting up interest rates. However, exchange rates went up enormously as well, which resulted in the crisis of domestic manufacturers. It is not true to say that exchange rates are invariably and inevitably a reflection of economic activity in a certain country.
One could take this back to the 19th century, when exchange rates were related to a certain value of gold. Again, they were the reflection not of economic activity but of the price at which gold was exchanged. It is common ground, although I should like to know the view of the right hon. Member for Down, South on this, that we were right to abandon gold as a standard against which to judge exchange rates. Had we not abandoned that, we would restrict our money supply, and therefore the growth of world trade, to the value of a commodity in the ground, which is unacceptable to the international community because much of that gold is in the ground of South Africa or Russia.
We are looking—and the basis of the argument of the right hon. Member for Down, South is this, although he failed to make the point — at how we can apply economic and financial disciplines to international and domestic economies without having some more regulated manner of being able to value our money. If sound money, and the right hon. Gentleman is a great exponent of this, is the basis of growth of trade and investment in our domestic economy, so it must be, by logic, in world trade.
Let us go back into the history of this crisis to see what has happened. There is a malfunctioning of the international monetary system. The present crisis had its seeds and origins in the fact that we were ripping off the oil-producing countries during the 1950s, the 1960s and the early 1970s. We were paying for the scarce commodity of oil with an ever-devaluing international currency because the United States Government began to finance the Vietnam war without taxing their citizens to pay for it. They then began to print money, thereby devaluing the 631 US dollar, which had been the foundation stone of exchange rate systems that had replaced gold. The fixed rate system that was introduced by the Bretton Woods conference was thereby undermined.
The oil countries naturally said that the rip-off must stop. Eventually, they got together and formed OPEC and jacked up the price of oil. That action produced the surpluses in the oil-rich countries, which were fed into the world banking system. A bank is both a lender and a borrower. It cannot lend money that it does not take in. Where was the banking system to find the projects and investments on which to lend money in order to repay the Arabs—the oil-rich countries—in a proper, undevalued currency? The newly emergent and fast-developing countries—especially the oil-rich—were the means. At that time, the investments made by those banks were sound, given that the price of oil remained at its then value.
However, oil prices are now falling, resulting in inability to repay loans. Those countries are then unable to repay the interest on those loans. The right hon. Member for Down, South is being absurd to suggest that a country can refuse to import oil, which is a basic source of energy. Many countries cannot refuse to buy it. Neither Britain nor a developing country can do that. They must continue to import oil to keep their countries going. The option of not importing oil was not open to developing countries. Therefore, they had to borrow.
The non-oil, developing countries are in the most extreme poverty and will not be affected by the Bill. The House should be considering the problem, to which the Economic Secretary did not address himself— I have complained not only to him, but to every Treasury Minister in the past three years—of the difficulties in the international monetary system. The Government should have the political will, formed through proper discussion and preparation, to lead an international discussion to regulate and apply the discipline of money in the economy. We must ensure that countries do not print money or over-inflate their economies. We must seek to improve on that.
§ Mr. Nicholas Baker
My hon. Friend is an expert on this subject. Does he agree that, contrary to the views of Opposition Members, there must be conditionality in the loans, and the conditions must be organised on an international basis?
§ Mr. Wells
I am grateful to my hon. Friend for that intervention. We are trying to concentrate on the discipline and therefore on the conditionality of IMF loans—which is the only international mechanism left, as the automatic disciplines of the gold standard or the fixed-rate exchange system no longer apply—which ensure that the debtor countries adopt the economic policies that pull them out of their difficulties.
§ Mr. Robert Hughes
Can the hon. Gentleman give an example of where conditions have been applied to a country that has not carried them out? What has the IMF done about that?
§ Mr. Wells
Jamaica was recently unable to fulfil IMF conditions and the IMF agreement was renegotiated, thereby enabling the economy to expand somewhat.
The Economic Secretary to the Treasury outlined the medicine that he said was standard IMF practice. I will read out a description of the usual IMF medicine 632As a condition for its assistance, the IMF almost invariably insists on measures that have the effect of contracting the economy, increasing unemployment and reducing consumption, in order to slow imports and shift resources to exports. The problem is that IMF conditions cannot work if applied at the same time in many countries, particularly in a period of global recession.That quotation is by Henry Kissinger writing in Newsweekat the beginning of the year, and not from any Keynesian Left-wing economist Dr. Kissinger approves the IMF as the only method open to apply the disciplines. However, he mentioned in his final sentence the great flaw. As my right hon. and learned Friend the Member for Hexham (Mr. Rippon) said, we cannot export to those who cannot buy. Therefore, a Marshall plan must be introduced, or a means by which those in need can buy. The IMF's mechanism and that of the World Bank is to lend money to state economies and to pay attention to the world trading system and the GATT. We must consider the totality of the international monetary system.
The Bill is a welcome step in the right direction. I congratulate my right hon. and learned Friend the Foreign Secretary on his negotiations when he was chairman of the IMF interim committee, especially as the Americans were much opposed to him at the time.
There is a note of hope. The problem of debt has brought together great minds and great speakers in the Chamber to consider the issues of international liquidity, international exchange rates and competing interest rates. If the experts can prepare themselves to deal with the situation on a more global basis, we shall lay the foundations for the expansion of world trade, which must be a precondition to domestic prosperity and the reduction of unemployment in this country. We live in a world in which electronics move vast quantities of money between exchanges. The poor are dependent on the rich and the rich are dependent on the poor. The world is inter-dependent, so there must be a proper rate of exchange and mechanisms for smoothing the problems of indebtedness and trade differences to assist the expansion of world trade. That will occur only if the Government have the political will to lead in the world. I beg that they do so.
§ Dr. Jeremy Bray (Motherwell, South)
I am glad that the hon. Member for Hertford and Stortford (Mr. Wells) exposed some of the fallacies expressed by the right hon. Member for Down, South (Mr. Powell). It is a bit pathetic to see new hon. Members troop in to listen to what they think they might believe if only they had the courage, but to hear a barrage of internal contradictions and fallacies which make them go away disappointed. They should reflect that if petrodollars had not been recycled not only would the bottom have dropped out of the oil market, but the bottom would have dropped out of many other markets and we should now be in an even deeper world slump.
I am glad that the hon. Member for Hertford and Stortford talked about the problem of the international coordination of monetary policy. I hope that he will read the second special report from the Treasury and Civil Service Committee.
I congratulate the Economic Secretary. I hope that he will not be deterred by his junior ministerial office from thinking independently about policies. The present Chancellor was not when he held junior office and I am 633 sure that the results in the hon. Gentleman's case will be more constructive than they were in that of his right hon. Friend.
The Economic Secretary acknowledged what the Committee said about the banking crisis. I was a member of that Committee. I pay tribute to the hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) specifically. At an early stage he insisted on the importance of the banking crisis as a major dimension in the general international monetary inquiry on which we had embarked.
The problem of the Opposition's reasoned amendment is broader than the terms in which it is posed. It can be met more fundamentally in the specific case of Argentina by avoiding the Fortress Falklands policy and by attaching conditions, not to the short-term IMF loan which causes a forest of problems, but to the refinancing of those loans as bonds to which proper conditions can be attached on the lines that we recommend in our report. There are dangers in an over-politicisation of conditionality. I am not sure that in 1976 we would have enjoyed an even stronger dose of conditions. I do not rule out in future the proper resort by Britain to IMF resources, free of conditions which are too burdensome.
The origins of the banking crisis were in the problems of recycling the OPEC surplus. The enthusiasm with which that recycling was undertaken is worth remembering. The debtor countries needed to borrow. The OPEC countries wanted a way of investing their money in an easily available and liquid form in the private sector. The banks in Britain and the United States were ready to undertake the necessary mediation. In the years 1974 to 1980 that seemed a responsible policy. People did not anticipate the depth of the recession.
The problems affect all debtor countries, not just countries such as Mexico, Brazil and Argentina. If my hon. Friend the Member for Bolsover (Mr. Skinner) were here, he might care to remember that the debt crisis started with Poland. For the same reasons Poland, having embarked on an over-ambitious programme of industrialisation, was thwarted by the collapse of the markets which it anticipated meeting. The funds, whether from the private banks or international institutions, were exhausted and not available for the many credit-worthy industrial developing countries which were never a risky investment. But because the funds were not available and because their own markets had collapsed — an even bigger collapse than we had experienced in manufacturing demand — not only the rich and rapidly developing countries were at stake.
The criticisms in our report refer particularly to the lack of risk assessment by the banks, even in the circumstances of the time. There seemed to have been extraordinary lapses by banks in checking credit worthiness and current indebtedness. Nowadays, when banking advisers go to a country they have to write to possible creditors to ask, "Do you have any debtors in this country?" That is a result of lax supervision in the past.
But the biggest factor, which the Economic Secretary did not mention, was the failure of the developing countries and banks to anticipate the depth of the policy-induced recession. In paragraph 3.8, our report states:Another respect in which the world economic environment has degenerated since the late 1970s … has been the adoption 634 of.monetary policies in the advanced industrial countries which have led to high and fluctuating interest rates and to very unstable exchange rates as between the major currencies.That was not anticipated, nor was it capable of anticipation.
f those errors caused the banking crisis, its cure cannot be found without a resumption of growth and a reversal of those policies. The problems cannot be solved because, first, the borrowing is and will remain short term until there is a resumption of growth and credit worthiness. Secondly, the drying up of the oil surpluses means that funds are not readily available for overseas investment. Thirdly, the debt service, as my right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore) said, comes near to exceeding the value of exports so that there have already been huge reductions in imports for the most severely affected countries.
The need is not just for refinancing, but for a restructuring of the debt. In paragraph 5.19 of the report, we suggest the lines that that should take. The report states:the lending should be long term; the real burden of interest payments should not rise unexpectedly or independently of borrowers' ability to pay; and the volume of borrowing should be dependent on the country using the funds to supplement a high level of domestic saving to finance sound investments as well as on the country following prudent macroeconomic policies.There is a need for long-term bonds to which, properly, much more elaborate conditions can be attached than to short term bank loans. They could be launched by a consortium of developing countries and be partially guaranteed by, for example, the IMF's gold stock—the report makes that suggestion — and subject to the borrowers adapting the sound growth-oriented policy which makes good use of borrowed funds. That is a more healthy context in which to view, not so much the politicisation of IMF conditions as their economic relevance.
The major change needed is the return to monetary policies in the advanced countries which are favourable to growth. Last Thursday, when the Chancellor of the Exchequer announced his mean and damaging cuts, we saw the latest chapter in the development of monetary policies that are inimical to growth. I said then that the measures were "trivial" in relation to the problems involved in maintaining the illusion that the Chancellor has induced in financial markets.
The 5 per cent. reduction in the growth of sterling M3 and other money supply aggregates for which the Chancellor is looking represents about £5 billion off the PSBR. The Chancellor was announcing a £1 billion—or, more realistically, a £½ billion— reduction in the PSBR. It is no wonder that the markets reacted immediately and dismissed the Chancellor's measures as footling. To please Mr. Gordon Pepper in the doctrines in which he has encouraged him, the Chancellor should not only have avoided the cut in interest rates just after the election, but should have increased them and made much larger cuts in public expenditure. That is a consequence of leaving the medium-term financial strategy in place. It leads the market to expect further increases in interest rates. It encourages the investment strike upon which the market has embarked, and out of which it will be brought only by the increase in interest rates for which it is looking.
My right hon. Friend the Member for Bethnal Green and Stepney put the point well on ITV's "News at Ten". He explored the argument underlying what the Chancellor 635 of the Exchequer had done in his medium-term financial strategy. But my right hon. Friend spelt out no alternative rules. One possible approach is beautifully illustrated by Mr. Fforde in the current Bank of England Quarterly Bulletin. He made a revealing remark about the setting of monetary targets. He distinguished between the political economy of money supply strategy, which is concerned with political presentation, and the practical macro-economics of a money supply policy, which is concerned with macro-economic relationships between money supply as an intermediate target and the ultimate objectives of policy regarding prices, output and employment.
Mr. Fforde remarked on the contrast between the political economy and the reality, and said:it would scarcely have been possible to mount and carry through, over several years and without resort to direct controls of all kinds, so determined a counter-inflationary strategy if it had not been for the initial 'political economy' of the firm monetary target.It was on that that the presentational confidence was built. He continued:what matters is the refusal of the authorities to stimulate demand in 'Keynesian' fashion, or to 'reflate', as conditions develop that would in the past have justified and provoked such a response. The fact that the monetary targets have not concurrently been met, or that the meaning of particular developments in this or that aggregate has become very ambiguous, is of much less importance.Mr. Fforde may believe that, but the markets do not—as they are now showing.
We must move on from the present stage of Government strategy and look for a viable alternative. This is not the occasion on which to embark upon a full-scale examination of our macro-strategy. However, one major aspect of it is of particular concern to the IMF, and we should not allow it to pass in a Bill that makes a major increase in the resources of the IMF.
As the hon. Member for Hertford and Storford said, there is a clear need to take into account the exchange rates, nominal incomes and the final targets in the conduct of monetary policy. The mechanics of how to do so were explored by the Treasury Committee in its report on the exchange rate, and were spelt out both in the chairman's draft and, especially, in mine.
The developments in the exchange rate policy of a single country are not without international repercussions. If one country adopts a managed exchange rate regime, it is a feasible course to follow. Even a bloc, such as the European monetary system, can do so. But if it is successful and other countries follow, the combination of countries can be highly destabilising. Destabilisation can occur quickly if the exchange rate targets aimed at are incompatible, as countries seek incompatible competitive devaluations or revaluations.
The other international agencies, especially OECD, have examined the matter, and like major national agencies such as the Federal Reserve Board in the United States, and the Japanese Economic Planning Agency, have developed the apparatus of linked national economic models. But neither the Treasury nor the IMF has done so. Since we saw the IMF in January, it has taken some steps to examine the interaction of exchange rate regimes of a rather different sort than we have now, but those steps are still rudimentary and far from the policy level. They need to be put firmly at the top of the agenda if the IMF is to justify the increase in resources that we are giving it, and 636 certainly if it is to lead the negotiations needed to set up a more viable long-term solution to the problems of the banking crisis.
If we are not to have a Committee stage, I hope that the Economic Secretary will explain why, in clause 2, we are giving the Treasury carte blanche to commit quite unlimited sums in support of quite unspecified actions by international agencies and central banks. I rather sympathise with the proposal. If we were to set a precedent of requiring legislative endorsements of particular support operations, it could have a most unfortunate effect in Washington if congressional approval were required. It would be better for the Economic Secretary to come clean and say that he is asking for a carte blanche for the Treasury in this extraordinary respect. Perhaps it is a measure, if not of the lap-dog character of the House, at any rate of its trust in an institution that I hope will do rather more to earn that trust than it has done in the recent past.
§ 6.6 pm
§ Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)
I shall speak only briefly as I know that other hon. Members wish to take part in the debate. We are discussing one of the most important subjects that we shall ever discuss. The world is waking up late to the fact that there has been an international "Rake's Progress" taking place year after year, where greed has been paramount—especially since 1974 when the price of oil was hoicked up to vast levels and thousands of billions of dollars were swilling around the world. That great irresponsibility occurred because people did not learn the first-year exam lessons that I thought bankers had to learn, and which are certainly meant to be engraved on every bank manager's desk — one cannot lend short-term money for long-term projects.
We are now at the stage where the long term has arrived—which proved to be so short term—and thousands of billions of dollars of loans from the Arab countries have turned out to be poisoned loans. They have been invested in long-term projects and the world has reached a stage where, as the right hon. Member for Down, South (Mr. Powell) said, there is a kind of madness. We have discussed the South American loans, and mentioned Brazil, Mexico and the African countries. They owe vast sums of money—some $600 billion. But nearer to home there are vast debtors on our doorstep. There was an interesting article in Investors Chronicle a fortnight ago under the heading "The debtors on our doorstep". The second XI in Europe encompass 144 million people. Those 11 countries have not had a trade balance since 1960. Apart from the $600 billion about which we all talk, there are $130 billion of loans much nearer home that must also be rephased.
I shall give the House an example of absolute lunacy that shows the great disrespect we have of loans. Poland is one of the greatest debtor countries in Europe, yet it has just lent $134 million to Nigeria—another great debtor of the system. Those problems that lie ahead make the problems that we face today seem comparatively small. When we consider what has happened, how the problem has grown and the report to which the hon. Member for Motherwell, South (Dr. Bray) referred, and about which we have held discussions here and overseas, there must undoubtedly come a time of reckoning. A debtor's strike looms clearly on the horizon and will occur, not because 637 of evil men, but because the resources are not available in those countries, which may disappear because of civil war or poverty.
I disagree with the inference made by the right hon. Member for Down, South that we can stop the roundabout by putting an iron bar in the spokes. Just as that iron bar would break the wheel, if we were to stop the roundabout for the countries such as Poland and Brazil, whether in Europe or South America, we would reduce the economy of the entire Western world and other countries to absolute chaos and cause genuine poverty such as we have not known since the dark ages. Therefore, we must be realistic and co-operate with the International Monetary Fund. As I said before Christmas in a debate on the Third world, we have the will and the means but we must have the courage to correct the position.
The problem is that huge borrowings, whether by people or countries, are accepted as a macho principle and a way of life. We in the Western world are meant to be the great producers, yet we are not producing wealth. There is no real economic growth but only huge borrowings. Successive Governments in Britain and overseas have followed the philosophy that a good standard of living can be maintained, but need not be earned, or that if it need be earned, it need not be earned yet. With that philosophy the Western world will always have interest rates at the current usurous levels. Throughout the history of the world no genuine economic growth has taken place when real interest rates were above 3 per cent., and current real interest rates are nearer 10 per cent. Therefore, it is not surprising that borrowings are huge and that there is no real growth.
If today's debate produces an awareness in the West of the need to change course to sustain the economic viability of the world, it will have been useful. But let no one think that when we approve the Second Reading today the problem passes with it. The sums involved are comparatively minute now compared with what they will be in the next few years. We must find an answer in the next few years, because we do not have 10 or 20 years. If we have the will, we have the means and can do something about it.
§ Mr. Tam Dalyell (Linlithgow)
In his previous incarnation as Under-Secretary of State for Energy, the Economic Secretary to the Treasury was always willing at least to try to answer questions, in contradistinction to many of his colleagues. Therefore, to keep my speech brief, I shall put to him two complicated questions.
The first deals with joint default. I was privileged to be the leader of the first Inter-Parliamentary Union delegation to Brazil in the mid-1970s, and I have maintained a deep interest in that country. Is it not a fact that it is dawning on the world's big debtors that their weakness is also their strength? They have realised that they need not take the IMF medicine and that there is no need to risk the riot and revolution that austerity may bring. Instead they can default, refuse to pay their debts, or impose a moratorium and delay paying back what they owe. It is no secret that Lloyds bank has loaned much of its capital to Mexico and Argentina. It is also well known that the relations between 638 the City banks, to which my right hon. Friend the Member for Cardiff, South and Penarth (Mr. Callaghan) referred, and Brazil are in the same category.
Those loans have brought neither stability nor prosperity. In some cases they have brought weapons and revolt, not least to the smaller central American states to which my right hon. Friend referred. To the bankers, the Falklands dispute was not just a war but a crisis of credit—in Argentina, which owed more than $30 billion—and all over Latin America.
Is it true, as has been reported in the press and as was reported in the BBC programme "Panorama" about four weeks ago, that the Mexican president Lopez-Portillo held two secret meetings with the Brazilians and the Argentines about joint default on or about 24 September 1982?
On that occasion he could not persuade either the Brazilians or the Argentines to default, and Mexico could not go on her own. I understand that the position may change sooner rather than later. I do not wish to be personal in the House, but my brother-in-law is a Jesuit priest who has worked in Mexico City for many years, and he has told me that a monumental social crisis is round the corner if we are not careful. Those who saw the "Panorama" programme must have noted the extraordinary contrast on the border between Texas and Mexico where the First world and the Third world meet. The position cannot continue.
What is the Government's reaction to that meeting and to the meeting in April 1983, which was not secret, between Jesus Silva Herzog of Mexico and Antonia Delfim Netto of Brazil, whom some of us have met? The "Panorama" programme contained the following statement by Mr. Herzog:I think Mr. Keynes was the one who said many years ago that when you are the debtor of an important sum then you are the partner of the bank.If we do not help developing countries to solve their indebtedness problem they will not be our importers for many years. Will that not hurt recovery? It is in the interests of the developed countries to find a way to ease the indebtedness of under-developed nations.
In a previous debate my hon. Friend the Member for Livingston (Mr. Cook) raised a matter about which he and I are deeply concerned. British Leyland has decided that its factory at Bathgate will be geared mostly to producing Third world exports. My hon. Friend in his speech asked a crucial question. It is in Hansard, and I hope that somehow it will be answered, because many trade unions, workers and management connected with Leyland want to know what we will do in our interests for the Third world.
I listened carefully, as I always do, to the right hon. Member for Down, South (Mr. Powell). There is another side to this coin. If he were the hon. Member for Linlithgow or Livingston and had this urgent constituency problem on his hands, I wonder whether he would make the same categoric speech that he made this afternoon. The truth is that factories such as Leyland's at Bathgate, having become Third world dependent — there are many in many constituencies—face this urgent problem. What hope can the Treasury hold out—given the defaulting, not just in central and south America but possibly in Nigeria and other parts of Africa—to the huge work forces sent to Scotland, in this case, by the Macmillan Government? The work force wants some type of reply.
If we cut off the development component, we shall create an intolerable situation in the developing countries. 639 We cannot have a policy that is designed solely to enable private banks to be repaid. There must be something for the people of the developing countries as well. They must be persuaded that they are not simply working for foreign banks.
My collegues may have seen the by-lined article by Bernardo Kucinski in The Guardian today, which stated that Mr. Delfim Nettowill capitalise on the increasing social unrest by warning bankers against demanding more than Brazil can give.Later it stated:Lula's strike could result in widespread food shortages and subsequent industrial disruption.One might add, "and how!" Problems of debt and recession spread from one country to another. Trade with other countries dwindles as each country has to import less. This debt trap in Latin America is—partially, at any rate— holding back economic recovery throughout the world. My first question is: Does the Minister accept that general analysis? In particular, what about our self-interest problem, which is epitomised at Bathgate?
My right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore) explained fully and powerfully the horrendous arms problem. This is not the occasion to go into the whole Falklands issue, but I draw the attention of Ministers in general to a horrific development—the purchase from the Italian firm Oto-Melara and from Matra in France of the Otomat, which is different from the Exocet. It has a range six times that of the M38 Exocet. The more modern Exocet has a range of about 42 kilometres and the previous one had a range of about 20 miles. This means a range of about 125 miles. These weapons may be used — heaven help us —against our ships by aircraft which are halfway between the Falklands and the Argentine coast. The Ministry of Defence is wrong in saying that they can be land-based only; they can be married, as the Exocet was, to the wing of an aircraft.
The British people cannot understand a set-up whereby Argentina is being given money which will be partly invested in Switzerland and partly spent on a remote-controlled mine, which the "International Defence Review", a highly reputable American publication, says the Argentines have specifically ordered. We are dealing here with mines that can be dormant for two years and are only five metres long. They are polyurethane-based, which means that they are very difficult to counter in any way. They have lithium or silver-zinc batteries which can last a long time. They can travel up to 100 km at 20 knots and can be set off by aircraft 500 km away at 30,000 ft. They have a TV camera which can identify their victims. That is just one example of the type of weapon that reliable sources tell us Argentina is ordering.
The Minister's answer to my interjection and that of my right hon. Friend the Member for Cardiff, South and Penarth was that that was all very terrible, but we had to face the fact that the break-up of the Argentine economy would be even more terrible for the West. Given those two evils, we had to do more to prevent the second than the first. It is a judgment with which I might have more sympathy than many of my right hon. and hon. Friends. However, in reply to that I read the moving letter dated 26 May published in The Observer written shortly before he died by David Tinker on HMS Glamorgan to his friend Gareth. He said:Your letter arrived today with the reinforcements: HMS Bristol, Andromeda and Co. Hi, life out here is no joke. We all 640 thought that being 'wogs' they would be bound to lose, but unfortunately Europe seems to have supplied them with super-modern invasion kit.Those are the eloquent words of a man who was shortly to give up his life.
I agree with the Government that there is a considerable threat to the banking system if any of those three countries were to default. They are debtors on a huge scale. They have vast power. The conclusion that some of us must draw is that, from the Government's standpoint, the inexorable logic is that they had better negotiate with Argentina very soon. Negotiation is the only solution. It may be humiliating for the Prime Minister and difficult for many people, but the alternative is default and all the troubles that go with it.
For that and many other reasons, I conclude—it may not be the conclusion of all my right hon. and hon. Friends, but I have to speak personally in this matter—that the sooner that there are negotiations on the future of the Falkland Islands, the better for us, the West and, not least, for the inhabitants of the Falkland Islands.
§ Mr. Robin Cook (Livingston)
We have had a distinguished debate tonight, destinguished not merely by those who took part but by those who did not take part. The right hon. and learned Member for Hexham (Mr. Rippon) first drew attention at an early stage to the complete absence from our councils of any representative—even a humble, silent representative—on the alliance Benches. We have not had an intervention from those Benches since he spoke.
At one point, I took the opportunity to nip out and consult the alliance manifesto. I found that it pledged support forAdditional finance for the developing world … through fresh issues of international money.Then, for the more technically minded SDP voter—I am most grateful that the hon. Member for Truro (Mr. Penhaligon) has finally graced us with his presence—international money is defined in brackets as "Special Drawing Rights." Later in the same document we find that the alliance committed itself tosupport the principles of the Brandt Report, and in particular the proposals for increased credit through the international institutions.As we have seen tonight, whatever the alliance may have said to the electorate, it has no intention of using undue exertion to support those principles in our debate. One can only conclude that, despite the fine rhetoric of the manifesto, the alliance has concluded that there are no votes in resolving the debt crisis of the Third world. That is a pity, because many jobs in Britain undoubtedly hang on that debt crisis.
The most obvious characteristic of the speech of the Economic Secretary was his possibly over-complacent confidence that the debt crisis is under management and will come under control. One is tempted to recall the precedent set by the new governor of the Bank of England who, in a statement at about the time of his appointment at the turn of this year, announced that the debt crisis was over. Only 24 hours later, he learnt that Brazil had been obliged to announce that it planned to defer any debt service payments for 1983. That unfortunate conjunction obliged a Treasury official to say, with great tact, that the governor-designate was a man two or three years ahead of his time.
641 The Economic Secretary's observation that the debt crisis is under control fails to measure up to the scale of the problem. The scale is horrendous. It does not matter whether we measure it by reference to the banks or by reference to the countries that are in debt. The New York banks alone have now committed themselves in loans to the three principal countries of Latin America to the equivalent of nine times their combined capital base, and a number of the countries that are in debt now owe sums equivalent in total to five years' entire export earnings of those countries. In the case of Brazil, debt servicing alone will soon cover the entire revenue obtained from export sales.
As some of my hon. Friends have hinted, what we are contemplating is the consequence on a global scale of the monetarist fetishism whose similar consequences on our own domestic stage we have debated rather more frequently. Some harsh things have been said about the clearing and commercial banks who have indulged in a lending spree during the past seven years. The most imprudent action by the commercial banks in the 1970s was to assume that the major industrial powers would continue to act rationally. In 1979, some of the major Governments ceased to behave rationally. The figures show that the mounting debt total was perfectly manageable until 1979. Between 1975—the year of the first oil increase, which gave rise to the petro-dollars—and 1979, the total increase in the Third world debt, measured as the ratio of debt to export, increased from 37 per cent. to only 50 per cent. That was a tough increase, but a manageable one. Between 1979 and 1982, interest rates doubled and the ratio increased from 50 per cent. to 75 per cent., placing a totally unmanageable and crippling burden on the countries involved. That burden did not arise from fresh borrowing. It arose from borrowing to cope with the increase in interest rates which was the consequence of the monetarist experiment of the major industrial powers. We must recognise the very substantial contribution that the Western powers, and especially our own Government, have made towards creating the problem.
§ Mr. Rippon
The problem did not start in 1979. It started when the Labour Government adopted the monetarist policy and raised interest rates to 16 per cent. That was the time when the right hon. Member for Down, South (Mr. Powell) made a significant speech to the junior chamber of commerce at Bangor.
§ Mr. Cook
The right hon. and learned Gentleman tempts me to reopen a range of arguments in which I myself participated in 1976, but I shall not go into that area of history.
The right hon. and learned Gentleman will find that the movement of world interest rates coincides with the introduction in 1979 in Britain and in 1980 in America of an additional degree of monetarism. It is from that point that one can date a spiralling of world interest rates and a spiralling in the debt of the Third world.
One curious feature of the situation is mentioned in the Treasury and Civil Service Committee's fourth report on "International Monetary Arrangements", to which I shall refer. The most curious and unreal feature is that when the countries that have received loans are going bust— I shall not bandy words with the right hon. Member for 642 Down, South over whether the countries are technically bankrupt — and are undergoing major austerity programmes in order to meet their loans, the banks making the loans are behaving with every appearance of prosperity. In the current year, despite the attempts of the Bank of England to dissuade them, the British clearing banks have declared record dividends, increasing dividend payments by several times the rate of inflation. It is strange that at a time when half of Latin America is going bust, the banks participating in the loans that created that crisis are showing record increases in both shares and dividends. The Select Committee's report drew attention to what it regarded asthe highly dubious practice of seeking to make profits out of the rescheduling of what are effectively bad debts.According to the figures released today, it is estimated that the commercial banks have contrived to make a profit of £1.75 billion out of rescheduling the bad debts of the Third world.
There is something grotesque about carrying out at a profit an activity turning on the rescheduling of what are effectively bad debts. Moreover, that profit of £1.75 billion can only make worse the crisis that the rescheduling is supposed to be easing.
My right hon. Friend the Member for Cardiff, South and Penarth (Mr. Callaghan) introduced a point that has run through the debate. There is a gathering consensus that the only permanent way out of the crisis is to expand out of the world slump. If the countries caught with these debts are obliged to respond by contracting their economies, the consequence must be that their ratio of debts to exports will worsen. There is therefore a critical part to be played by the industrialised nations which constitute the market for those exports.
In a report that is given some coverage in this morning's newspapers, the Group of Thirty states that unless the industrialised world grows at a rate of 3 per cent. per annum, there is no prospect of the Third world increasing its exports at a rate that will enable it to catch up on the debts that it has already contracted. The Group of Thirty points out that Britain has a pivotal role to play. The chairman of the group suggests that the countries that should take the lead in stimulating the expansion of demand to provide a market for Third world exports are those that currently enjoy a balance of payments surplus and a low inflation rate. Although he does not name them, it is clear that he has in mind Germany, Japan and Britain. There is poignancy in that advice, in that the chairman who offers it is Dr. Johannes Witteveen, who descended upon us in 1976 to advocate deflation. If even Dr. Witteveen is now convinced that the time is right for Britain to carry out some degree of reflation, why have the Government, who are in charge of the economic levers of Britain, far from bringing forward a modest degree of reflation, actually during the past week introduced a degree of deflation into our economy?
§ Mr. Cook
I hope that the hon. Gentleman will forgive me if I do not give way, but most hon. Members had more time in which to speak than I have. However, if the hon. Gentleman will forgive me, I promise to give way to him on a future occasion.
My right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore) referred, as did several other hon. Members subsequently, to the case of Argentina. I 643 should like to take up a point made by the Economic Secretary, because it is not our argument that Argentina should be made to go to the wall or be forced into bankruptcy. We want a modest condition to be attached to any further facilities made available to Argentina. As hon. Member after hon. Member has said, conditionality is what the IMF is all about. Barely a facility is extended which does not have a condition attached to it by the IMF. Conventionally, the package involves austerity, deflation and a cut in living standards for the country receiving the facility. There is an irony there, in that article 1 of the IMFobliges it to promote growth, but in practice most of the packages arranged in the past two decades have sought to stifle it. Whatever the merits of those packages for industrialised nations such as Britain, they are plainly inappropriate for nations that are destitute, and for whom the consequences of deflation and austerity can be such a hard cut in living standards that it imperils families living on the bread line. Indeed, the Government of Brazil, who are dominated by the military, and are thus unlikely to be mealy-mouthed or soft and gentle, have now been obliged to tell the international community that they cannot accept the consequences of the austerity package, which is part of the conditions of the facilities made available to them.
Whatever the packages may do to the countries that receive them, they are perverse from our perspective because they compound our problem. When we oblige such countries to accept austerity measures, we destroy our markets. It has been calculated that 150,000 men and women in America have lost their jobs because of the collapse of the Brazilian market for American goods. As my hon. Friend the Member for Linlithgow (Mr. Dalyell) has observed, our constituencies face a further 500 redundancies at the British Leyland Bathgate plant as a direct result of the Third world's debt crisis. Much of that collapse in the market results from the conditions attached to loans from the IMF. They are imposed as part of the price of the additional loans made available.
There can be no doubt that the IMF and other similar operations impose conditions on those who take their loans. Therefore, we seek from the Government a condition on the loan to Argentina to prevent it from using that additional facility for additional arms purchases. That point is touched on in the Select Committee's report. In paragraph 5.27 it suggests that there may well be a case for placing restrictions on loans to countries which might be likely to use them for irresponsible acts, such as overextended purchases of arms.
We believe that there is such a case in respect of Argentina. The Minister must answer two questions if he is to persuade the House that there is no such case. First, he must explain why it is prudent to make further loan facilities available to Argentina when they are dwarfed by that country's arms expenditure. My right hon. Friend the Member for Bethnal Green and Stepney referred to the loan of £1 billion or £1.5 billion that is being signed today in New York. However, that is less than the sum that Argentina is committing to the purchase of naval ships alone. It cannot be right to assist in the rescue of Argentina's economy while conniving at that Government's expenditure of very large sums on arms, which can make no contribution whatever to the development of its economy or to providing the finance with which to repay the loans that we are providing today.
Secondly, and most profoundly, the Minister must persuade the House that there is any sense in Britain 644 offering Argentina an additional credit of £100 million so that it can purchase weapons at the same time as it insists on being in a state of hostilities with Britain, and refuses formally to cease them. The Government have a choice. They can decide to negotiate with the Argentine Government over the question of the Falkland Islands sovereignty, or they can insist, as they have hitherto done, on the resolute approach and can refuse to have any such negotiations. In that latter case they are obliged to withdraw from bolstering Argentina's economy with the credit with which it can purchase arms. If the Government attempt to adopt both of those courses, they will lay themselves open to the charge of hypocrisy. The Opposition will have no part in that hypocrisy and for that reason we shall vote for our reasoned amendment.
§ Mr. Moore
It has not been at all difficult to sit through this enthralling debate. I enjoyed the debate in my new capacity as a Treasury Minister, although, clearly, I must put on a less pleasant and interested face in order to reduce that impression of optimism or blandness.
My hon. Friend the Member for Hertford and Stortford (Mr. Wells) was right to say that the debate had ranged over the whole world's international trade and debt problems. Indeed, it is a compliment to the House that such a debate can take place in this Chamber, and it illustrates the Chamber's importance to the nation.
I was fairly frequently taunted with the accusation that I was over-optimistic or bland. However, the right hon. Member for Cardiff, South and Penarth (Mr. Callaghan) was nice enough to say to me, on my first appearance as a Treasury Minister at the Dispatch Box, that such impressions had been given for 10 years, and I assume that that encompasses the period during which he led the country.
I should like to remind Opposition Members of precisely what I said. I have looked at my notes again because the issue is important. I was talking about difficulties and I said that the debt problem nevertheless was slowly responding to treatment. I shall in future take much sterner advice from Treasury officials and use even more negative language, because I do not for a moment underestimate the seriousness or importance of the issues involved.
I am in some difficulty in answering many of the legitimate and specific questions that were raised relating, for example, to clause 2. The hon. Member for Linlithgow (Mr. Dalyell) kindly said that I would always try to respond to the points made. As always, if I cannot cover some of the detailed points, I shall write to those hon. Members who raised them. However, I shall try to address my remarks to the major points made.
§ Mr. Robert Hughes
It is not good enough for the Minister to appear at the Dispatch Box during a debate on a major Bill and state that as he cannot answer some points he will write later to those hon. Members involved. Consequently, I hope that there will not be any attempt to drive the whole Bill through the House on the nod.
§ Mr. Moore
I am, of course, the servant of the House, and I am sure that the House will regard that intervention in the way that it should do. The debate was rightly wide-ranging, and hon. Members legitimately asked why so many of us were concerned with tinkering at the margin 645 in the face of possibly structural problems in the whole area of world debt. My hon. Friend the Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) was right to say that at some stage we should consider to what extent we should concern ourselves with different and major initiatives.
Before trying to answer some of the substantive points that were legitimately raised, I should point out that the Bill seeks substantially to increase not only the quotas but the facilities in terms of GAB borrowing.
I accept and recognise the difficulties, but the Bill is at least a step in the right direction. With one exception, that has been accepted in all quarters of the House. The right hon. Member for Cardiff, South and Penarth asked a legitimate question. I confirm that, in addition to quota resources, the resources of the GAB will now be available to meet the needs not only of founder members but of any fund member undertaking an adjustment programme. When the fund is faced with payment imbalances which threaten the stability of the monetary system, this second window—I went into this subject in some detail in my speech — is activated when the managing director proposes use of the GAB and the G10 participants and the executive board agree. This is, of course, a matter of fund resources and does not of itself affect the amount of access of individual members to those resources. I think that what I have said will help the right hon. Gentleman, and it is a matter that I shall be happy to pursue, in view of its importance, if he wishes, at another time.
The right hon. Member for Bethnal Green and Stepney (Mr. Shore) shared my distaste, but essentially I believe that he offered no alternative to trying, through the IMF, combined with international banking operations—if I have time I shall try to show the present position and how it relates to the matter— gradually to bring Argentina back to normalcy.
The right hon. Member for Down, South (Mr. Powell), in a speech in which I was interested in an academic sense, although I could not agree with its total substance, asked whether, whatever Argentina's present internal political structure—and this is the question that I put to the right hon. Member for Bethnal Green and Stepney—the long-term resolution of our relationships with Argentina would be improved or hindered by trying to resolve them with the help of institutions such as the IMF, and the conditionality, however limited and however difficult it may be, that it is able effectively to attach to its loans.
Perhaps I might go through three questions asked by the right hon. Member for Bethnal Green and Stepney. First, I do not see the choice that he poses between the risks and the costs attached to the defence of the Falklands, and the risks to the financial system. I do not believe that there is a choice. Argentina, which has a trade surplus, would be perfectly able to buy arms if she defaulted or if the international system collapsed. I remind the right hon. Gentleman that the Labour Government, of which he was a member, supported specific lending to South Africa in 1976 precisely on the basis that political criteria should not be permitted to determine IMF lending. I shall not go into the whole debate about the politicisation of IMF policies. Of course, the existence of an IMF programme puts a squeeze on all Argentine Government spending, including their spending on arms.
646 The answer to the right hon. Gentleman's third question, as the right hon. Member for Down, South said, is that it would be a curious position if we were simply to wash our hands of the matter—if that is what the right hon. Gentleman was suggesting. What could United Kingdom non-participation mean? We are a leading member of the IMF, and British banks are members of leading syndicates to Argentina. By participating in the IMF we are in a position, however limited, to insist that all the IMF conditions are met and continue to be met as each tranche of the fund money falls to be drawn.
I do not in any way exaggerate our strength and our position. I am seeking to contrast the ways in which IMF conditionality — it is in no way different from the conditionality that was accepted by the right hon. Gentleman when he was in office—is a tool in the process of returning Argentina to normalcy.
My right hon. and learned Friend the Member for Hexham (Mr. Rippon), in a major contribution to the debate, covered many questions that were raised by hon. Members on both sides about the nature of the structures of the IMF, its future, its resources and its liquidity. I think that it might help all right hon. and hon. Members if I go through my right hon. and learned Friend's question. He first asked about private banks. No formal guarantees are associated with this measure. The right assurance to private banks is that provided by fund conditionality through a programme to which banks also contribute.
The second question, about the prospect of loans being repaid, is linked, first, with the success of the adjustment programme, and, next, with world recovery. Our belief and that of the fund is that debt problems respond to these changes, just as the problems began, because of over-borrowing and the recession. We believe that debt export ratios will improve. We must not forget that these economies have great underlying strength.
The third question related to the ways in which IMF member countries were committed to getting these increased resources agreed by the end of this year. Some have already achieved that. In most cases, as in our case here today, legislative action is still in progress.
My right hon. and learned Friend's fourth question related to Williamsburg. Williamsburg restated the basic economic strategy, that is, control of budgetary deficits and monetary aggregates so as to control inflation. It is a matter of continuing policy. Williamsburg spoke of making greater efforts to achieve convergence of economic performance so as to move towards greater exchange rate stability. It is a matter not of instant action, but of continuing policy. It is a subject in which my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) has played a prominent part. It involves continuing discussions among, in particular, the countries whose currencies make up the SDRs.
Many questions have been asked about IMF resources. The fund recently agreed on a substantial increase in quotas and will also be able to draw on the recently enlarged general agreements to borrow that I mentioned, if international monetary conditions warrant it. Together, these measures should provide the fund with sufficient resources for intermediate needs. I expect new quotas to be ratified early next year, and the fund should have adequate resources to last until then. If there is any need to top up the fund's resources after the eighth quota review, I see no reason why arrangements could not again 647 be made to cover the requirements. Of course, the fund will be able to draw on the GAB if the conditions for activating are met.
I believe that the IMF should rely primarily on resources from its members from quotas, but I am prepared to look at the matter. With other fund members, I am anxious to ensure that the fund has adequate resources to lend to countries in balance of payment need. Clearly, fund liquidity is kept constantly under review, but I am prepared to discuss any constructive proposals.
The right hon. Member for Bethnal Green and Stepney asked what information was available about bank loans. It might help the House if I put the matter on record. As part of the overall financial support package for Argentina, five facilities were made available, by the IMF, commercial banks and the Bank of International Settlements. The first was a short-term bridging loan for $1.1 billion from international commercial banks. It was agreed in December last year. A number of drawings have been made, but it has not been totally drawn down yet. One final tranche remains. The following month, in January 1982, the two IMF facilities were agreed. A compensatory financing facility of SDR 520.1 million was agreed and made available immediately. At the same time, the IMF agreed a standby facility for SDR 1.5 billion, but this is being released in five quarterly instalments, subject to performance criteria being satisfied. The first two instalments have been paid, and the third is due next month.
Also in January 1982, after the IMF programme had been agreed, the Bank for International Settlements approved a short-term facility. As I said, that facility of $500 million was never drawn and has now lapsed. Finally, there is the medium-term commercial bank loan of $1.5 billion which has been under discussion for several months. Negotiations by the banks are proceeding. I am not advised that the suggestion about a signature today is accurate.
I have tried to cover some of the fundamental issues.
§ Mr. Moore
I shall have to come back to that matter, because I cannot be specific at this moment.
I do not in any way underestimate the difficulties that we face. I believe that together the measures before the House strengthen the practical role that this country can play in co-operative international operations to deal with the current international financial difficulties. The way in which those difficulties are handled will influence the success or failure of particular operations for particular countries, and also the shape of the international financial system in future decades. I believe that it is right for us to support the existing international financial institutions and to join other nations in helping responsible countries facing severe difficulties. I urge the House to oppose the Opposition amendment and to support a Bill which seems to have almost universal and unanimous support in the House.
§ Question put, That the amendment be made:—
§ The House divided: Ayes 107, Noes 212.650
|Division No. 13]||[7 pm|
|Alton, David||Archer, Rt Hon Peter|
|Anderson, Donald||Atkinson, N. (Tottenham)|
|Banks, Tony (Newham NW)||Leighton, Ronald|
|Barnett, Guy||Lewis, Ron (Carlisle)|
|Barron, Kevin||Lloyd, Tony (Stretford)|
|Beckett, Mrs Margaret||McCartney, Hugh|
|Bermingham, Gerald||McKay, Allen (Penistone)|
|Bidwell, Sydney||McKelvey, William|
|Boothroyd, Miss Betty||Mackenzie, Rt Hon Gregor|
|Bray, Dr Jeremy||McTaggart, Robert|
|Buchan, Norman||Madden, Max|
|Callaghan, Rt Hon J.||Marek, Dr John|
|Callaghan, Jim (Heyw'd & M)||Marshall, David (Shettleston)|
|Campbell-Savours, Dale||Michie, William|
|Clark, Dr David (S Shields)||Mikardo, Ian|
|Cohen, Harry||Millan, Rt Hon Bruce|
|Cook, Frank (Stockton North)||Morris, Rt Hon A. (W'shawe)|
|Cook, Robin F. (Livingston)||Morris, Rt Hon J. (Aberavon)|
|Corbett, Robin||Park, George|
|Corbyn, Jeremy||Pendry, Tom|
|Crowther, Stan||Penhaligon, David|
|Cunliffe, Lawrence||Pike, Peter|
|Dalyell, Tam||Powell, Rt Hon J. E. (S Down)|
|Davis, Terry (B'ham, H'ge H'I)||Powell, Raymond (Ogmore)|
|Deakins, Eric||Radice, Giles|
|Dixon, Donald||Redmond, M.|
|Dobson, Frank||Rees, Rt Hon M. (Leeds S)|
|Dormand, Jack||Richardson, Ms Jo|
|Douglas, Dick||Rogers, Allan|
|Dubs, Alfred||Ross, Ernest (Dundee W)|
|Dunwoody, Hon Mrs G.||Sedgemore, Brian|
|Eadie, Alex||Sheldon, Rt Hon R|
|Evans, loan (Cynon Valley)||Shore, Rt Hon Peter|
|Evans, John (St. Helens N)||Short, Ms Clare (Ladywood)|
|Ewing, Harry||Silkin, Rt Hon J.|
|Fatchett, Derek||Skinner, Dennis|
|Field, Frank (Birkenhead)||Smith, C.(Isl'ton S & F'bury)|
|Fisher, Mark||Soley, Clive|
|Foot, Rt Hon Michael||Spearing, Nigel|
|Foster, Derek||Stewart, Rt Hon D. (W Isles)|
|Freeson, Rt Hon Reginald||Stott, Roger|
|Garrett, W. E.||Thomas, Dr R. (Carmarthen)|
|George, Bruce||Thompson, J. (Wansbeck)|
|Godman, Dr Norman||Thorne, Stan (Preston)|
|Golding, John||Tinn, James|
|Gould, Bryan||Wardell, Gareth (Gower)|
|Gourlay, Harry||Welsh, Michael|
|Hamilton, James (M'well N)||Wigley, Dafydd|
|Hamilton, W. W. (Central Fife)||Williams, Rt Hon A.|
|Harrison, Rt Hon Walter||Winnick, David|
|Healey, Rt Hon Denis||Woodall, Alec|
|Holland, Stuart (Vauxhall)|
|Hoyle, Douglas||Tellers for the Ayes:|
|Hughes, Robert (Aberdeen N)||Mr. Frank Haynes and|
|Kaufman, Rt Hon Gerald||Mr. Harry Cowans.|
|Adley, Robert||Braine, Sir Bernard|
|Alexander, Richard||Brandon-Bravo, Martin|
|Amess, David||Brinton, Tim|
|Ancram, Michael||Brown, M. (Brigg & Cl'thpes)|
|Arnold, Tom||Bruinvels, Peter|
|Ashby, David||Buchanan-Smith, Rt Hon A.|
|Atkins, Rt Hon H. (S'thorne)||Buck, Sir Antony|
|Atkins Robert (South Ribble)||Budgen, Nick|
|Baker, Nicholas (N Dorset)||Burt, Alistair|
|Baldry, Anthony||Butcher, John|
|Batiste, Spencer||Butterfill, John|
|Beaumont-Dark, Anthony||Carlisle, John (N Luton)|
|Bellingham, Henry||Carlisle, Kenneth (Lincoln)|
|Bendall, Vivian||Carttiss, Michael|
|Benyon, William||Cartwright, John|
|Berry, Hon Anthony||Chapman, Sydney|
|Biffen, Rt Hon John||Clark, Dr Michael (Rochford)|
|Biggs-Davison, Sir John||Clarke Kenneth (Rushcliffe)|
|Blackburn, John||Cockeram, Eric|
|Bonsor, Sir Nicholas||Conway, Derek|
|Boscawen, Hon Robert||Cope, John|
|Bottomley, Peter||Cormack, Patrick|
|Bowden, Gerald (Dulwich)||Couchman, James|
|Boyson, Dr Rhodes||Currie, Mrs Edwina|
|Dicks, T.||Latham, Michael|
|Douglas-Hamilton, Lord J.||Lawler, Geoffrey|
|Eggar, Tim||Leigh, Edward (Gainsbor'gh)|
|Fallon, Michael||Lester, Jim|
|Fletcher, Alexander||Lewis, Sir Kenneth (Stamf'd)|
|Fookes, Miss Janet||Lilley, Peter|
|Forman, Nigel||Lord, Michael|
|Forsyth, Michael (Stirling)||Luce, Richard|
|Forth, Eric||Lyell, Nicholas|
|Fox, Marcus||McCurley, Mrs Anna|
|Galley, Roy||Macfarlane, Neil|
|Gardner, Sir Edward (Fylde)||MacKay, Andrew (Berkshire)|
|Garel-Jones, Tristan||MacKay, John (Argyll & Bute)|
|Glyn, Dr Alan||Macmillan, Rt Hon M.|
|Goodlad, Alastair||McNair-Wilson, M. (N'bury)|
|Gow, Ian||Major, John|
|Gower, Sir Raymond||Malone, Gerald|
|Greenway, Harry||Marland, Paul|
|Hamilton, Neil (Tatton)||Mates, Michael|
|Hargreaves, Kenneth||Mather, Carol|
|Harvey, Robert||Maude, Francis|
|Hayward, Robert||Mawhinney, Dr Brian|
|Higgins, Rt Hon Terence L.||Maxwell-Hyslop, Robin|
|Hind, Kenneth||Mayhew, Sir Patrick|
|Hirst, Michael||Meadowcroft, Michael|
|Hogg, Hon Douglas (Gr'th'm)||Mellor, David|
|Holt, Richard||Merchant, Piers|
|Hooson, Tom||Meyer, Sir Anthony|
|Hordern, Peter||Miller, Hal (B'grove)|
|Howarth, Alan (Stratf'd-on-A)||Mills, Ian (Meriden)|
|Howarth, Gerald (Cannock)||Mills, Sir Peter (West Devon)|
|Howells, Geraint||Mitchell, David (NW Hants)|
|Hughes, Simon (Southwark)||Moate, Roger|
|Hunt, David (Wirral)||Montgomery, Fergus|
|Hunt, John (Ravensbourne)||Moore, John|
|Hunter, Andrew||Morris, M. (N'hampton S)|
|Jenkins, Rt Hon Roy (Hillh'd)||Morrison, Hon P. (Chester)|
|Jessel, Toby||Moynihan, Hon C.|
|Johnson-Smith, Sir Geoffrey||Murphy, Christopher|
|Johnston, Russell||Needham, Richard|
|Jones, Gwilym (Cardiff N)||Nelson, Anthony|
|Jones, Robert (W Herts)||Neubert, Michael|
|Kennedy, Charles||Newton, Tony|
|Kershaw, Sir Anthony||Nicholls, Patrick|
|Key, Robert||Norris, Steven|
|King, Roger (B'ham N'field)||Onslow, Cranley|
|Knowles, Michael||Oppenheim, Philip|
|Knox, David||Osborn, Sir John|
|Lamont, Norman||Ottaway, Richard|
|Page, John (Harrow W)||Stevens, Martin (Fulham)|
|Page, Richard (Herts SW)||Stradling Thomas, J.|
|Pawsey, James||Tapsell, Peter|
|Peacock, Mrs Elizabeth||Taylor, Teddy (S'end E)|
|Percival, Rt Hon Sir Ian||Tebbit, Rt Hon Norman|
|Powell, William (Corby)||Terlezki, Stefan|
|Prentice, Rt Hon Reg||Thomas, Rt Hon Peter|
|Proctor, K. Harvey||Thompson, Donald (Calder V)|
|Rathbone, Tim||Thompson, Patrick (N'ich N)|
|Ridsdale, Sir Julian||Thorne, Neil (Ilford S)|
|Rippon, Rt Hon Geoffrey||Thornton, Malcolm|
|Robinson, Mark (N'port W)||Thurnham, Peter|
|Rowe, Andrew||Townend, John (Bridlington)|
|Ryder, Richard||Tracey, Richard|
|Sackville, Hon Thomas||Trippier, David|
|Sainsbury, Hon Timothy||Viggers, Peter|
|Sayeed, Jonathan||Wakeham, Rt Hon John|
|Shaw, Giles (Pudsey)||Waldegrave, Hon William|
|Shaw, Sir Michael (Scarb')||Walden, George|
|Shelton, William (Streatham)||Wall, Sir Patrick|
|Shepherd, Colin (Hereford)||Waller, Gary|
|Shersby, Michael||Wardle, C. (Bexhill)|
|Silvester, Fred||Warren, Kenneth|
|Sims, Roger||Wells, Bowen (Hertford)|
|Smith, Sir Dudley (Warwick)||Wells, John (Maidstone)|
|Smith, Tim (Beaconsfield)||Wheeler, John|
|Soames, Hon Nicholas||Wilkinson, John|
|Speller, Tony||Wolfson, Mark|
|Spencer, D.||Wood, Timothy|
|Spicer, Jim (W Dorset)||Woodcock, Michael|
|Spicer, Michael (S Worcs)||Young, Sir George (Acton)|
|Stanley, John||Tellers for the Noes:|
|Stern, Michael||Mr. Archie Hamilton and|
|Stevens, Lewis (Nuneaton)||Mr Ian Lang.|
§ Question accordingly negatived.
§ Main Question put forthwith, pursuant to Standing Order No. 41 (amendment on second or third reading) and agreed to.
§ Bill accordingly read a Second time.
§ Bill committed to a Committee of the whole House. [Mr. David Hunt.]
§ Further proceedings stood adjourned, pursuant to order this day.