Argentina debt deadline focuses issue on US policy toward banks
Washington — Will other debtor nations follow Argentina's example? That is the most pressing worry international financial experts have in the wake of Argentina's announcement that it will miss a March 30 deadline for interest payments on loans it has from US banks.
Argentine Economics Minister Bernardo Grinspun said the country took the action because it did not want to reduce its already small supply of foreign reserves.
Argentina's announcement will not have a major impact on US interest rates or banking system soundness if two major condition are met, experts say. The first condition is that Argentina resume interest payments before June 30 as Economics Minister Grinspun predicted Tuesday at a meeting of the Inter-American Development Bank in Uruguay.
The second condition needed to maintain stability in world finance and trade is that the nonpayment pattern does not spread to other debtor nations.
''The danger is that it could spread to other countries,'' US Trade Representative William Brock said Tuesday. Banks would shy away from additional lending and that would make it ''more difficult to get credit out into the trading system,'' he says.
The reason other nations might follow Argentina's lead is that the International Monetary Fund has forced severe domestic spending cutbacks on Latin American countries in return for help in meeting their debt crisis. So there is a danger that if Argentina appears to be able to successfully walk away from its debts, even temporarily, that leaders of other major debtors nations may be tempted to follow.
''In both Brazil and Chile everybody is looking to see what happens with Argentina and how the banks deal with it,'' says Enrique Sanchez, director of the Latin American Service at Wharton Econometric Forecasting Associates. ''If Argentina gets away with it, I wouldn't be surprised to see other countries'' try the same approach, he says.
In Mr. Sanchez's view, ''getting away with it'' would include having the US government make some accommodation with US banks to make Argentina's nonpayment less painful.
Treasury Secretary Donald T. Regan says that if the interest from Argentina is not paid on time then US banks ''will have to take the hit to their earnings.'' But Treasury officials have hinted that some arrangement may be made which would give US banks a bit more time before they would have to reduce their earnings as a result of Argentina's move.
Under US banking rules, banks must classify a problem - or nonperforming - loan as one on which the borrower is more than 90 days behind on interest payments. The significance of that is that the bank must then remove the interest income from its quarterly income statement.
In the case of US bank loans to Argentina, some income also will come off US banks' fourth quarter 1983 profit statements. That is because Argentina has not paid interest or principal on foreign loans since October, according to the Comptroller of the Currency's office.
Argentina has borrowed some $10 billion from US banks and is about $2.7 billion behind on interest payments. But only about $700 to $800 million will be overdue by 90 days on March 30. Argentina's total debt is some $43 billion.
Among US banks with large loans to Argentina are Manufacturers Hanover Trust, which has lent $1.32 billion; Citicorp, which has lent $1.09 billion; Chase Manhattan, which has lent $775 million; and J.P. Morgan, with $741 million.
According to estimates from Keefe Bruyette & Woods Inc., a firm that specializes in bank stock analysis, Manufacturers Hanover could face a 28 percent reduction in first-quarter earnings as a result of nonperforming Argentine loans. Meanwhile, Citicorp could take a 7 percent hit to earnings, Chase Manhattan could face a 12 percent reduction, and J.P. Morgan could see a 9 percent erosion in earnings.
Analysts say banks stocks already reflect these potential earnings reductions. Between Feb. 15 and March 21 the Salomon Brothers bank stock index has skidded some 6.3 percent. During the same period the Standard & Poors 500, a broad market index, rose 1.6 percent.
Large banks, Mr. Sanchez notes, generally have not posted any quarter with losses or nonperforming foreign loans in the past year and a half - a time when the world debt crisis has been severe. To have such a quarter now could prompt shareholders to call for a further reduction in lending to developing countries, he says.
The impact, however, on domestic borrowers should be minimal. Both Treasury Secretary Regan and Federal Reserve Board chairman Paul Volcker have said this week that Argentina's nonpayment of interest will not affect US interest rates.