Domestic politics has Latin lands on edge over foreign debt
From the standpoint of the American banking community, the dangers arising from the developing-country debt problem are receding. For the Latin American debtor nations, however, the political pressures arising from their debts are growing.Skip to next paragraph
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Peru is an example. It offers no major financial threat to its 300 or so foreign creditor banks. Even if Peru were to repudiate the entire $4.7 billion it owes them, the loss would not be big enough to shake the stability of the international financial community.
Peru's political situation is another story. The Andean nation, warns Latin American specialist Esther Wilson Hannon, may be the first new democracy in the Western Hemisphere to fall unless it gets significant United States financial assistance.
Peru's new President, Alan Garc'ia P'erez, was elected to office April 14. It was Peru's first constitutional succession from one civilian government to another in 40 years. ``A considerable achievement,'' says Mrs. Hannon, who is with the Heritage Foundation.
Bankers themselves are aware of the political risks in Latin America. They are searching for new techniques that might help the debtor nations. But so far there is no consensus on what to do.
``There isn't sufficient growth in these countries,'' notes Rimmer de Vries, an international economist at Morgan Guaranty Trust Company. ``Surely we can scratch our heads and come up with new ideas.''
Another bank economist, speaking of such nations as Peru and Bolivia, commented: ``There is a very real question as to whether countries without a diversified export base are going to be able to service their debts. It may be necessary to reduce their interest payments.''
J. Antonio Villamil, senior economist with the Southeast Banking Corporation in Miami, expressed some sympathy for Peruvian President Garc'ia's proposal that his nation use only 10 percent of his nation's export receipts to service its debts.
For social and political reasons, he said, the Latin debtor nations should be enabled to ``reactivate their economies.''
If they are going to stay in business long, bankers must normally be hard-nosed about loan repayments. At this time, however, bankers may be feeling somewhat more flexible about handling their developing-country loans because their balance sheets have improved decidedly since the debt crisis began in 1982.
By slowing down their lending to developing countries and building up their primary capital (including loan loss reserves) more rapidly, US banks have reduced their developing-country loan exposure relative to their capital.
Morgan Guaranty calculates that if all the developing countries agreed among themselves to repudiate all their loans, American banks would suffer losses equivalent to 141 percent of their primary capital, that is, the bank funds owned by their shareholders.
That is down from a peak of 186 percent at the end of 1982. For Latin American debts alone, the equivalent percentages are 93 percent and 120 percent.
For the nine largest money-center banks, such as Morgan Guaranty, Citibank, Chase Manhattan, and Bank of America, the ratios for all developing-country loans are 224 percent at year-end 1984, down from 288 percent at year-end 1982. The numbers for the Latin American nations alone are 146 percent and 177 percent.
If the banks continue to limit the growth of their developing-country ``exposure'' (loans not covered by home government guarantees) to 4 percent annually and go on piling up capital at the rate of the last five years, the loan-to-capital ratio would drop by the end of the decade to 93 percent for all banks and to 155 percent for the nine money-center banks.
Those percentages may still sound disturbing. They imply that debt repudiation would basically bankrupt the banks. But the banks have always assumed, and so far have been proved correct, that not all developing countries would refuse to service their debts at once.
Indeed, the banks have figured that developing countries will be exceedingly reluctant to repudiate their debts, because the economic results can be even worse than servicing them.
A nation would immediately lose its trade credits. Its exports or ships might be subject to seizure abroad by aggrieved creditors.
There are also some signs of progress in the key debtor nations. Brazil, for example, should have a trade surplus this year of $12 billion, about $1 billion more than it needs to pay interest on its roughly $100 billion in debts, reckons William R. Cline of the Institute for International Economics.
Argentina could have a trade surplus of $3.5 billion to $4 billion, somewhat less than the $5 billion it needs to pay interest on its debts. But the nation is at last tackling its economic problems more seriously.
What should be done to continue the progress?
Morgan's Mr. de Vries suggests that Western Europe and Japan should open up their markets further to developing-country exports.
During the current economic expansion, the US has taken some 80 to 90 percent of the growth in exports of the developing countries. ``Europe and Japan have just been sitting,'' he says.
De Vries would also like the World Bank to step up its lending and its loan guarantees to help boost growth in the developing countries. And he would like national bank regulators to give banks more flexibility in rescheduling loans.
There are many other suggestions for easing the debt burdens and helping stimulate growth. The key remains a cooperative effort among the banks, their regulators and governments, the international financial institutions, and the debtor nations.
``This is a joint affair and should stay a joint affair,'' de Vries concludes.