US policy on Iraq's foreign debt may have collateral benefits for developing nations

Therefore, when the debtor's economy is growing slowly its interest burden will be reduced and, in good times, when growth is high, the debtor will pay a much higher interest rate to its foreign creditors.

This first-rate proposal will achieve two important ends: it will dissuade excess borrowing in good times - a temptation to which developing countries often succumb - and it will ameliorate their debt burden in hard times.

Our present global financial system does precisely the opposite. As most external indebtedness is denominated in a foreign currency, interest rates are low in good times as rates on foreign borrowings are lower than on local debt.

However, once a country encounters troubles, its currency is likely to devalue, thus dramatically increasing the real cost of servicing the debt.

This US proposal would counter this effect by tying the interest burden to debtor country growth.

Now, we only need the US to promote the idea of the New Zealand development expert, Peter Dirou, for Paris Club creditors to denominate all or part of the debt they are owed in the currency of the nation that owes it.

This would make the global financial system far more stable and promote prosperity for the debtor nations and their international creditors.

Finally, in an initiative of five members of the US Congress - three Democrats, two Republicans - a Bill was introduced on June 3 proposing a Jubilee Act that would require the US Treasury to work to achieve complete cancellation of the debts to the International Monetary Fund of the 50 poorest nations in the world. This marvellous initiative builds on the ongoing work of the Jubilee network.

If enacted, it will revolutionise poverty reduction in the poorest of countries.

Foreign debts are the single biggest impediment to poverty reduction in most poor nations, many of which spend five or more times as much on servicing their foreign debts as they do on health and education combined.

Foreign indebtedness takes children out of classrooms and food from their mouths. America needs progress on debt relief for Iraq now.

This imperative is prompting enlightened thinking on the problems of the desperately poor nations, nations that rarely show up on the American radar. Might this be the silver lining to the grey Iraqi cloud?