The plan due to be endorsed by heads of government of the US, Britain, France, Canada, Italy, Germany and Japan at their summit which began in Cologne yesterday is targeted at almost 40 countries which together owe $200bn.
It would be financed partly by selling 10 million ounces of gold owned by the International Monetary Fund (IMF) and partly by a fund aimed at raising $2bn to help with interest repayments on outstanding debt. The deal was hailed as an "enormous step" by Tony Blair's spokesman. Yesterdaythe Prime Minister told his colleagues debt relief was not just a moral issue but in the self-interest of the industrialised world, because it brought the poorest countries closer to the global economic mainstream.
But his words will not prevent a demonstration planned in central Cologne today which could be one of the largest seen at a G7 summit: 70,000 campaigners are expected to join a human chain around the summit centre, led by celebrities including Bono of U2 and Bob Geldof, and including thousands of protesters from developing countries.
The debt deal was the first concrete result of a summit bound to be dominated by Kosovo and the means of saving Russia from bankruptcy. British officials denied that there was any direct link between negotiations in Helsinki to resolve the question of Russia's participation in the Kosovo peace force and the G7's sympathy to Moscow's financial plight.
The package expands on an initiative from 1996, which, despite much trumpeting, has proved largely ineffective in reducing the debts crushing its supposed beneficiaries, the Heavily Indebted Poor Countries. Last week a Commons committee described the scheme as "on the brink of failure", while even the IMF admitted it had not made much difference.
In a gloomy assessment, the International Development Committee noted that Uganda and Bolivia - the first beneficiaries of the scheme - had already seen their total debts spiral back towards unsustainable levels. On average, nations which do qualify pay a derisory 2 per cent less in debt servicing a year, while most of those for which it is intended cannot meet the criteria required.
Theoretically, that will start to change. The qualifying period for potential beneficiaries will be cut from six to three years, and the number of countries eligible will increase from 29 to 36, thanks to a more flexible definition of what constitutes "sustainable" debt repayment levels.
Last night's agreement required climbdowns from several countries. Germany had to drop its opposition to IMF gold sales, while Japan, which holds 40 per cent of poorest-country debt, had to accept that wholesale debt relief would not necessarily encourage borrowers simply to be more profligate. The US relented on its earlier hostility to a shorter qualifying period. Problems could also be created by the gold sales, driving down still further the price of a metal which is an important export earner for some of the poorest countries. The gold price is now at its lowest since mid-1979.
Oxfam claimed that the scheme would provide at most $50bn of relief, while such countries as Mali, Burkina Faso, Bolivia and Mozambique would still be caught in the "debt trap," forced to pay more for debt servicing than on primary health care and education.
The agency urged the G7 to double the amount of aid, saying that if financing through the World Bank and IMF gold sales were taken into account, the cost would be be just 0.003 per cent of the combined Group of Seven GDP over the next seven years.
Another group, Christian Aid, urged the G7, the World Bank and IMF to declare a five-year across-the-board moratorium on debt service.