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Order Returning to Third-World Finance

By David R. Francis / April 10, 1992



THE developing country debt "crisis" is gradually fading into history.

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The crisis broke in the summer of 1982 when Mexico, hit by the drop in oil prices, couldn't service its debts. The news alarmed world finance ministers, gathered in Toronto for the annual meeting of the International Monetary Fund. There was fear for the stability of the entire international financial system. Commercial banks quickly stopped making new loans to developing countries - except when forced to as debts were rescheduled. The major debtor nations in Latin America and elsewhere cut back dramatic ally in their imports from the United States and other industrial countries. The standard of living in many debtor nations fell back sharply in the remainder of the 1980s.

It was a mess.

Slowly, however, patience, purposeful delay, some forgiveness of loans, and economic reform and growth have diminished the importance of the issue. The systemic threat was probably gone by the mid-1980s, experts reckon. The danger for most major commercial banks was over by the end of the decade. They had set aside adequate reserves against potential defaults on the debt.

Commercial bank losses have so far totaled roughly $40 billion to $50 billion, estimates William Cline, an economist with the Institute for International Economics in Washington, D.C.

"It has altogether been a very disagreeable experience for the banks," notes John Haseltine, deputy managing director of the Institute of International Finance (IIF), an organization established by the major creditor banks to do research on the debt issue.

Now the importance of those debts is shrinking for many developing countries as well. Indeed, Richard Feinberg, president of the Inter-American Dialogue, says it's probable that by the end of this decade "most countries will be able to manage their debt service without undue strain."

On Tuesday, Argentina and its foreign bank lenders agreed "in principle" on a plan in which the banks will forgive as much as 35 percent of $23 billion in medium and long-term debt. In return, the banks will get safer bonds or other securities, backed by US Treasury bonds, equal to the remaining 65 percent. Argentina also will begin repaying its $8 billion in overdue interest payments. Argentina expects to cut its foreign debts by $10 billion. "I am sure that this agreement will mean a turning point in t he Argentine economy," said Finance Minister Domingo Cavallo.

The Argentine deal was modeled after Brady debt-relief plans agreed to earlier with Mexico and Venezuela. The next debtor nation to be dealt with by the banks is Brazil. It owed commercial banks $69 billion at the end of 1991, according to the IIF.

Talks with Brazil are to resume April 21. Mr. Cline notes that those Latin American nations getting into better debt shape, including the three Brady plan countries plus Chile and Columbia, have all managed as well to implement "good economic policies."

Commercial banks are owed altogether $643 billion by 50 countries, the IIF says. Total external debts of the developing countries, including those owed to banks, governments, and international institutions, amounted to $1.35 trillion at the end of 1991, the World Bank reports.

A study by Mr. Feinberg, Eduardo Fernandez-Arias, and Frank Sader for the Overseas Development Council in Washington, calculates that in connection with these massive debts, debtor nations will be sending money on a net basis into the richer industrial countries throughout this decade. In other words, interest, amortization, and payments for buybacks of collateral on this debt will exceed new long-term loans from industrial countries by about $263 billion during the 1990s. That, in one sense, is reverse foreign aid.

The encouraging finding of this study is that as this decade moves ahead, increases in net investment flows and grants from the industrial countries to the poorer nations will outweigh these net financial transfers related to past debt. The positive flow into the developing nations could exceed $20 billion a year by the latter half of the decade.

"The crisis of third-world debt will then lie in the past not only for the commercial banks but also for the debtor nations," the three state.