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A look at what's behind the rising cost of loans to the world's developing countries

By Harry B. EllisStaff writer of The Christian Science Monitor / October 11, 1983



Washington

''If you put it in purely market terms, interest rates that banks charge debtor countries are not high enough to cover the risk,'' says Lawrence B. Krause of the Brookings Institution.

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''Clearly the risk is up, so a market approach to granting new loans would dictate higher rates and fees,'' says C. Fred Bergsten, director of the Institute for International Economics.

Both went on to say that a lot more than market forces goes into complex decisions about rescheduling old loans and giving fresh money to nations that cannot pay their bills.

Critics in Congress and elsewhere charge that banks have made loans in excess of their capital, but they add that instead of taking their lumps for making unwise loans to foreign countries, banks are hiking fees and interest rates.

''Bankers are aware that forcing up a rate too much may be counterproductive, '' lessening the chance that a lender will get his money back, Mr. Krause says.

''It is a judgment call,'' says Mr. Bergsten, ''as to whether the banks are overcharging.''

The issue of overcharging breaks down into two parts: new loans to debt-strapped lands and the rescheduling of existing debt that developing countries cannot repay.

Of the two by far the more important is the recurring need of third-world nations to renegotiate billions of dollars' worth of old loans, says Brookings expert Robert Solomon.

The question of greed, he says, ''arises not so much in setting rates and fees on new loans, because that extra burden on the debtors is relatively small.''

What amounts to a great deal of money, Mr. Solomon says, is the levying of higher interest rates and large ''upfront'' fees by banks, when they reschedule old debt.

Major loans to developing countries are handled by consortia of banks - often including American, European, and Japanese lenders - negotiated and managed by a ''lead'' bank.

Managing a complex loan costs money. So the lead bank, to cover costs and earn a profit, charges the debtor a management fee.

''These fees,'' Solomon says, ''may make current operations of the banks look good. But often they mask the fact of the banks' overexposure and, indeed, increase the banks' own risk that they will not be repaid.''

A study of such fees and their propriety is under way at the Federal Reserve Board.

Many banks act responsibly in their rescheduling, a senior Federal Reserve officialsays, and extend loans with no repayment due for the first two years. ''But they are charging substantial fees for this service,'' the official says.

''Ideally, if old debts could be rescheduled for longer periods of time, and with smaller upfront fees, everyone would be better off,'' Lawrence Krause says.

But this is not the case. Many loans are rolled over for a one- or two-year period at floating interest rates accompanied by expensive fees.

Overall, the process resembles a revolving door. Lenders extend fresh funds, which debtors use to pay interest due on old loans. With each rescheduling, the total debt burden ratchets up.

Competition among banks, experts agree, and the fear of not being repaid, are major reasons reschedulings are not for longer periods of time.

Uncertainty about the future impels banks to protect themselves with short-term commitments, expensive to the debtors.

This situation is unlikely to change, many experts agree, until governments and central banks of the rich industrial lands - where most loans originate - agree upon and impose more uniform lending codes on their own banks.

Until then, the world debt problem will continue to be managed on a patchwork basis, with the International Monetary Fund, central banks, and commercial lenders rushing to the rescue as each new crisis erupts.