US leaves Brown's aid plan in doubt

America's decision to throttle at birth plans for a new bankruptcy code for indebted countries left serious doubts hanging over Gordon Brown's ambitious plans to double annual aid flows to $100bn (£64bn), writes Larry Elliott.

With the Bush administration reluctant to take on Congress over a mechanism that would replicate America's system of wiping the slate clean for corporations, British Treasury officials admitted that the same problem could imperil the chancellor's proposal to create an international financing facility (IFF).

Mr Brown won the agreement at the weekend of both the Group of Seven leading industrialised countries and the International Monetary Fund to look at Britain's proposal to raise money by selling bonds backed by rich-country governments, with the capital repaid out of future aid flows in 20 or 30 years.

The Treasury is working on the technical details of the proposal with officials in other likely donor countries, and is confident that a workable plan will be available by the time Jacques Chirac hosts the annual G8 summit - the G7 plus Russia - at Evian in early June. "At that stage we will see whether there is the political will to do this", one UK source said.

Although Mr Brown is arguing that a doubling of aid flows through the IFF is vital if the world is to meet the development targets for 2015 set by the United Nations, the fear is that President Bush will give the idea lukewarm support at best.

France is the one G7 country to give the chancellor's proposal wholehearted support, but there is concern in London that Mr Bush will not wish to give Mr Chirac a triumph at the summit and would not be prepared to ask Congress for more money at a time when the White House has just requested $80bn to fight the war in Iraq.

The Treasury said the IFF was "the only game in town" when it came to mobilising more money for aid, adding that it was encouraged that the IMF had agreed to explore the British proposal over the coming months.

But G7 sources said at the weekend there was a risk that the IFF could go the same way as the sovereign debt restructuring mechanism, a proposal that has been worked on for the past six months by the IMF but which has now been abandoned following the implacable opposition of the US.

The sources stressed that the Bush administration had been lobbied hard by the US financial sector, which had profited from the massive bail-out packages that have been hastily arranged over the past decade to help countries through periods of crisis. One said there was enormous resistance from the banks to any measures that would put an end to "welfare on Wall Street".

John Snow, the US treasury secretary, said at the weekend that rather than support a new bankruptcy mechanism, America was backing collective-action clauses instead. CACs prevent creditors from holding out for a full settlement of their debts when other countries are seeking to organise a writedown, and binds them to the wishes of the majority.