Mexican cash crisis may prompt banking-practice reform
Toronto — The international banking business, says Richard Hill, will be ''a lot healthier'' because of the Mexican debt crisis.
This view of the chief executive officer of First National Bank of Boston is not common among the bankers gathered here for the annual joint meeting of the International Monetary Fund (IMF) and the World Bank. Most are too immersed in the immediate debt crisis to speculate on some favorable outcome.
''When you have $80 billion at stake,'' explained Frederick Heldring, deputy chairman of the Philadelphia National Bank, referring to Mexico's estimated total foreign debt, ''it has got to be the issue.''
Negotiations are currently under way here between top officials of the IMF and Mexico on the terms of a $4.5 billion, three-year loan from the fund to that Latin American nation. The loan is to tide Mexico over what it regards as a ''cash crisis'' resulting from the decline in oil prices.
The negotiations are apparently not going easily. Before the IMF hands over any money, it will reqire Mexico to agree on certain economic reforms. These conditions might include a reduction in the public deficit, cutback in consumer subsidies, and a more open trading system.
Further, there are hints that the IMF insists any commitment on conditions be made not only by the outgoing Jose Lopez Portillo administration, but also by that of President-elect Miguel de la Madrid Hurtado, who takes office Dec. 1. The new regime will undoubtedly want to be tainted as little as possible by any politically unpopular reform package.
Though Mexico owes First National Bank of Boston some $.5 to $1.0 billion, Mr. Hill explains his expectation that some good will arise from the current international debt crisis by citing two factors:
1. Much of the world is going through a period of disinflation. Over the past two years this has trimmed interest rates 6 or 7 percent, cut inflation in half, and reduced oil prices 15 to 20 percent, as far as the US is concerned. This process of disinflation is painful. But the economy emerging from this period will be ''a lot stronger.''
2. The financial community will have learned some lessons. Mr. Hill maintains though most commercial banks have individually diversified their risks by not concentrating too much of their lending in one country, they ''have got to learn to cooperate more fully with the World Bank and the IMF - and with each other.''
Such cooperation, he believes, could provide commercial banks with better information on national debt problems.
There's little news of the progress of the talks with Mexico reaching the press. Mexico took the trouble Tuesday to deny some news reports. Otherwise both sides are saying nothing publicly.
Meanwhile, the commercial bankers are waiting nervously on the sidelines. Whenever two bankers meet, says Mr. Heldring, they ask each other what percentage of their capital would be lost should Mexico repudiate all its international debts - a contingency considered highly unlikely. A few American banks, Mr. Heldring says, have 50 percent or more of their capital at risk. Most of the world's 1,000 or so banks that have lent money to Mexico have far less at stake.
Mr. Heldring concludes, ''it is terribly important that this be handled well and you get reasonably quickly an agreement with the IMF. It will set the tone for other countries.''
Several other nations, such as Argentina and Poland, have debt problems of various degrees of severity. Poland's commercial bank creditors were meeting Tuesday in Warsaw with Polish officials for exploratory talks on further rescheduling of its massive international debts.
The Mexican talks have something of a deadline. Commercial banks agreed Aug. 23 to a 90-day rollover period of payments of principal due up to Nov. 23 by public sector debtors, that is, owed by Mexican government agencies or government-owned corporations.
The Tuesday release promised that Mexico will present to its creditors ''a broadly based economic and financial program which would expect to address the liquidity situation of Mexico in a permanent fashion'' by that latter date.
It is estimated that Mexican government entities owe some $55 billion, the remaining $25 billion or so is owed by private companies. Some $28.3 billion of the Mexican external debt is held by American commercial banks.
Both Messrs. Heldring and Hill figure Mexico, with its huge oil reserves, will eventually emerge from its debt crisis. And both are counting on the IMF to force Mexico to make the tough decisions which will bring its international accounts into better shape.
''It is rather difficult for private banks to insist on conditionality. . ., '' said Mr. Hill.
Some public officials make rude comments about how the IMF must act as a debt collector muscleman for the commercial banks as well as for official agencies. However, if commercial banks attempted to govern the economic policies of developing nations, the comments would undoubtedly be even nastier.
Mr. Hill maintains that the present repayment crisis will prompt the banks to insist on bigger ''spreads'' between the cost of money and the interest they charge on loans to the developing countries. Considering the risks, ''we didn't price adequately,'' he said.
With interest rates down substantially in the world, developing countries can expect to save many billion of dollars in interest payments on their more than $ 500 billion of external debts. But the banks will be aiming for higher profits on this business to cover potential losses.
Some American banks, particularly smaller or regional banks, have been trying to avoid rolling over their Mexican loans.
Commented Mr. Hill: ''This is the time to co-operate - not the time to take advantage of the situation to reduce your exposure'' to possible Mexican loan losses.
If a bank should attempt to bail out, it could not expect to get back into the international lending business ''for a long time,'' he warned. Such institutions would not be invited to participate in future loans by either the leaders of banking consortiums or by the offended developing country.
''If they opt out now, they are opting out for years,'' he said.
IMF managing director Jacques de la Rosiere also urged the commercial banks to keep up their international lending, and ''judge each debtor on its own merits and . . . not allow the emergence of debt financing problems in one country to cloud their judgment on the creditworthiness of neighboring countries.''
It is widely feared that the Mexican crisis will hurt the credit- standing of Brazil and other Latin American debtor nations.
Some critics have charged that the commercial banks pushed their money down the throats of developing countries, making them spendthrifts. Mr. Hill denies that. ''We responded to their requests and then made credit analyses. We have not pressured them to borrow money from us.'' He admitted, however, the bankers have been highly competitive in seeking the business and that governments were able to take advantage of this to get excellent loan terms.
Whatever, the debtor nations and commercial creditors are now tied together, each dependent on the other. That is not likely to change - even if some debt schedules are stretched out.
America's big Mexican lenders Estimated exposure to Mexico Loans Bank (in billions of US $ ) BankAmerica 2.5 Citicorp 2.0-2.5 Chase Manhattan 1.5-2.0 Manufacturers Hanover 1.4 First National Bank (Boston) 0.5-1.0 Continental Illinois 0.75 First Interstate (Los Angeles) 0.7 Bankers Trust 0.5 Wells Fargo 0.5 Source: The Economist Financial Report