IF you borrow money to buy a house or a car, you must make monthly payments. If you don't, you lose the house or car and your credit rating is ruined. Most people pay.
But there is an old saying: Borrow $1,000 and it is your problem; borrow $1 million and it is the bank's problem. The more borrowed, in other words, the greater the risk to the bank.
With third-world nations, it's not millions. It's not even billions. More than $1 trillion has been borrowed.
Total Latin American debt is about $360 billion - mostly owed by Brazil, Mexico, Argentina, and Venezuela. This debt worries US banks and the US government the most, because the nations are strategically important neighbors of the United States and most are in the same financial straits.
Much of the ``collateral'' on these loans is only a promise, not an easy-to-resell house or car. So when debtor nations have a hard time paying because of economic problems at home, the banks might threaten to withhold future loans, but can do little else to collect. If banks alienate the borrower, it might refuse to pay, and that can mean a financial loss for the bank.
This, in a nutshell, is what the ``debt crisis'' is all about.
Of course, it is really much more complex. Many of the debtor nations in Latin America, for instance, were cajoled into borrowing money in the mid-1970s when New York banks were trying to ``recycle'' excess petrodollars deposited by increasingly wealthy oil countries.
Graft, inefficiency, and capital flight caused some of the borrowed money to disappear rather than go into productive projects. Much of the debt, moreover, was incurred by wasteful military regimes that have since been replaced by democratic governments. But the obligation to repay the loans remains.
Some observers raised questions about the growing debt in the late '70s, but loanmaking actually accelerated until 1981. Then, suddenly, the economic weather changed.
Many of the loans were made at adjustable rates, so as interest charges rocketed in the late '70s and early '80s, debt service - loan payments - rocketed, too. The chronic US budget deficit exacerbated the high interest rates and caused debtors to criticize the US for demanding austerity from them while acting irresponsibly at home.
Meanwhile, most third-world nations - exporters of basic items such as copper, oil, or beef - were hurt when commodity prices tumbled worldwide. When the US and much of the world slid into a recession in the early '80s, these nations found it difficult to sell their raw materials, goods, and services abroad.
Export earnings fell. Soon some were devoting a huge chunk of what they earned abroad just to service loans. They slashed imports, including modern industrial equipment. Their standard of living, rather than rising, slumped dramatically.
The net outflow of money from Latin America in the past five years has been $25 billion a year on average, not counting capital flight, according to the Inter-American Development Bank. In other words, money is leaving Latin America for the industrialized world just when it is needed for development. This outflow and the drop in living standards have led many economists to describe the region's economic situation as the worst since the depression of the 1930s.
The president of the Inter-American Development Bank, Antonio Ortiz-Mena of Mexico, last week warned that some third-world countries will default on their debts if commercial banks keep taking back more money in repayments than they put out in new loans.
The crisis became front-page news in the summer of 1982 when Mexico verged on default. Since then - and despite periodic crises - banks, the International Monetary Fund, the US government, and debtor nations have patched things together, preventing a default. Several times a year for the past five years they have refinanced loans, stretched out repayment periods, and watched, as debtors such as Peru and Brazil became more outspoken about the onerous debt.
This is called ``managing'' the crisis in a book by Howard Wiarda, a scholar on Latin America at the American Enterprise Institute (``Latin America at the Crossroads,'' Westview Press, Boulder, Colo.)
The crisis atmosphere revived most recently in February, when Brazil announced a temporary moratorium on debt payments.
Javier Murcio, a senior economist specializing in Latin America at Data Resources Inc. in Lexington, Mass., says the Brazil debt crisis is most troubling because, of all Latin debtors, Brazil has had the most success at exporting.
``It's become evident that there is no long-term solution yet,'' Mr. Murcio says. ``Latin debtors have tried orthodox and new strategies, but it is a deep-rooted crisis.'' He points out that interest payments on debt eat up 6 to 10 percent of the gross domestic product of most debtor nations and ``that is 6 percent less to be invested in these countries.'' For a developing nation, this is a sizable loss.
A number of plans have been advanced for easing the burden on debtors (story on right). But there is no ``win/win'' solution in sight.
Still, says William Cline, senior fellow at the Institute for International Economics, ``there have been important examples of successful adjustment out of the debt problem in recent years, including Turkey, [South] Korea, and Colombia. There is good reason to expect that the principal debtors will eventually follow this success.''
Federal Reserve chairman Paul Volcker and others want to prevent a series of defaults. This would hit US banks particularly hard. It could require the government rescue of one or more big money-center banks. This would reverberate throughout the US financial market.
On the other hand, no one wants to see the debt burden become so unbearable that it causes fledgling democracies in Latin America to collapse, to be replaced by anti-debt demagogues from the right or left. Nor does anyone wish to see these countries slip into deeper poverty or explode in anti-Americanism tied to the debt question.
Mr. Wiarda says his interviews with all parties indicated a consensus that there are only three or four years to resolve the crisis; otherwise, there could be big trouble for the international financial system.
Economist Cline counsels against losing hope: ``I would suggest that we are at least halfway in dealing with the international debt problem, and that it would be foolish to turn back now.''
A glossary of debt terminology Concessional loans: Loans usually provided by a government or an institution like the World Bank with very favorable terms for the borrower - often, 20- to 30-year repayment at very low interest rates. These loans fund development projects, which often take that amount of time to complete. Concessional loans are a form of foreign aid. Debt conversion: A way for the banks to get rid of some loans by converting them into securities that can be sold to other parties. This reduces the risk to a bank's financial position. Debt-equity swaps: When third parties purchase debt and then swap debt for part or all of the ownership of a business in the debtor country. This reduces the immediate debt burden the country is carrying. Debt rescheduling: Arrangements between debtors and creditors to ease the burden of debt servicing (making debt payments) by such techniques as postponing the payment of principal or interest, rolling over debts into longer-term obligations at lower interest rates, and, sometimes, adding new money, thus expanding total loans. Debt service ratio: The sum of payments a country makes on external debt divided by its exports of goods and services. This shows how much of a financial burden the debt is on a nation. External debt: Public and private debt that is owed outside the debtor country - to banks in New York, for instance. International Monetary Fund:The agency that lends money to debtor nations to help balance trade deficits. The IMF is often criticized by debtors for demanding politically unpopular austerity programs in return for its aid. LIBOR: The London interbank offered rate. This is what banks in the London market charge when they lend to other creditworthy banks. It is a base for calculating many international loans (LIBOR plus two percentage points, for instance). LIBOR - and loans pegged to LIBOR - goes up and down as economic conditions change. Nonperforming loan: One that's 90 days overdue. If interest on a loan by an American bank is overdue that long, the bank must classify it as ``nonperforming.'' It is then at least partly lost to the bank; this cuts into the bank's profits. Spreads: How a lender makes money. This is the difference between what it costs a bank to get money (which may be LIBOR) and the interest rate the bank charges a borrower. Debtor nations have tried to get spreads and other fees reduced, thereby paying less in debt service. Banks don't like this, since it cuts profits. Spreads today are about one percentage point above LIBOR.
Ways of dealing with the crisis Baker plan: US Treasury Secretary James Baker III has called on commercial banks to advance an extra $20 billion over three years in new loans to 15 leading debtor nations. Official creditors such as the World Bank and the Inter-American Development Bank would raise the rate of disbursements to these countries by $3 billion a year.
All this would be in exchange for economic reforms by borrowers, such as less state control of economies and removal of import barriers. The goal of these steps is to speed up economic growth in developing countries.
Debtor nations support this, but say the resources are insufficient. Commercial banks generally work under the plan, but have not come forward with the level of new money Mr. Baker asked for. Assistant Treasury Secretary David Mulford last week urged banks to show ``greater flexibility'' in dealing with the debt. Bradley plan: Sen. Bill Bradley (D) of New Jersey has proposed that creditor nations and commercial banks give debt relief to troubled debtor nations. The plan calls for the elimination of three percentage points of interest and three percentage points of principal over three years. Debtors would reduce trade barriers and boost economic growth. The biggest financial loss would be to banks. There is some concern that concessions to debtors could encourage others to hold back payments. Japanese plan: Japanese banks re cently decided to pool some third-world loans and transfer them to a new company jointly owned by the banks. Its only purpose would be to collect bad loans. The new company would be funded by the banks' money to buy loans from them at a discount. This is not so much a solution to the debt problem as a creative way for the Japanese to take loans off their balance sheets and get a tax break for doing so. Latin America: No unified policy exists among debtors. But most are looking for lower interest charges to have more money for economic growth. Thus, Latin nations have taken the following positions:
Brazil, the biggest debtor, last month suspended interest payments on more than $70 billion in private overseas debt until it can arrange new financing with banks.
Argentina has kept up regular payments, but recently warned that if it cannot borrow more money it may have to stop payments.
Peru has been paying only 10 percent of its export earnings since mid-1985. This has boosted Peru's economic growth substantially.
Bolivia stopped making interest payments in late 1986.
Ecuador has canceled payments for the rest of the year because of earthquake damage to its oil industry.
Chile has been in the forefront of nations using debt-equity swaps to reduce the debt level.
Mexico, second only to Brazil in debt, has regularly made payments, and negotiators are putting the final touches on a new refinancing package. Money-center banks: Most of the big New York lenders would rather deal with debtors on a case-by-case basis. Regional US banks and European banks, moreover, are increasingly unwilling to participate in new money packages.
The banks with the highest levels of loans in Latin America are Citicorp, BankAmerica, Manufacturers Hanover, Chase Manhattan, J.P. Morgan, and Chemical Bank. In general, these banks oppose the formation of a ``debtors' cartel'' and have not articulated an overall solution to the debt problem, worried that such a solution would require significant financial losses on their part.
Still, the banks have worked to boost their capital reserves and take other precautionary measures in the event they have to take some losses. Citicorp said last week that Brazil's decision to freeze debt payments might force it to take a $190 million charge against its 1987 earnings, but the bank denied it was writing off the value of the loans. Assorted plans: Some 60 ideas have been proposed in all. These are the most widely known:
New York investment banker Felix Rohatyn, instrumental in helping New York City through its financial crisis in the mid-'70s, has proposed lower interest rates on loans, stretched-out repayments, and government guarantees.
Frans Lutolf of the Swiss Bank Corporation has proposed debtors be allowed to defer interest payments to compensate for the low prices of commodities such as oil. The deferred interest would be added to the outstanding debt and repaid when export prices rise. This is known as ``interest capitalization.''
Former West German Chancellor Helmut Schmidt has called for cancellation of the debt of the least developed countries and a massive boost in development aid by newly rich Japan.
Sen. Paul Sarbanes (D) of Maryland proposes letting third parties buy a country's debt at a discount and pass the savings on to the debtor nation.
Harvard economist Jeffrey Sachs says all countries whose per capita income has fallen 15 percent should be forgiven five years of interest.