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International bankers reaffirm commitment to a stable dollar. Too swift a decline could slow economies of Europe and Japan

By David R. FrancisStaff writer of The Christian Science Monitor / September 29, 1987



Washington

If the world's finance ministers and central banks were cheerleaders at a football game, they would be shouting: ``Hold that line.'' Gathered here for the joint annual meeting of the International Monetary Fund (IMF) and the World Bank, they are trying to keep the United States dollar from plunging in value too fast.

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They are also attempting to maintain the present strategy for dealing with the trillion-dollar third-world debt crisis.

Some important central bankers suspect the dollar will eventually have to drop further on the foreign exchange markets to discourage US imports and encourage exports, thereby reducing the massive American trade deficit. However, neither these officials nor others want a rapid decline. They are concerned it could be disruptive, stepping up inflation in the US and possibly prompting an economic slowdown in Western Europe or Japan.

Thus the Interim Committee, a 22-nation policymaking group of the IMF, noted ``the importance of stable exchange market conditions.''

Similarly the Group of Seven (the US, Japan, West Germany, France, United Kingdom, Italy, and Canada) at a meeting Saturday reaffirmed ``that currencies are within ranges broadly consistent with underlying economic fundamentals. They recommitted themselves to continue to cooperate closely to foster the stability of exchange rates around current levels.''

The language was almost identical with that used by the seven at a meeting at the Louvre in Paris last February. Since then, the countries' central banks have spent an estimated $70 billion in foreign exchange markets to keep the dollar within the broad levels set in Paris.

Maintaining their recent success in stabilizing the dollar's value on foreign exchange markets may not be easy. The volume of trading on these markets is so huge that the efforts of central bankers to hold the line can be quickly overwhelmed should investors, speculators, and businessmen decide the dollar is headed down.

Japan assured the other six major industrial democracies that the Bank of Japan's move to curb commercial bank lending last week was not the start of a significant tightening of Japanese monetary policy. The money markets in the US were concerned that higher Japanese interest rates would necessitate higher American interest rates.

Both the Japanese and West German central banks have been concerned that the rapid growth of the money supply in their nations could be inflationary. They would like to curb that growth without boosting world interest rates much.

The US won some praise for the unexpectedly large $60 billion reduction in the federal budget deficit in the fiscal year ending tomorrow. The Interim Committee was also pleased with President Reagan's decision to sign legislation aimed at trimming the deficit further in fiscal 1988.

The other major issue at this gathering of representatives of 151 nations was the debt problem. Some nations were concerned that Brazil might take unilateral action on the nearly $70 billion it owes foreign commercial banks.

Earlier in the month it had proposed converting loans into bonds at a huge discount. This would have meant massive losses for the banks. But US Treasury Secretary James Baker III rejected the plan Sept. 8 as a ``nonstarter.''

In a meeting with creditor banks here yesterday, Brazil proposed that the banks convert part of their loans into so-called ``exit bonds'' on a voluntary basis. It also requested an additional $10.4 billion in new loans to cover the interest on their old loans and continue the imports that help the nation maintain growth.

The proposal has not gone over well with Brazil's creditor banks.

Brazil unilaterally suspended interest payments on its loans last February. Some academic advisers, including Rudiger Dornbusch, an economist at Massachusetts Institute of Technology, have been urging Brazil to take further action.

However, Brazilian Finance Minister Luiz Carlos Bresser Pereira approved of the Interim Committee's communiqu'e, noting that ``unilateral initiatives carry heavy risks for all parties.''

Michel Camdessus, managing director of the IMF, spoke of some ``elements of fatigue'' in the developing nations because their debt problems have stretched on much longer than anticipated at the start of the crisis in 1982. But he maintained that the strategy of dealing with each nation on an individual basis and striving for a combination of economic adjustments and growth in debtor countries remains valid.