Terms of Insolvency

The Third World debt crisis may reach a critical juncture in the next few months. On the one hand, the major Western powers and the multilateral lending agencies continue to counsel patience and perseverance to overcome the crisis. On the other, there are growing indications that debtor nations - and the commercial banks to which they are indebted - have had enough.

Differences were aired at a privately-organized "U.S. Congressional Summit on Debt and Trade" in New York in early December. At that conference, U.S. Treasury Secretary James Baker defended his case-by-case approach to resolving the debt crisis before a wide range of international critics who argued that more general and immediate measures are necessary to restore growth to the developing world.

U.S. opposition to Baker's plan is spearheaded by Sen. Bill Bradley, D-NJ., who is seeking to couple partial debt relief with aggressive trade legislation to restore purchasing power to the Latin American markets and hasten reduction of the massive, $170 million, U.S. trade deficit.

Bradley's idea is to knock 9 percent off the principal owed by Latin debtors over the next three years and cut interest rates on loans by 3 percent.

At the New York conference Baker criticized the plan as "counter-productive" since few banks would be willing to extend further money after being forced to write off 9 percent of their current loans.

World Bank President Barber Conable has also opposed Bradley's idea on the grounds that debtor nations will lose creditworthiness with the commercial banks if they demand debt forgiveness. For the time being, said Peter Riddleberger, a press spokesman for the Bank, "Bradley v. Baker is an internal American issue."

But according to Franz Luetolf, director of the Swiss Banking Corporation, "Most banks feel their exposure to the indebted countries [is] still too large and too risky to begin voluntary lending again."

Increased voluntary lending by the commercial banks is a linchpin of Baker's proposal.

Luetolf and many other European bankers, who have already written off large sums from their Third World loans, indicated that they consider the Bradley plan more favorably than do U.S. administration officials.

Recent developments on the international debt service scene mirror the recent public clash between Treasury Secretary Baker and Sen. Bradley in New York.

For more than four years, World Bank and International Monetary Fund (IMF) officials, as well as the Reagan administration and its allies, have maintained an outwardly optimistic attitude toward debt repayment.

Most have treated the problem of external debt in the developing world with brisk exhortations for more effort and better teamwork, coupled with heavy emphasis on any rare success.

"[W]e can all welcome the agreement reached on the commercial bank financing package in support of Mexico's adjustment efforts," Jacques de Larosiere, managing director of the IMF, told reporters at the conclusion of the 1986 World Bank/IMF annual meetings last October. "This is an important example of the parties involved acting together in their common interest."

Mexico is of paramount importance to the United States since it owes the most of any single debtor to U.S. banks. But the IMFs accord with Mexico alleviated one crisis and sparked others.

First to complain were the commercial banks. Mexico's agreement had been negotiated by a committee of major banks on behalf of that country's 500 commercial creditors.

Only days after the agreement had been signed by the bank committee, bankers around the country began grumbling about the commitment that had been made to increase commercial lending by 12.6 percent, and release $3.5 billion of a total $6 billion by the end of this year.

"Everybody wants to be supportive of Mexico," said Clark Miller, an executive vice president at the Bank of Boston. But, said Miller, a lot of bankers think the low interest rates in the package, plus the fact that the rates are retroactive, make the package too costly for the banks.

For these bankers, the latest emergency package to Mexico is "one too many times to the well," said Miller.

The bankers expressed their reluctance by delaying signing the agreement. If they had not been prodded into signing, the entire commercial portion of the financing arrangement would have been put on hold.

Without the World Bank and the IMF to push them, commercial bankers would understandably prefer to keep to a minimum their loans to the beleaguered economies that make up most of the Third World - regardless, it seems, of the policy reforms some developing nations are willing to undergo.

A large part of the bankers' hesitancy is due to the fact that most loans to developing country governments are worth much less than their book value on the private market. According to figures recently made available by two New York firms, Salomon Brothers and Shearson Lehman Brothers, loans to Argentina's government are now being sold at about 67 cents on the dollar, loans to Mexico at 62 cents, while loans to Peru are worth only 24 cents on the dollar.

Even as the bankers were being cajoled into the Mexican agreement, trouble was breaking out in the Philippines, which will have up to $2 billion in maturities on loans due next year. Debt rescheduling talks with Manila's commercial creditors temporarily broke down because former Finance Minister Jaime Ongpin wanted some of the same breaks for his country as Mexico had received.

Ongpin and his economists reportedly were seeking Mexico's low, retroactive interest rate on the $9 billion in loans that Manila wants to reschedule. But sources say Citibank, in particular, is holding out for higher rates and tougher terms.

Granting the Philippines the same terms as Mexico, said Miller, is "hardly feasible." The Mexican agreement, he said, cannot serve as the "lowest common denominator" for other countries wishing to reschedule their loans.

The commercial bankers view Mexico as a special case and they cannot afford to be as generous with other countries. The bankers don't want the Mexican agreement to create a domino effect of demand among debtor nations.

In contrast to the commercial banks, sources at the World Bank, which is presently putting together a $310 million loan package for the Philippines, feel the bankers are taking too hard a line.

While talks with the Philippines entered a deadlock, Zaire - perhaps the most loyal Western ally on the African continent - unilaterally announced it would no longer spend a third of its export earnings on debt service payments and would redraft its five year, IMF-approved economic plan.

Said Zairian president Mobutu Sese Seko: "A young country cannot go on indefinitely sacrificing everything for the sake of servicing external debt."

Mobutu's action came on the heels of a highly-touted IMF accord with Nigeria. The $452 million Nigerian package, had been said by one World Bank economist to "send very important signals" to other West African governments as to what they could expect if similar policy reforms were implemented.

Ironically, until its revolt, Zaire had been the example to which Western economists pointed when they needed a model for other African countries to follow.

Under the IMF's guidance, Mobutu, one of the most corrupt and brutal of African leaders, had devalued Zaire's currency 80 percent, slashed public expenditures, and lifted most import restrictions. But even Mobutu caved in to public pressure last year and raised public sector wages by 40 percent.

Because of its actions, Zaire has been cut off from IMF and World Bank funds. But Mobutu's bold stand may yet be followed by other African countries with similar debt problems.

Developments in the Philippines and Zaire underscore the emptiness of the official rhetoric surrounding the debt crisis. Few debtor nations can expect the kind of treatment from the multilateral and commercial banks as Mexico, and to a lesser extent Nigeria, received.

This reality, despite official statements to the contrary, makes Bradley's proposal for partial forgiveness of Latin America's debt highly relevant. Largely dismissed when it was first introduced last summer, the proposal will be examined more carefully by Congress now that the Democrats control the Senate.

Said one Bradley press aide, "The Senate is definitely going to push to have [Bradley's debt proposal] put into legislation in 1987."

Economic Reform in Latin America

Two recent reports underscore the frailty of most Latin American economies. They demonstrate that beyond the hearty official rhetoric of team work to overcome the balance-ofpayments crisis, day-to-day living conditions for most Latin Americans are worse than ever. And they are unlikely to improve, the reports suggest, unless fundamental changes are made in the way the debt crisis is tackled.

The Inter-American Development Bank (IDB) begins its lengthy 1986 report, Economic and Social Progress in Latin America, with the wry observation that, "The emergence of a broad international consensus that the debt problem would not cease to be a serious concern and that the region's economic recession was lengthening dangerously was perhaps the most important development for Latin America in 1985."

In 1986, according to the Inter-American Development Bank, Latin America as a region has suffered a decline in the value of its exports, a spurt in population growth and consequent sharp decline in per capita Gross Domestic Product (GDP), economic stagnation, and an increase in unemployment rates. For the countries of Latin America, the IDB says, "continuing to honor previous financial commitments at the cost of postponing growth, has become unacceptable."

"The only way out of the debt crisis is through a resumption of growth," the IDB states. Everyone, from the debtor nations themselves, to the commercial banks and the multilateral lenders, surely agrees. But, as the report notes, the economic indicators are pointing in the wrong direction for this to happen.

A second report, Toward Renewed Economic Growth in Latin America, issued by the Institute for International Economics (IIE), documents the same dismal indices, but includes some recommendations about how to change the situation. The HE argues that the malaise which now afflicts Latin America, although aggravated by the outbreak of the debt crisis in 1982, took root long before. The factors which the HE considers most significant to the region's decline are all tied to protectionist and inflationary domestic policies.

At the same time, the Washington-based think tank says the countries of the region will need much more money from industrial countries than presently envisioned by the Reagan administration and its allies. The HE predicts some $20 billion will be needed annually over "the next few years" if policy reform can take hold and lead to real growth for the debt strapped region.

The IIE's report is upbeat. "We believe that the principles outlined in this report offer a persuasive and feasible strategy for the future and that they can help countries in both parts of our hemisphere to build on the current crisis to forge a new future of success and harmony for all their peoples."

To date, however, there is nothing to indicate that the Reagan administration or its allies feel the same way. They are still holding out for "more of the same."