Consultants to the Third World

Where does a financially-strapped third world country go when it is seeking advice on how to renegotiate its debt with its commercial bank creditors?

A growing number of debtor nations, from Zaire to Indonesia to Costa Rica, are turning to an unusual and secretive consortium of three prestigious investment banks. The banks, Lehman Brothers Kuhn Loeb in New York, Warburg Paribas in London, and Lazard Freres in Paris and New York, formed the partnership in 1975 to assist third world governments in rescheduling their foreign debts.

The consortium came together when the three firms were hired separately to reorganize Pertamina, the Indonesian state oil company, which was then bankrupt. After the Indonesia contract, business for the high-priced financial advisers picked up. "There's no question about it, it's a growing field because more and more countries are in trouble and are receptive to advice," says Richard Weinert, a partner in Leslie, Weinert & Co., a small investment banking firm in New York.

Each of the three legs of the consulting triad operates out of a different Western nation and each seems to be most successful in attracting clients from the former colonies or spheres of influence of that Western power. For instance, the French office of Lazard Freres was instrumental in making the former French west African colony of Gabon a client; Warburg snared the former British colony of Ghana, and Lehman sold its services to numerous countries in Latin America.

In addition to Gabon and Ghana, the consortium has been called on to advise the perennial banker's headache; Zaire, and such debt-ridden countries as Sri Lanka, Turkey, and Peru. Most recently, the group was retained by financially ailing Costa Rica.

In a typical case, following the advice of the three investment houses, a debtor nation will first work out an agreement with the International Monetary Fund for a loan with harsh conditions attached. Second, the country will renegotiate its debt to foreign governments, sometimes called "official" or "bilateral" debt. Then, with the aid of the consulting consortium, it will try to work out a restructuring of the "private" debt, that is, the country's debt to commercial bankers.

"They don't drive a hard bargain," says Chandra Hardy, an economist at the World Bank, referring to the investment houses. "It's more like managing a large problem."

Hardy, who recently completed a study called "Rescheduling World Debt," describes 46 cases of debt renegotiations, pointing out that a country seeking advice often owes money to several hundred banks in different countries at a variety of interest rates and time schedules. If a country has borrowed unwisely, loan payments bunch up, leaving a debtor nation at least temporarily unable to meet its obligations. This can have ruinous consequences on a country's credit rating, Harding told Multinational Monitor:" If you don't pay the private banks, you don't get the money from anybody else."

Each of the three investment banks in the consortium has a specific g overnment advisory group, packed with former government luminaries. The Lehman group, for instance, can call upon the services of former under secretary of state George Ball, former assistant secretaries of state Richard Holbrooke and Richard Moose, and Theodore Roosevelt, the great-grandson of Theodore Roosevelt. At Lazard in New York, the advisory group is headed by Frank G. Zarb, former Federal Energy Administrator under Richard Nixon. And in London, the Warburg group employs several former senior British government officials.

"The obvious advantage is that government people have probably had official relations and are likely to know people in the foreign government," says Charles Frank of the New York investment bank, Salomon Brothers. Another banker added that it was helpful to have prestigious former government officials handle debt restructuring because in such cases, "you're dealing with the prime minister of a country."

While the Lehman-headed triad dominates the field of advising developing nations on debt reschedulings, there are several other firms which are seeking to establish a presence in the lucrative business. Salomon Brothers, for instance, recently won a contract to represent Bolivia in rescheduling $400 million in debts to an array of foreign banks.

But the group's most intriguing competitor is Leslie, Weinert & Co. Ordinarily, the firm specializes in international loan syndications, the discounting of trade paper, and international investment and financial counseling, particularly in Latin America. But one partner in the firm, Richard Weinert, also helped negotiate for Nicaragua a relatively generous private debt rescheduling package, which has yet to be duplicated anywhere in the world.

When the Sandinistas seized power in Managua in 1979, they inherited a looted national Treasury and a national debt of $1.6 billion', with $582 million owed to 115 different private banks.

From the beginning, the Sandinistas sought to renegotiate the debt rather than repudiating it, as some bankers had feared. The new government in Managua received proposals for assistance from the Lehman triad and from Salomon Brothers. But Nicaragua's chief negotiator, 29-year-old Alfredo Cesar Aguirre, thought the million-dollar fees of the two firms were exorbitant.

Then along came Richard Weinert. A part-time instructor at Columbia University, Weinert had met several Nicaraguan officials through his academic contacts. He submitted a proposal to assist Nicaragua at a far lower charge, reportedly around $250,000. Moreover, Weinert was philosophically far more in tune with. Sandinista thinking. As Nicaragua's Cesar told the Institutional Investor, "When I got the proposal from this guy Weinert, it was as if he was reading my mind. His proposal talked about how Nicaragua should be considered a special case because of the change of government and the devastation of war."

After a series of heated negotiations in Panama City with a private bank steering committee led by a Citibank senior vice-president William Rhodes, the Sandinistas were able to reach an unprecedented agreement. For the first time in any rescheduling, the commercial banks agreed to defer interest payments as well as principal payments. At the same time the banks agreed to stretch out the repayment of interest and principal over a 12-year period, "the longest term of any rescheduling in the post (world) war (11) period," according to Institutional Investor. The normal rescheduling period is for seven years.

The Nicaragua case, however, may be difficult to duplicate. In other cases of rescheduling, says Weinert, countries have not ended up with substantially different terms "than they would have received if they had negotiated with the banks." Still, given the indebtedness of third world countries and the gloomy world economic outlook, chances are investment bankers will continue to earn a pretty penny advising financially-strapped developing countries.

Jim Khatami writes for Interlink News Service in New York.