A very subdued party of navy blue suits and gray heads stood in the baroque splendor of the Rathaus of the Free and Hanseatic City of Hamburg. Mayor Claus von Dohnanyi was in the midst of greeting these 200-plus top international bankers - everyone from Paul Volcker to Walter Seipp of West Germany's Commerzbank.
Suddenly, five casually dressed young women and one man emerged from a side room and unfurled 20-foot-long banners that read: ``Debt forgiveness today.'' ``Debt forgiveness for the third world.''
The demonstrators stood peacefully. ``These are my `Greens,''' said Mayor von Dohnanyi. ``Let them stay.''
A mild rustle went through the crowd of bankers and their spouses, confronted as they were during this carefully orchestrated and buttoned-down conference with a surprise controversy. As it turned out, the protesters were from Hamburg's Greens party.
It was a curious moment - and a curious issue to protest. For, while the Greens and vast numbers of people in the impoverished third world might know little of it, the debt issue seems to be on the mend. The bankers, at least, think so.
At a three-day meeting of the International Monetary Conference, an annual gathering of bank chiefs, there emerged a consensus that the third-world debt crisis is easing. Radical notions such as debt forgiveness, debt repudiation, and loan defaults are no longer the worries they were just last winter, when Brazil shook the financial world by declaring a moratorium on debt payments.
The main reason for the optimism among bankers is that, led by Citicorp, big banks with loans to the third world have boosted reserves against possible loses.
``The additions to our reserves,'' noted Willard Butcher, chairman of Chase Manhattan Bank, ``give us greater flexibility.''
Banks have also aggressively embraced such alternatives as debt-equity swaps to wipe some loans off their books. Feeling healthier now, banks are providing new money to debtors somewhat more readily than they were last winter. And economic growth in North America and Europe is helping boost third-world exports.
Meanwhile, the Brazilian moratorium looks like it is on the verge of being scrapped. Brazil has been much more conciliatory. A simple financial calculation has played a big part.
``For most debtor countries,'' Mario Henrique Simonsen of the Brazilian Institute of Economics told the bankers, ``the costs of fully servicing the interest bill [on international debt] appear as much smaller than those of being excluded from normal channels of international trade. This virtually ruled out any possibility of outright debt repudiation.''
In desperation, however, gambits such as Brazil's Feb. 20 moratorium still might occur. What Brazil did, Mr. Simonsen says, ``disastrous as it might have been for the country, provides a striking example of how a debtor country may react once it feels that transfers abroad are a permanent drag on its domestic savings.''
But the need for new loans - especially for a country as economically ambitious as Brazil - has brought it back to the table. Brazilian authorities are more open today to debt equity swaps (where some bank debt is transformed, through a complex maneuver, into ownership of a local business). They have also gone to the International Monetary Fund (IMF) and indicated they are ready to deal with creditors again.
Behind all of this is an apparent conclusion that - prosaic as it might sound - the only way out of the debt quagmire for debtor nations is through export-led growth. As Simonsen points out, this not only increases the willingness of debtors to cooperate with the world financial community, but also ``will enable them to borrow new money without increasing their debt/export ratios.'' New loans can be obtained as exports increase.
Thus the rise in commodity prices over the past year, and especially in recent months, has been greeted with a sigh of relief among debtor nations. Higher prices and greater demand for oil, metals, and agricultural goods means stronger exports from the commodity-oriented third world.
The trend looks good for both banks and debtor nations. But there could be many a slip. Global economic growth could falter, causing commodity prices to drop again. Inflation worries in countries like the United States could prompt tighter economic policies, which might lower commodity prices, too.
Protectionist legislation, especially in the US where a tough trade bill is before Congress, could hinder the export drive from developing nations.
Interest rates could also rise, making debt repayment more difficult. And it is important to note that while the trend lines look positive, they are only just taking off. Richard Erb, deputy managing director of the IMF, says he ``gets the clear impression that it is very difficult for [debtor] countries that have undertaken economic reforms to borrow from commercial banks.''
Debt equity swaps and other arrangements are good, he says, but ``the reality is that governments need untied external financing packages to facilitate the large debt servicing payments they make to commercial banks.'' And he worries that all the new financial options could ``slow down the process of negotiating or assembling financial packages.''
Still, the bankers usually call the shots, and the debt crisis is no exception. Take a report issued this week by the Institute of International Finance, a Washington-based group of elite international banks.
While encouraging swaps and other ways of concentrating on investment lending rather than balance-of-payments lending, the report put the burden squarely on debtor countries to become creditworthy and regain access to global capital markets. Forcing the banks to write down their loans (calling them bad and taking a loss) or to grant debt ``relief,'' the institute said, is ``in conflict with continued bank participation.''
If you did take to us, the banks are saying, we simply won't make new loans. You need the money; we don't need the loans.
The Greens later surrounded the bankers' hotel, inconveniencing them for 45 minutes or so. They were certainly addressing the right crowd with their calls for debt forgiveness, but the bankers are feeling confident today that the debt crisis is going in their favor.