After boosting reserves, US banks are less likely to grant new Latin loans

FOR the developing countries, Citicorp's decision to throw $3 billion into its reserves to cover possible bad loans to heavily indebted nations raises an important question. Will that action and the parade it started of similar moves by other commercial banks reduce the flow of money to debtor nations?

The answer is probably yes.

Banks are already highly reluctant to increase their loan exposure in developing countries, certainly in those nations that are in debt trouble. It smacks of sending good money after bad.

Indeed, United States banks cut their outstanding credit to non-OPEC third world nations by $8 billion last year, from $107 billion at the end of 1983 to $91 billion on Dec. 31.

Citicorp chairman John S. Reed hasn't ruled out new loans to developing nations. But he hopes to reduce his bank's exposure by selling loans and engaging in more ``debts-for-equity swaps.''

If banks continue trying to get their money out of the debtor nations, that knocks the bank leg off the ``Baker plan'' stool. US Treasury Secretary James Baker III suggested in 1985 that the world's debt crisis strategy needed revision to provide debtor nations with an opportunity to enjoy more-vigorous economic growth.

Mr. Baker feared that recession or slow growth in the debtor nations could have political consequences, boosting political instability and damaging immature democracies.

Facing huge budget deficits themselves, the governments of the industrial nations figured they were in no shape to step up their own loans or aid to these countries. So they urged the banks to fork up.

The Baker initiative also called for the industrial nations to maintain good growth rates and improve their own economic policies, goals certainly not fully achieved. And - the third leg of the stool - the debtor countries were to carry out economic reforms.

Eight of the 15 debtor countries in the Baker group have signed loan agreements with the International Monetary Fund that involve significant economic adjustments. Ten have accepted conditional loans from the World Bank that also involve reforms.

But the extra money from the commercial banks that was supposed to make such reforms politically easier has not been forthcoming except in some cases. Brazil owed US banks $22 billion at the end of last year, up from $21 billion in 1983. Mexico's debt held by US banks was down $2 billion to $24 billion, though it could go up again this year. The Argentine situation: steady at $8.5 billion. After boosting reserves, banks are even less likely to offer more funds.

What's to be done to insure economic progress in the third world?

John W. Sewell, president of the Overseas Development Council in Washington, says governments of the rich nations must come to the rescue. They should have helped out more 10 years ago, he adds.

Given their budget restraints, they could boost the capital of the World Bank. One dollar contributed by the US enables the World Bank to lend $60 billion, because other nations also put money in the pot and the bank itself borrows money against that capital in the world's financial markets.

The United States, Mr. Sewell argues, could also make its foreign aid more effective by shifting its focus from military and short-term security worries to economic, political, and humanitarian concerns. That would provide more security in the long term, he says.