Bargaining is tough on Baker plan for helping debtor nations
Boston — World Bank officials had hoped the initiative by United States Treasury Secretary James A. Baker III to deal with developing-country debts would bear fruit faster. But with billions at stake, bargaining has become lengthy and tough. Last October at the annual joint meeting of the International Monetary Fund (IMF) and the World Bank in South Korea, Mr. Baker proposed that commercial banks dig up $20 billion in fresh loans for the 15 most deeply indebted nations over the next three years. The World Bank and its sister multilateral institutions, such as the Inter-American Development Bank, are to provide $9 billion more.
Mr. Baker's plan was aimed at avoiding a political and economic crisis in developing countries, particularly in Latin America. The new money would give these nations the possibility of easing austerity programs a little.
Getting agreement has not been easy. ``Everybody is looking for the best terms,'' one official notes.
Here's what has been going on among those involved.
The finance ministers and foreign ministers of Latin America's leading debtor nations, concluding a two-day meeting in Montevideo, Uruguay, yesterday, agreed that the Baker initiative is not sufficient. They suggested additional ways to ease their debt burdens.
For example, they called for lower interest rates on their $350 billion in debts to ``historical levels'' and for the addition of some interest payments to the principal. They urged commercial banks to take less profits on their loans. They renewed a proposal that the IMF expand a facility that provides loans when large drops in commodity prices depress export earnings to include costs of natural disasters and major rises in interest rates.
A third suggestion, designed to encourage further commercial bank lending, would give new loans a preferred status. They would be repaid before old loans, should this become an issue. They also want more money than suggested in the Baker initiative. They urged commercial banks to increase their loans by 3.5 percent a year for three years to keep up with inflation, rather than the 2.5 percent in the Baker plan. And they want the World Bank and the regional development banks to boost their loans 20 perce nt a year rather than 50 percent over three years.
Commercial banks, worried about the danger of nonpayment, have not increased their loans to the debtor nations so far this year.
The Cartagena Group, as the 11 Latin American debtors call themselves, are also insisting that the International Monetary Fund (IMF) or the World Bank not be too tough when demanding reforms and austerity as part of loan packages.
Under the Baker initiative, these multilateral institutions are to continue their demands that developing countries put their financial houses in better order.
The Cartagena nations would also like less protectionism in industrial nations and higher commodity prices, both of which would ease their repayment problems.
``We are in an emergency situation,'' said Julio Mar'ia Sanguinetti, president of Uruguay. ``Bigger steps are required, more daring steps.''
According to a joint announcement over the weekend by the World Bank and the IMF, commercial banks holding 90 percent of the loans to the developing nations are willing to go along with the Baker plan.
That is not yet a formal commitment to provide new money, however. The new loans will have to be worked out in negotiations for rescheduling the debts of specific nations.
Further, the banks want more help from governments and multilateral institutions.
Andr'e de Lattre, managing director of the Institute of International Finance in Washington, says banks would like more sympathetic treatment of their third-world loans by bank regulators and tax authorities if they are going to lend more. The institute carries out research on the debt issue for the world's major creditor banks.
As it is, US regulators require banks to put loans on a non-accrual basis [recording no profits] when they have not been serviced for 90 days. US banks contend European regulators are more generous in permitting banks to put away reserves against loan losses and write off these reserves against taxes.
Banks would also like governments to enlarge their export financing programs. That money would also help debtor nations expand their economies faster.
Some of the larger money-center banks have been talking of the World Bank's giving up its preferred-creditor status on some of its loans. This would spread the debt burden around. At present, when the commercial bankers reschedule a nation's debts, the loans to that nation by the World Bank and the other multilateral institutions are not included. They are to be repaid on time regardless of delays on the other loans.
But World Bank officials maintain this would be unwise, and Mr. de Lattre agrees: ``The creditworthiness of the World Bank might be endangered.''
The World Bank borrows most of the money it relends to the developing countries from capital markets in industrial nations. It obtains interest rates close to those paid by the US Treasury because its preferred-creditor status on its loans assures lenders they will be repaid.
Normal creditor status might make it more difficult for the bank to insist on policy reforms in return for its loans, a bank official says. These reforms make it more likely that commercial banks will get their money back too, he adds.
If it were not for the tightness of the US budget, the bank might have regarded the Baker initiative as an occasion to push for an increase in its capital -- action requiring Congress to appropriate funds.
Whatever, the bank already has sufficient capital and borrowing power to raise its lending by about $2 billion a year for three years. The other $1 billion a year is to be lent by the regional development banks, primarily the Inter-American Development Bank.
Bank officials do point out that toward the end of the three-year period the governors of the bank will have to start considering an enlargement of its capital if it is to continue its development lending at an accelerated pace.
The bank has already launched studies of projects that are good candidates for extra loans. Baker's initiative was carefully constructed to use the money of institutions other than the US government.
It's still uncertain as to which debtor will be the first to benefit from the Baker plan. Mexico soon will need more money, especially with falling oil prices. Argentina is undergoing austerity.