Bankers Claim the Danger of Global Collapse Is Receding

In international banking circles recently, there has been a turnaround on the thorny subject of lending to third world countries. 1980 was a year of worry; at numerous banking meetings and in special industry reports, great concern was voiced, over the abilities of less developed countries to pay off their loans. Fears of defaults from major debtor countries ran high, with commercial bankers concerned about their own capacity to pay interest on the massive deposits they held from OPEC countries (see MM, April, 1980).

No longer - at least not with the despair of yesteryear.

Financing chores are "once again manageable," pronounced Sir Jeremy Morse, chairman of the British clearing bank, Lloyds, at the annual international monetary conference held in June at Lausanne, Switzerland. Citibank's Walter Wriston agreed: "The adjustment process has worked remarkably," he told the conference, sponsored by the American Bankers Association.

Even the ever-cautious Henry Wallich, governor of the Federal Reserve Board, thinks that the cataclysmic warnings were premature. "The concerns about the markets' ability to recycle the new enormous OPEC surpluses have so far at least proved unnecessary," Wallich wrote in a Journal of Commerce op-ed on July 30. "Pessimistic forecasters have had to revise their predictions and to move the period of probable difficulties further into the future."

One reason for this shift in perceptions may be psychological. Weathering a series of potentially threatening debt crises-Peru in 1978, Turkey in 1979, Brazil in 1980, Poland in 1981, and Zaire permanently-by agreeing to delay the period of debt repayment, bankers may simply feel that the threat of a default is false; they know they can agree to postpone the debt rather than face the problems of a default. "After years of fear that the failure of almost any nation to pay on time could trigger a chain reaction of bank collapses and even global depression-the financial fabric has, in fact, survived without apparent damage," Business Week noted in June. "Now that debt rescheduling is becoming familiar, it no longer stirs those chilling fears."

But the basic factor behind the change in attitude is world oil prices. As the current oil glut has brought petroleum prices down, the amount of OPEC deposits in Western banks has been falling, relieving banks of some interest payment burdens. The OPEC surplus -the amount by which revenues exceeded expenditures in OPEC countrieshit an all-time high of $111 billion in 1980. This year, the figure may drop to less than $80 billion, according to Morgan Guaranty Trust Co. First National Bank of Chicago is even more optimistic, predicting a drop to $68 billion in 1981 and a further decrease to $50 billion next year.

The decline in oil prices has also taken some-but by no means all-of the pressure off non-oil producing third world countries, whose petroleum bills have been an increasingly crippling burden over the past decade.

But in spite of the 'relief provided by oil price declines, debt repayment costs to third world countries are likely to increase this year, due to U.S. monetary policy, which has raised world interest rates. Debt service payments, which will cover 21 % of third world export earnings in 1981 compared with 17% in 1978, will continue to rise because of high interest rates, said Jacques de Laroisiere; managing director of the International Monetary Fund, at a U.N. banking meeting in Geneva in July. (The real cost of foreign debt servicing for developing countries rose by 103% between 1973 and 1980.)

What is more, with the world economy in recession, less developed countries continue to see their primary export commodities fall in price and the market for their manufactured products shrink due to Western protectionist measures. As a result, third world countries will continue to suffer declining foreign exchange `earnings, which will mean ever more trouble in paying back debts.

Optimism by some major bankers notwithstanding, the problem of third world debts is far from solved; indeed, the picture remains dark.

At the end of 1980, the third world as a group owed a total of $580 billion, more than half of this to private banks. More significantly, bank debts owed by non-oil producing countries amounted to $200 billion, Wallich noted. This leaves banks increasingly overextended. For instance, "for the nine largest U.S. banks, exposure to non-oil developing countries has risen from 156% of gross capital funds in 1977 to 204% of capital in 1980," wrote Wallich.

And to make matters worse, the debt repayment situation is deteriorating. Developing countries, in arrears by $5.1 billion at year's end 1979, had fallen behind by $6.8 billion by December, 1980, according to International Monetary Fund statistics.

Moreover, the bulk of this third world debt is owed by a mere 10 or 12 countries. Brazil, with a debt of $60 billion, leads the league of megaborrowers; Mexico, with $55 billion, runs a close second; Turkey, south Korea, Indonesia, Yugoslavia, and Egypt all are within the $12-$15 billion range; the Philippines and Chile owe about $8 billion each; and Colombia about $5 billion.

Such concentrated lending represents risky exposure for the banks. "The possibility that several ... larger borrowers could experience debt servicing difficulties at the same time can no longer be discounted," warned Chandra Hardy, an economist at the World Bank, in June of this year. "Such a bunching could cause serious problems for banks," she added, dissenting from the prevailing up-beat mood.

Even the cause of this year's optimism among bankers-the drop in oil prices -may actually contain serious weaknesses. "The current slack in the oil market could rebound in a sharp surge in prices when demand and supply come back into balance," noted the Financial Times' World Business Weekly on June 22nd this year.

Heedless of these cautions, bank lending in the Euromarket for the first half of 1981 reached an all time high of $38.02 billion, with non-oil-producing third world countries borrowing an astonishing 45% of the total-an 80% increase in their borrowing for the same period last year. Mexico was the big winner, landing almost $5 billion in loans.

This burst in lending has raised a few eyebrows among more prudent bankers. Wilfried Guth, co-chairman of West Germany's largest commercial bank, Deutsche Bank, warned his colleagues in September that most of the recent loans are going to those very countries that "are already heavily indebted." This trend, he suggested, may be dangerous. "We may be optimists or pessimists by nature, but as good bankers we have to be prepared for the more difficult situations that could occur."

Wendy Cooper is a freelance journalist based in New York, specializing in international business.