Debt relief and self-interest

IT'S less a matter of bailing out the banks than of preventing economic stress and political instability in much of the Western Hemisphere. That recognition should guide United States policy on third-world debt in the months ahead. The Reagan administration has stood by its plan of demanding full interest payments from debtor countries and tying further loans to economic reforms in those countries. Debt relief has been a no-no - something that would inevitably, it was argued, draw on taxpayers' funds to underwrite bank losses.

The administration's approach has failed. Debtors in Latin America were supposed to have rallied themselves to service debts and adopt reforms in order to qualify for more loans, thus laying the groundwork for economic growth. With growth, theoretically, debt accumulations would recede. But political realities in countries like Brazil, Argentina, and Mexico have spoiled this scenario. Policies of strict debt repayment and austerity are costly in social terms. Inflation and drooping living standards have punished low- and moderate-income Latin Americans.

At the same time, bankers have become leery of further loans in the hemisphere, so development money has dried up. National economies have shrunk.

Will the Bush administration recognize that US interests lie in a more compassionate approach to Latin America's problems, including some form of debt relief? A quick response might be, ``How could it? The man who crafted the Reagan policy will be secretary of state.'' But at the State Department, James Baker III is likely to see things from a different perspective from the one he had at Treasury.

He'll see a number of young democracies, or older democracies just becoming more politically vibrant, staggering under debt burdens. He'll see countries that should be fighting deficits and inflation by developing new export industries scrambling to service their debts instead. Some, like Argentina, have fallen months behind in interest payments. Others, like Brazil, manage to keep up, but find they have to keep piling debt on debt.

The recognition is growing, worldwide, that something creative has to be done. If things creak along as they are, massive defaults loom ahead, followed by chaos in world financial markets. Large commercial banks, joined by governments in Europe and Japan, say they stand ready to start a program of debt relief. They emphasize they're not talking about outright debt forgiveness, but ways of rescheduling debt, exchanging some of it for other assets, and linking economic aid to reforms in the debtor countries.

The US, nearly alone, stands in the way. It's time for Washington, which is itself no stranger to debt problems these days, to become part of the solution.

By aiding Latin American economies, the US will be doing itself a big favor, too. Strengthened markets to the south are needed if the US is to sell enough goods to shrink its trade deficit.

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