Nations in debt try to pull themselves back from the brink
Boston — For some 18 months now, various pessimists have been forecasting that some major debtor nation - say Brazil, Mexico, or Argentina - will declare bankruptcy , causing widespread commercial bank failures and financial calamity in the United States, Western Europe, and elsewhere.
It hasn't happened. None of the major national actors in this world-scale drama have repudiated their debts or declared a default. No major commercial bank has announced massive losses on its developing country loans or needed to be rescued financially by its central bank.
Indeed, as William R. Cline, an economist with the Institute for International Economics and author of a forthcoming book on international debt, notes, ''Things have been getting better - not worse. It is not clear what kind of evidence is required to change the minds of these predictors of collapse.''
Mr. Cline figures an important turning point toward the better was in November 1983, when the Brazilian Congress accepted a limit on the indexation of wages against inflation. That was a key requirement of the International Monetary Fund (IMF) before it would grant Brazil a $5.4 billion loan program. That agreement in turn opened the way for Brazil to get some $6.5 billion in new loans from more than 700 commercial banks, a deal finally signed Jan. 27.
Brazil, with more than $90 billion in debts, is apparently financially safe for another year at least. It is hoped the Latin nation will manage a $9 billion trade surplus this year, using that surplus to service its debts.
Talk within Brazil and other major Latin American debtor nations of declaring a unilateral debt moratorium has faded. Argentina's new democratic government has indicated it will negotiate toward rescheduling its debts. Mexico has already enjoyed a major improvement in its international payments situation, notching up more than a $3.5 billion balance-of-payments surplus last year.
Moreover, the IMF and groups of commercial banks have actually produced the loan money necessary to give these nations time to work their way out of serious international payments problems.
''The most important thing that has happened,'' says Mr. Cline, ''is that the international economic recovery makes continued progress.''
In a study completed last summer, Mr. Cline found that a good recovery would mean ''the severity of the debt problem recedes substantially.'' He calculated specific reductions in international payments deficits for leading debtor nations. In fact, the balance-of-payments situation for Venezuela and Mexico has improved much more than he calculated. Brazil came in on track with his forecast.
Mr. Cline assumed a 1.5 percent growth in the world economy in 1983 and 3 percent annually in 1984-86. There are signs the world recovery could be more rapid than that this year.
World recovery eases the debt problems of the developing countries because they can sell more goods to the industrial nations. It also pushes up the price of commodities, including those that are among the vital exports of the poorer countries.
Those prices have not gone up as rapidly as Mr. Cline anticipated. Nor has the US dollar dropped as much in value on the foreign exchange markets as he forecast. A decline in the dollar would make it easier for developing countries to repay their dollar-denominated debts. ''This is just a delayed phenomenon,'' he reckons. In fact, he suspects the dollar will plunge some 20 or 25 percent in value over the next year or so.
''So far,'' he concludes, ''the blueprint for global debt recovery is very much being fulfilled.''
However, the debt problem will not go away immediately. ''There will be some countries in difficulty at some time over the next 10 years,'' Cline warns. In the last few months, for instance, a severe debt problem has emerged in the Philippines. Nonethless, he figures such major debtors as Brazil, Mexico, Argentina, and Venezuela should ''return to normal market circumstances'' by 1987.
That doesn't mean their massive debts will be repaid fully. It means that commercial banks will be making new loans or recycling old loans to such nations voluntarily, because they think it is good business with strong prospects for prompt payments on principal and interest. Now, banks are making these loans under financial duress.
Further, up to now, the debts of the developing countries have been growing, though at a much slower pace than the 20-percent-per-year rate of the 1970s. World Bank president A. W. Clausen estimates the total debt of the developing countries - long-, medium-, and short-term - at about $810 billion at the end of 1983. Commercial banks increased their ''exposure'' in poorer nations by some $ 15 to $20 billion during 1983. They were not, as some allege, ''bailed out'' by the International Monetary Fund.
Since mid-1982, when Mexico's troubles kicked off the debt crisis, some 30 countries have renegotiated terms on as much as $100 billion of this debt. Last year, for instance, there were 16 official multilateral debt renegotiations involving IMF members, ranging from $13 million for the Central African Republic and involving only five creditor nations to several billion dollars for Brazil, with 16 creditor nations.
Both of these, and most reschedulings, were worked out within the so-called Paris Club. Officials from the debtor government meet in Paris under the chairmanship of a senior official of the French Treasury with officials from the creditor nations. There are no written operating rules: Each rescheduling is dealt with on a case-by-case basis. At the meeting, the creditors and debtors reach an understanding among themselves on the general terms of the rescheduling that are described in the ''Agreed Minutes.'' These terms form a pattern for subsequent bilateral rescheduling agreements between the debtor and each creditor country.
The Paris Club meetings are usually also observed by representatives from the IMF, the World Bank, the United Nations Conference on Trade and Development (dominated by developing countries), the Organization for Economic Cooperation and Development (with industrial nation members), and the Commission of the European Communities. If the debtor country is in poor financial shape, the IMF will be particularly interested in that it may be negotiating the terms of ''conditionality'' for a loan. In other words, the IMF will insist on the debtor nation taking steps to bring its balance of payments into better shape before it will make a loan. The loan is intended to give the nation some time to solve its economic problem.
The conditions - often involving extremely unpopular measures, such as reduced budget deficits, tighter credit, and trimmed subsidies - are to ensure that the nation actually does tackle its international payments problem.
Once the IMF has made a deal, the commercial banks meet with the officials and private debtors in the developing country to work out a rescheduling of their loans. If the IMF is satisfied, the commercial bankers feel reassured that the debtor country will gradually get into good enough shape to service its debts properly.
Up to now, the commercial bankers have agreed at these negotiating sessions to reschedule only that debt coming due in one year, preferring to keep debtors on a short leash in a time of world economic uncertainty. But earlier this month , Bank of England governor Robin Leigh-Pemberton urged creditors to consider rescheduling two- or three-year debts at the same time, particularly where those debts fall due in a period covered by an IMF program aimed at returning the nation to balance in its international payments.
Further, various politicians and economists have suggested that the banks lower their interest charges on third-world loans when they are rescheduled. This idea, however, has not been popular with bank executives. They are already having to set aside increased reserves against the possibility of loan defaults by some developing countries.
Rather, the banks usually win a rescheduling fee of perhaps 1 percent of the principal. In some cases they have won an increased ''spread'' between their cost of money and that charged the developing country.
Despite the increase in the debts of the developing countries last year, the developing countries are paying back more to the commercial banks than the banks are lending. That is because interest costs were piling up even faster. World Bank president Clausen estimates the net transfer of medium- and long-term lending was a negative $7 billion in 1983, and will be a negative $21 billion this year.
''It is premature for developing countries, as a group, to be transferring resources to the high-income countries on this scale,'' he says. For the 13 major creditors, the net transfer of resources averaged 2 percent of total national income - a large amount.
The world economic slump that ended last year, combined with the debt crisis, has had a severe impact on developing countries' economies. The World Bank estimates that output in the developing countries grew less than 1 percent last year and less than 2 percent in 1982. With population growing about 2 percent, average per-capita income actually fell in both years - which is tough when, in the poorest countries, incomes average $1 a day. The oil-importing countries of Latin America suffered a decline in per-capita income of 14 percent over the last three years.
This year, however, the World Bank predicts an average growth of 3 to 3.5 percent in the developing countries. But Clausen cautions: ''It will take years to repair the damage that has been done to third-world prospects.''
Martin Feldstein, chairman of President Reagan's Council of Economic Advisers , credits the averting of a world financial crisis to ''international cooperation - the statesmanlike behavior of the debtor countries and commercial banks.''
Perhaps, Dr. Feldstein has speculated, everyone acted so responsibly because no one is wholly to blame for the situation. The commercial banks did take excessive risks in some of their credit extensions in the 1970s. Some of the debtor countries borrowed too much and spent some of it unwisely on unprofitable investment, or on expanding government programs.
Indeed, Jacques de Larosiere, managing director of the IMF, in a talk this month, spoke of ''clear evidence'' that severe debt problems are closely linked with weak national policies. One problem was massive government budget deficits, often often paid for by creating too much money.
Also, governments often set prices for certain goods and services too low, out of line with market realities, leading to distortions and excessive subsidies. They overvalued their currencies, thereby discouraging exports and encouraging imports. Or they kept interest rates too low, prompting money to flow out of a nation or into such nonproductive uses as hoarding. Another problem, Mr. de Larosiere noted, was inadequate debt management. Too many loans were short-term, rather than medium- or long-term.
But the basic cause of the debt crisis was a sudden and unexpected change in world economic conditions.
In the period since 1979, the price of oil has tripled. For the non-oil-producing developing countries, the value of oil imports rose from 6 percent of total merchandise imports in 1973 to 20 percent in 1980-82. The additional cost of their oil imports amounted to $260 billion over the decade, according to a calculation by economist Cline.
The real exchange value of the dollar rose 55 percent, meaning that the developing countries had to export even more goods to buy imports or service their dollar debts.
Nominal interest rates (that is, including inflation) averaged 15.8 percent on the developing country debts in 1981-82, where they had averaged 10.2 percent prior to that. The rise in interest added perhaps $41 billion to the debt burden in 1981-82 beyond what the nations might have anticipated from past real interest rates, Cline figured. Real interest rates - those after subtracting inflation - rose to unprecedented heights.
Perhaps worst of all, the industrial nations sank into a deep and prolonged recession. Commodity prices, important to many developing countries, plunged. Their exports paid for fewer imports, a factor Cline estimates as costing the non-oil developing countries about $79 billion in 1981-82. World trade actually dropped in 1982 and only started to recover in 1983. These debtor countries were again hit to the tune of some $21 billion.
In all, these developing nations had a hard time earning the foreign exchange needed to pay the interest or principal payments due on their massive loans. Cline reckons that these external shocks - oil, higher interest charges, worse terms of trade, reduced export volume - added some $401 billion to their debts in the decade after 1973.
By now, however, the developing countries and their creditors have the situation under better control. The maturity structure of the external debt of the developing countries has been, as the IMF's Mr. de Larosiere says, ''substantially improved.'' Most debtor countries have taken economic steps to get their international payments in better shape. The IMF is currently supporting more than 40 such ''adjustment'' programs among its members with loans. It committed more than $11 billion to such programs last year alone.
Further, de Larosiere reports, the combined current-account deficit (the balance of trade, tourism, and investment flows) of the non-oil developing countries has fallen dramatically in the space of two years from an ''unsustainable peak'' of $110 billion in 1981 to $67 billion in 1983.
This shift, as he points out, involved ''great sacrifice.'' But the world is now in better financial shape. The debt crisis will echo for years to come, but less loudly as the global recovery continues.