Third-world debt raises new concern among first-world banks. `Make do' attitude in early '80s yields to more-radical proposals
IN parts of the developing world, especially Latin America, economic conditions are being compared to the Great Depression of the 1930s. Because of this, some debtor nations are slapping a ceiling on what they will pay on foreign loans - and banks in the United States and Europe are worried. The third-world debt crisis has entered a period of ``agonizing reassessment,'' says economist William R. Cline of the Institute for International Economics in Washington. Some signs of trouble:
In Brazil, national labor organizations called a 24-hour, nationwide general strike earlier this month aimed partly at ending ``bloodletting debt payments.''
Peru is piling up arrears in debt at a rate of $800 million a year. It refuses to earmark more than 10 percent of its exports to service its $22.2 billion foreign debt. Even so, Peru is fast running out of money.
Zaire also refuses to pay more than 10 percent of total export revenues to service its $5 billion in foreign debt. Zaire has withdrawn $57 million of a $257 million standby arrangement with the International Monetary Fund (IMF). Further disbursements have been halted because of Zaire's reticence to adjust its economy as the IMF has asked.
Argentina has been seeking a $1.4 billion credit from the IMF, plus money from the IMF's ``compensatory financing facility,'' to help it deal with weak grain prices. Argentina's foreign debt: $53.4 billion.
``We are looking at a position which is clearly self-defeating,'' says Gregory Fager with the Institute of International Finance, a Washington-based research group set up by the world's major commercial banks. More than muddling through
If the ``muddle through'' approach characterized the global debt crisis in the early 1980s, the scene has shifted now to radical new proposals: ceilings on debt payments, forgiving some of the debt, and swapping debt for equity.
Participants at a recent New York conference sponsored by Sen. Bill Bradley (D) of New Jersey, Rep. Jack Kemp (R) of New York, and other congressmen proposed ways of forgoing some of the $967 billion debt owed by developing countries.
Senator Bradley suggested forgiveness of 3 percent of the debts per year for three years, coupled with a 3 percent reduction in interest rates during the same period. Franz Leutolf, general manager of the Swiss Bank Corporation, proposed that the debtors be granted temporary relief from paying interest on their loans. Henry Kaufman, economist and managing director of Salomon Brothers, a New York investment bank, urged that developing countries that make adequate economic adjustments be allowed to convert some of their debt into marketable securities.
All of these suggestions involve the commercial banks taking substantial losses on the $620 billion owed to them. So far, though, the majority of these banks and the finance ministers of the major industrial countries oppose any debt forgiveness program.
Rather, they want to follow the basic strategy launched after the debt crisis began in 1982 when Mexico was unable to service its debts: country-by-country negotiations to reschedule debt, combined with economic reforms and austerity in the developing countries to enable them to balance their international payments better - including debt service charges.
At the joint annual meeting of the IMF and World Bank in Seoul in October 1985, US Treasury Secretary James Baker III enhanced that basic strategy by proposing that commercial banks and multilateral development banks provide $20 billion in new money over three years, tied in with stronger market-oriented policies in the debtor nations.
Mr. Baker defended his plan at the recent New York meeting, rejecting any ``quick fix'' through significant write-offs of debt or massive new loans along the line of a new Marshall Plan, like the one that helped Western Europe after World War II.
The ``Baker Plan'' had its first major success Nov. 19 when some 90 percent of the 450 commercial banks with loans outstanding to Mexico agreed to lend it $6 billion. That amount could be enlarged to $7.7 billion should investment and growth stagnate in Mexico from further weakness in oil prices. As tough as the 1930s
On that same day, the IMF began disbursing $1.68 billion in loans to Mexico. One day earlier, the World Bank released $300 million in emergency loans, another part of the $6 billion to be provided Mexico by the multilateral institutions as their share of a $12 billion rescue package for Mexico. By Jan. 1, Mexico will owe foreigners $105.9 billion.
One major goal of the Baker plan was to provide debtors with financing to resume more rapid economic growth. The United States was concerned about the political stability of the debtor nations, particularly some of the fragile new democracies in Latin America, such as Brazil, Peru, and Argentina. A study by the World Bank found that the world recession and debt crisis in the early 1980s prompted a 13 percent drop in income per person in Latin America, ending some 30 years of rapid economic and social progress.
In many Latin American countries, the slump has been as bad as, or even longer and deeper than, the Great Depression of the 1930s in the industrial nations, says Guy Pfeffermann, a World Bank economist who helped prepare the report.
Except in Brazil, there has been little or no recovery in income per capita in the last two or three years. Population growth has at least matched relatively slow economic growth. One reason is that Latin nations pay more for imports than they receive from exports. Commodities, still the bulk of exports from most of these nations, are priced in real terms at the levels of 1930-32. But banks are in better shape
Facing political difficulties because of the decline in living standards, many of the debtor nations seek financial relief. Major industrial nations, however, are already struggling with severe budgetary deficit problems and maintain they cannot provide additional foreign aid directly. So they are pushing the multilateral institutions and the commercial banks to provide funds.
The World Bank has stepped up its lending considerably. The IMF provides temporary balance-of-payments financing to debtor nations if they carry out adjustment programs. Commercial banks are reluctantly agreeing to pour good money after dubious (if not bad) money.
Nonetheless, since 1982 their new lending to debtor nations has plunged so dramatically in volume that, in the case of American banks, total third-world loans now amount to about 125 percent of the banks' capital, versus nearly 200 percent in 1982.
In some other industrial nations, banks are in even better financial shape. Each year of delay in providing more new money to the debtor nations puts the banks in a stronger position as they build up their capital reserves.
Today the refusal of even a major debtor nation to service its loans would not endanger the international financial system. In 1982, that was not so certain. Still, to debtors, the system is unfair.
Alfredo Chiaradia, a counselor at the Argentine Embassy in Washington, complains that US and European Community farm programs have both encouraged surplus grain output and subsidized exports. That has driven down world prices and slashed Argentina's income from its export of grain - a factor accounting for 75 percent of that nation's export revenues. And the the massive US budget deficit has driven up real interest rates - ``which have to be paid by us.''
Other debtor nations are unable to export their shoes, textiles, steel, or other goods because of protectionism in the US and other creditor nations. Because of such difficulties, the Latin American nations have sent abroad, through debt servicing, some $100 billion more than they have taken in between 1982 and '85, Mr. Chiaradia says. The result has been an economic slump.
``It is impossible to continue in this situation unless ... increased growth is permitted to these countries,'' he says. ``We must look for ways to reduce the principal or the interest costs. This is the juncture we are at now.''