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:Skip to next paragraph
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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 Zaire has withdrawn $57 million of a $257 million standby arrangement with the International Monetary Fund (IMF).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