"Cautious optimism," IMF/World Bank meetings, September 1984 AS BANKERS AND FINANCE MINISTERS convened in Washington, D.C. last Sep- tember for the IMF and World Bank's joint 1984 meetings, the mood was one of cautious optimism, in marked contrast to the doom and gloom which pervaded the two previous annual meetings. Gone was the fear that the banking system was on the verge of collapse. Mexico, Brazil, Argentina and Venezuela, the big four Latin American debtors, had all promised to repay the banks at the market rate of interest. Proposals calling on the banks to lower interest rates and provide financial relief to debtor nations had proved unnecessary. Beside feel- ing more financially secure, bankers also felt per- sonally vindicated. Their business acumen, which had been questioned in the press and at congres- sional hearings, had proved solid. Their solutions had worked. The financial crisis had been weath- ered, as many bankers predicted, and the forecast was for smooth sailing. While bankers were quietly celebrating their self- proclaimed victories, the stock market was signal- ling its belief that some sort of banking crisis is still a distinct possibility. For more than a year, the mar- ket had been pummeling bank stocks, in many cases pushing stock prices far below book value. Since book value is a measure of how much of a com- pany's assets each share represents, the market is saying, in effect, that many bank assets, such as loans to Latin America, are no longer worth 100 cents to the dollar.' As the stock market's evaluation suggests, finan- cial analysts are betting that banks are not going to collect every dollar they are ow6d. If the analysts are correct, their gloomy prognosis raises serious ques- tions about the soundness of the U.S. banking sys- tem as well as the sound judgment of U.S. bankers. Because bankers lent with such abandon during the 1970s, the stability of the U.S. banking system in REPORT ON THE AMERICAS Alfred J. Watkins is an economist working in Washington, D.C. His work has appeared in The Nation, Dissent, Working Papers, The New Repub- lic, and The Texas Observer. 34the 1980s is now in the hands of a few government officials in Rio and Buenos Aires. If only one or two of the largest Latin American debtors-Brazil, perhaps, which owes U.S. banks $21 billion, or Mexico, which owes $27 billion-fail to keep mak- ing timely principal and interest payments, all of the largest U.S. banks would be operating in the red for years to come. 2 Concerning the judgment of bankers, market analysts point out that the highest management eche- lons of the largest-and supposedly most sophisti- cated-banks countenanced a whole host of irre- sponsible lending policies. In order to launch the "go-go" environment of the 1970s, banks exploited loopholes in federal regulations designed to limit the amount of money they are permitted to lend any one borrower. For example, banks made loans to the Brazilian government and the government-owned oil company, Petrobras, arguing that they were le- gally distinct entities, each entitled to borrow up to the legally permissible limit. As a result of this self- serving, but ultimately self-defeating, interpreta- tion, banks boosted their Latin American loans far above the limits prescribed by U.S. regulations, not to mention common sense and prudence.' COMPOUNDING THE PROBLEM IS THE fact that several other banking safeguards were permitted to fall by the wayside. Salaries, bonuses and promotions were awarded on the basis of how many loans were made, not by how many loans were repaid. The name of the game was to make loans and move on, leaving the collection problems to someone else. 4 In the same vein, loan applications were only cursorily reviewed to see if the project was economically sound and if the borrower could at least pay interest. In the days before the crisis hit the front pages, it seemed as if bankers didn't want to let trivial concerns about repayment stand between them and a customer who wanted money. The result was a veritable frenzy of lending as credit officers, loan documents in hand, pursued any Latin American official willing to sign on the dotted line. Between 1975 and 1982, bank loans to Latin America more than quadrupled, rising from $23 bil- lion at the beginning of the period to $97 billion when the crisis erupted eight years later. As the cur- rent crisis would seem to indicate, anyone can lend billions of dollars. But top bank officials are paid six-figure salaries precisely because they are sup- posed to be able to get the money back with interest. On this count, the market seems to be suggesting, bankers are singularly ill-suited for the task. Bankers, of course, disagree vehemently. Yes, they admit, there may be individual cases of bad management or just plain stupidity. Bankers are no more immune from these basic human frailties than anyone else. And, they also admit, critics can al- ways cite examples which "prove" that stupid loans were made and that incompetent managers were pro- moted. But on the whole, bankers deny that the in- ternational financial system is rife with stupidity and incompetence. More to the point, they deny that any significant number of imprudent loans were made. And, they assert, given time and some temporary additional assistance, debtor nations will be able to repay completely every dollar they borrowed.' To a certain extent, these rebuttals might be dis- counted as a last ditch show of bravado. After all, if the critics are correct, bankers have nothing to look forward to but capital punishment. Banks will be- come insolvent wards of the federal government. Top management will be cashiered. Uninsured de- positors face the prospect of large losses. And stock- holders will be wiped out. But perhaps their confidence isn't merely a show of bravado. Perhaps the bankers know something that stock market analysts do not, and this explains why, despite the problems of the past two years and the market's pessimistic forecast, bankers don't ex- perience heart palpitations every time they con- template their Latin American loan portfolios. O UNDERSTAND THE DEBT CRISIS from the perspective of bankers, start with the charge that bankers put all their eggs in one basket. Manufacturers Hanover Trust, which last year was threatened with a run on its deposits in the wake of rumors about its "unsound" international lending activities, has outstanding loans in Latin America equal to nearly three times its stockholders' capital. The other major banks rounding out the top echelon of U.S. international banking all have outstanding loans at least equal to their stockholders' equity, and, in many cases, the amount is much greater. 6 With such high exposures comes the potential for crippling losses. According to figures released by A.G. Becker Paribas, a Wall Street investment house, writing off only 10% of their loans to Argen- tina, Brazil, Mexico and Venezuela would wipe out more than an entire year's profits at Bank of Ameri- ca and Manufacturers Hanover. Other money-center banks, including Chase Manhattan, Citicorp, Chem- ical, First Chicago, Bankers Trust and Morgan Guaranty Trust, would all be seriously crippled, al- though each would still be operating in the black. 7 If ever there was a case of bankers lending too much to too few borrowers, this would appear to be it. MARCH/APRIL 1985 35DEBT Y ET FROM THE BANKERS' POINT OF view, putting all their eggs in one basket, in effect, overlending and deliberately avoiding steps to diversify risks, is a sterling example of "coercive vulnerability." When so many large banks make so many large loans to the same small group of borrow- ers, the slightest hint that a borrower is having trouble making payments means that it is not merely the survival of one bank that is at stake, but the sur- vival of the entire Western banking system. The possibility of financial chaos virtually assures that the U.S. and other Western governments will weigh in on behalf of the banks, telling debtor nations to tighten their belts and devote more resources to debt payments. And on the slim chance that countries cannot, or will not, pay, coercive vulnerability in- creases the probability that banks will get some sort of government bailout. Claiming that loan officers did not carefully evaluate each project also misses the point and, from a banker's perspective, displays profound ignorance about the type of risks inherent in domestic lending as opposed to international lending. Typically, each domestic loan is secured with collateral and a legal contract dedicating a portion of that project's reve- nues to interest and principal payments. If the pro- jected revenues are not sufficient, the loan applica- tion will be rejected. In the international lending arena, these financial requirements and legal safeguards are both impossi- ble to enforce and meaningless, for at least two reasons. First, what matters to banks is not the economic feasibility of any individual project but the economic prospects of a country, that is, whether a nation can earn enough dollars by export- ing goods and services to repay its loans. If it can, even loans for unproductive purposes, like luxury condominiums in Miami, are perfectly sound. The borrower simply goes to the central bank, converting his pesos or cruzeiros into dollars, and remits those dollars to his banker. On the other hand, loans to build an economically productive, highly profitable steel mill may present severe re- payment problems if the country runs out of dollars, perhaps because food imports are draining dollars from the economy faster than steel exports can re- place them. Secondly, even if imports are not excessive, bank- ers have no way of controlling a country's total in- debtedness. This is especially significant because even if each loan passes the most rigorous credit evaluation, each succeeding loan increases the number of claims on a country's limited supply of foreign exchange. Inability to pay interest due to a shortage of foreign exchange-known as transfer risk--can transform "good loans" into virtually worthless IOUs. And this happens even though loans to the government sector were kept within safe and prudent bounds and loans to the most credit- worthy private sector borrowers were invested only in productive, profitable assets. Banks ignore trans- fer risk only at their own peril. This is not merely a theoretical possibility. In many instances, banks were making loans to the Latin American subsidiaries of top-rated U.S. multi- national corporations.8 The subsidiaries used the borrowed dollars to purchase new factories and other productive assets. Yet when the time came to pay interest, the subsidiary defaulted. And it de- faulted because it was producing for the local Latin American market-generating pesos or cruzeiros- while its liabilities were denominated in dollars. Normally, private borrowers expect to buy whatever dollars they need from their country's central bank. But if too many subsidiaries try to purchase dollars, their demand will soon outstrip the central bank's limited supply. The country will appear bankrupt, even though not a single imprudent loan was made and every dollar was invested productively. N FOREIGN LENDING, IN OTHER WORDS, all loans are good until the country has too many outstanding foreign currency loans, at which point all loans suddenly become worth less, if not worth- less. Without some agency to monitor and limit the total foreign currency liability of every public and private entity in a country, one bank's loans will wreak havoc on the loan evaluations and collateral of its competitors. But since there are no controls, why go through the motions of performing loan evaluations? It's all a charade anyway, and the banks know it, even if their critics do not. If, as the bankers believe, the crucial variable is a country's capacity to earn dollars to pay interest- and not some measure of project feasibility, it is not at all intuitively obvious that Citicorp's Walter Wriston and Chase Manhattan's David Rockefeller are the blunderers their critics make them out to be. A country, just like any other borrower, is bankrupt when its liabilities exceed its assets. But as The Wall Street Journal noted in a recent editorial, Mexico "could wipe out its foreign debt overnight by selling 20 billion barrels of oil at $4 a barrel."' At $29 a barrel, the current OPEC posted price, Mexico's as- sets are seven times greater than its liabilities. Banks would be hard-pressed to find many Fortune 500 companies that are so well capitalized and such sound risks. REPORT ON THE AMERICAS 36, ,I IDB-funded ranching on the Argentine Pampa What is true for Mexico is true for all the other Latin American debtors. In virtually every case, po- tential export revenues are many times greater than the outstanding debt. It is beside the point that cur- rent export revenues are not sufficient to pay princi- pal and interest. As the IMF points out in its 1984 World Economic Outlook, "What is crucial is not the current foreign exchange-earning ability of a country but its future prospects."' Seen from this vantage point, claims that the loans will never be re- paid are nothing but the chant of modern day Cas- sandras. With a little belt tightening, the banks ex- plain, every debtor nation can slash imports and in- crease exports. All they need is time to make the necessary economic adjustments and the political determination to use the newly generated trade surplus to pay interest. DURING DEBT CRISES EARLIER THIS century, U.S. bankers did not believe that Latin American politicians could be trusted to im- pose the sort of pain that would be needed if the banks were to be repaid. Rather than relying on moral suasion, the United States dispatched Marines to occupy the customs houses of delinquent debtor nations. Their mission was to confiscate all export revenues and remit the proceeds to the banks. Today, gunboat diplomacy is out of fashion. But that doesn't mean the banks have eschewed outside intervention. Instead of Marines in combat fatigues, the shock troops are international bureaucrats from the International Monetary Fund who arrive with three-piece suits and attach cases. But no matter what the uniform, the process is the same. National sovereignty is diminished. The na- tion's productive capacity and raw materials become the de facto property of the banks. And financial policy is conducted with an eye toward ensuring that banks get repaid, irrespective of what happens to the local economy or domestic standards of living. Today, banks and the IMF are locked in a sym- biotic relationship. IMF "adjustment" policies can- not possibly succeed without co-operation from the banks, but banks are reluctant to offer any assistance unless the IMF first assures them that a debtor coun- try's economic policies are oriented exclusively to repaying outstanding loans. T HE IMF NEEDS THE BANKS FOR THE simple reason that a national economy cannot generate the required trade surplus overnight. Rede- ploying resources on such a massive scale takes time. Products that had previously been imported have to be produced locally. Other resources that were serving domestic needs have to be pressed into service-boosting exports. All this takes time, but for the banks, time is the one resource that is in criti- cally short supply. Unless they receive interest pay- ments every 90 days, banks are required by U.S. government regulations to start posting losses on their delinquent international loans. A delay of even one day can do severe damage to a bank's bottom line, converting an otherwise profitable quarterly earnings report into a financial disaster. MARcH/APRIL 198537 E C C 0 MARCHIAPRIL 1985 37DEBT on te Amer DEBT To give the adjustment program time to work, someone needs to provide debtor nations with enough cash to keep paying interest. The IMF pro- vides some assistance, but it does not have nearly enough funds to keep every country up-to-date on its interest payments. In this respect, the IMF is simply incapable of bailing out the banks. Unless the IMF program is going to fail before it even gets off the ground, banks have to chip in with new loans and postpone, or "reschedule," payments coming due on old loans. Before they will agree to make loans to countries which cannot even pay interest on the old loans, banks want some assurance that they are not simply throwing good money after bad. The IMF gives them that assurance. Its adjustment programs serve as bond covenants. Under the terms of an IMF agreement, for example, a debtor nation cannot go on a spending spree, squandering scarce foreign ex- change and leaving banks in the lurch. IMF agreements cannot guarantee repayment. They have no force of law. But they are the only as- surance banks have that their financial interests will be heard loud and clear in the highest councils of government. With that assurance under their belts, banks will make enough new loans to protect the value of their old loans, lending debtor nations just enough so they can continue paying interest. F OR BANKS, THE DEBT CRISIS IS LITTLE more than a simple arithmetic problem. As long as a debtor nation can generate a trade surplus equal to its required principal and interest payments, that country is not bankrupt, no matter how much trouble it is currently having meeting its quarterly bank payments. Thus, calls for lower interest rates and other forms of debt relief are met by bankers with steely eyed hostility. Their attitude toward today's pleas for leniency is reminiscent of Calvin Coolidge's response to European countries petition- ing for relief from their World War I debts. "They hired the money, didn't they," was his only com- ment. Latin American officials do not deny hiring the money. But from their perspective, whether or not to repay the debt at market interest rates is a political and economic question, not a mathematical prob- lem. The key variable is the willingness to pay rather than the ability to generate the additional ex- port revenues. Latin American officials have never claimed that their economies do not have the re- sources needed to produce the required trade surplus, only that doing so will be politically intoler- able and economically disastrous. M OST LATIN AMERICAN LEADERS have not stinted in their effort to play by the banking community's rules, despite the economic hardship it has caused. The speed with which they have converted trade deficits into trade surpluses- generating dollars with which to pay interest-is nothing short of remarkable. In 1980, Latin America imported $7.4 billion more than it exported. In 1981, the trade account still showed a deficit of $1.6 billion. But by 1982, in the midst of the worst post- war recession, there was a trade surplus of $9.7 bil- lion and in 1983 of $31.2 billion." The $33 billion turnaround in the merchandise trade balance between 1981 and 1983 was due en- tirely to a dramatic fall in imports. The value of Latin American imports was reduced by over 40%, falling from $98.5 billion in 1981 to just over $56 billion in 1983. The drop in imports was especially sharp in Mexico, where a $17 billion turnaround in the merchandise trade balance was caused by a 62% fall in imports from $24 billion to $9 billion. Over the same two-year period, Argentina cut its imports by 50% and Brazil slashed its by 30%.'2 Imports are also inputs. Thus it is not surprising that such sharp cuts in imports resulted in equally sharp cuts in the resources available for sustaining economic growth and standards of living. Between 1981 and 1983, imports of capital goods declined by 49%, throwing Latin America's long-term invest- ment programs into reverse. Gross domestic invest- ment went from an 11% growth rate in 1980 to a 13% decline in 1982 followed by an additional 15.6% drop in 1983. 3 Overall economic growth fol- lowed the same downward trajectory. Latin Ameri- ca's Gross Domestic Product, a measure of the re- gion's total production of goods and services, fell 5% in real terms in just two years. In per capita terms, the decline was even steeper, falling by nearly 10% over the same period.' 4 DESPITE ALL THE PAIN AND ECONOMIC dislocation, these adjustment programs had precious little effect on the region's current account deficit, primarily because higher interest payments more than offset the hard-won gains on the trade front. Interest payments are now consuming an inor- dinate amount of export earnings; the trade surplus is still not sufficient to maintain financial equilib- rium. For example, during the 1982-83 period, Latin America dedicated more than 35% of its export rev- enues to interest payments, three times greater than the proportion recorded barely five years earlier. This regional average masks the exceptionally large 38REPORT ON THE AMERICAS 38 REPORT ON THE AMERICASburden recorded in such high debt countries as Argentina (51%); Brazil (44%); Costa Rica (44%); Chile (38%); and Mexico (38%)."5 Nevertheless, most Latin American countries are still not earning enough to cover their required interest payments. For all of Latin America, the 1983 trade surplus to- talled $25 billion, still far below the $38 billion of required interest payments. Argentina's $2 billion trade surplus in 1983 was not nearly enough to pay the country's $5.5 billion interest bill. Similarly, Brazil's $11.5 billion of required interest payments totally swamped its $6.3 billion trade surplus. Only Mexico, with a $12.7 billion trade surplus has man- aged to earn enough to pay interest in full.' 6 AS THESE STATISTICS INDICATE, PROG- ress to date has been inadequate. Whether Latin American nations will now redouble their ef- forts depends on their assessment of the future. If they believe that their financial problems are not intractable, they will continue playing by the rules of the game. If, on the other hand, being a compliant debtor promises only years of additional pain and very few rewards, the incentives to adopt a more militant posture will increase dramatically. Both debtors and bankers have found ammunition in two recent studies--one released in 1983 by Wil- liam Cline of the Washington-based Institute for In- ternational Economics,l' and the other in 1984 by the staff of the IMF.' 8 The studies report that by the end of the decade, debtor nations will have made significant progress in restoring economic growth and financial stability. As long as creditor nations like the United States do not erect new trade barriers and economic growth does not fall below 3% to 4% per year in the developed countries, debtor nations will have little trouble increasing their export earn- ings, explains Cline. Therefore, he concludes, "the debt will indeed be manageable and . . it would be counterproductive to adopt, out of unnecessary panic, sweeping debt reform measures."" To the directors of the big money-center banks, this conclusion was a much-needed public relations triumph. The message trumpeted in the U.S. press was unmistakable: the banking system is not bal- anced on a knife-edge, collapse is not imminent, and the financial experts have the situation firmly in hand. 2 " But to Latin American officials, for whom reassuring a skittish U.S. audience is less important than confronting harsh economic reality, these same reports provided incontrovertible proof that the debt has become a giant suction pump, siphoning re- sources from Latin America and deflating its economies. Therefore, with increasing frequency, the officials are concluding that trying to pay all the interest that the banks are demanding is a futile exer- cise. As long as interest rates remain high, they ex- plain, the debt will grow faster than export earnings, and bankruptcy will be a mathematical certainty. TO BUTTRESS THIS CONCLUSION, DEBT- or nations need only cite the Cline and IMF studies which show conclusively that interest pay- ments are not expected to decline to affordable levels, at least for the major debtors. In the case of Argentina, for example, Cline estimates that interest payments will consume at least 50% of its export earnings throughout the rest of the decade. Simi- larly, in Mexico and Brazil, the ratio of interest pay- ments to export earnings is not expected to fall sig- nificantly below the level which sparked the crisis in 1982 and 1983. Both studies also forecast that cur- rent account deficits-the gap between the trade surplus and required interest payments-will remain extraordinarily high by historical standards, al- though somewhat below the levels reached in the late 1970s and early 1980s. Persistent current account deficits caused by high interest rates and relatively insufficient trade surpluses must be financed by some combination of exporting more and borrowing more. Neither Cline nor the IMF would dispute this economic truism. In fact, they both cite the ability of Latin American debtors to export more and the willingness of banks to lend them more as conclusive proof that debtor nations will not have to default, that the crisis is not spiralling out of control. But as the Latin Americans begin to examine the effects of more borrowing and more exporting on their long-term development prospects, neither option appears to be particularly attractive. According to a study by the U.N. Economic Commission for Latin America (ECLA), most of the so-called growth generated by additional exports is merely a statistical chimera. The exports will not be used to purchase needed imports and the resources consumed in the export sector will not be available to produce goods and services for domestic use. In- stead, all the additional output will be sold overseas and the proceeds turned over to the banks in the form of interest payments. Consequently, the production of goods and ser- vices available for domestic use is expected to be re- latively stagnant, at best, and declining in per capita terms. The result, the ECLA study explains, is that "about 90% of the labor force incorporated in the 1980s would be out of work in 1990 .... In the production field, the decline in investment, the dis- MARCH/APRIL 1985 39REpti on t4 Amrca44s DEBT Catholic mass against IMF-imposed austerity, Sao Paulo, September 1983 mantling of installed capacity, and the discourage- ment rife in business circles gives grounds for fear- ing that the production potential likely to be achieved in 1990 will be less than that existing in 1980."2" FINANCING THE CURRENT ACCOUNT deficit with additional borrowing will do little to alter this gloomy prognosis. Borrowing merely changes the timing-not the volume-of the re- source drain. Since Cline and the IMF expect that banks will be lending debtor nations only as much as they need to keep paying the market rate of interest, Latin American debtors will not really be receiving any new funds. Every penny they receive will be laundered through the debtor nation's treasury and returned immediately to the banks in the form of in- terest. This laundering process helps banks maintain the fiction that their previous loans are still worth 100 cents to the dollar. But as far as the debtor na- tions are concerned, these new loans only increase the volume of raw materials and manufacturing out- put they must export in order to pay interest. Even more to the point, borrowing to pay interest has been a chief cause of the debt crisis, so it is diffi- cult to see how even more borrowing offers a way out of the morass. Since at least the mid-1970s, banks and debtor nations have been co-conspirators in a giant Ponzi scheme.* Virtually all of the in- creased indebtedness has been consumed by debt service payments. Between 1977 and 1983, for ex- ample, Latin America's total external debt rose from $116 billion to $336 billion. Of this $220 billion in- crease, $154 billion, or 76%, was consumed in in- terest payments.22 Between 1977 and 1983, for example, Brazil's total debt grew by approximately $57 billion, rising from $35 billion to $92 billion. During that same period, interest payments totalled approximately $48 billion. In other words, nearly 85% of the in- creased debt represents borrowing to pay interest. Borrowing to pay interest was the modus operandi in Brazil even before the 1979 jump in interest rates, the second oil price increase and the most recent re- cession-the usual explanations given for the onset of the debt crisis. Between 1977 and 1979, before any of these events had taken their toll, Brazil's debt grew by $16 billion while its interest payments total- led more than $11 billion. Brazil was not the only country to find itself in this predicament. In Mexico, the second biggest Latin debtor, the debt grew from $27 billion in 1977 to $87 billion at the end of 1983. Of this $60 billion increase, interest payments consumed $43 billion, or approximately 70% of the total borrowing. Be- tween 1977 and 1979, Mexico's debt grew by $14 billion and interest payments amounted to $8 bil- lion. Similarly, in Argentina the debt jumped from $8 billion to $40 billion while interest payments consumed $19 billion, or approximately 60% of the $32 billion of new lending. REPORT ON THE AMERICAS *For a discussion of Ponzi schemes, see Cheryl Payer's article in this issue. 40MARCHIAPRLL 198541 ATIN AMERICAN DEBTOR NATIONS are now in the midst of a profound economic transformation. Their current account deficits are not caused by gluttony or excess spending. In virtu- ally every case, imports are down sharply and ex- ports are rising. In other words, the current account deficit is negative, not because Latin American na- tions are living too well, but because interest pay- ments are too high. Even the IMF admits this is the case. "A growing proportion of the current account deficit of the non-oil developing countries has been primarily the result of higher interest payments on the external debt," the fund stated in a recent re- port. 2 3 With this in mind, a growing chorus of Latin American officials is now demanding some limits on the amount of interest they are required to pay. This past May, in a speech before the New York Society for International Affairs, Aldo Ferrer, former Argentine finance minister and current adviser to President Radil Alfonsin, stated the issue succinctly. "The question now before Latin America's debt- ors," he said, "is how much of their domestic re- sources should be appropriated to meeting their for- eign commitments."24 For over a year, Latin American debtors have been trying to give Western governments an answer. What they are saying, in a nutshell, is that they are prepared to pay much less than the banks are de- manding. In January 1984, Latin American debtors convened their first joint consultation, issuing the Quito Declaration and Plan of Action. Heading its list of suggestions is a call to "harmonize the re- quirements of debt servicing with the development needs of each country." 2 5 To accomplish this, the Quito Declaration insists that "export earnings should not be committed beyond reasonable percen- tages." Six months later, the Argentine government echoed those sentiments. In a letter to Jacques de Larosibre, managing director of the IMF, then Economics Minister Bernardo Grinspun stated that "there is no question of nonpayment," but then went on to explain that the government has "de- cided to limit the volume of such payments to the re- sources available to it from exports, without reduc- ing imports below the volume essential to maintain" satisfactory rates of investment and economic growth.26 Exactly what the Argentines had in mind was clarified a few pages later. From the beginning of 1984 to the end of 1985, Argentina projects that ex- port earnings will grow by $745 million. Over the same period, imports are projected to increase by MARCH/APRIL 1985 $650 million. Although it is never explicitly spelled out in the text, the implication of these statistics is clear: virtually all of the future growth in export earnings will be dedicated to reviving the economy. After Argentina has satisfied its domestic needs, the banks can have whatever is left over, in this case only 13% of the additional export revenues. HE PRECEDENT ARGENTINA IS TRY- ing to establish is quite radical. Creditors, especially the big money-center banks, are used to dictating terms. They are not used to having their clients throw down the gauntlet and issue ul- timatums. But while the letter to the IMF is a bold departure from tradition, it still displays a remarka- ble willingness on the part of the government to play by the banking community's rules. Argentina's ex- port earnings are projected to be $9.4 billion, gener- ating a trade surplus of slightly under $4 billion. The government is willing to use this surplus to pay in- terest. They will tolerate a $4 billion drain. But re- quired interest payments are projected to be approxi- mately $6 billion. The government is absolutely un- willing to slash imports by another $2 billion, on top of the 50% cut implemented since the crisis began, simply so they can pay every penny the banks are demanding. 2 7 Although Argentina is generally viewed as the country that is most eager to probe the limits of the financial system's tolerance, it may soon come to be viewed as one of the hemispheric moderates. The new civilian government has said it will not increase the amount of export earnings devoted to paying in- terest. However, this is far more generous to the banks than a proposal formulated by the Latin American Economic System (SELA),* calling for steep reductions in the volume of export earnings committed to interest payments.28 The SELA plan is based on the premise that "in- terest payments must be based on the ability to pay *SELA was founded on the initiative of Presidents Carlos Andr6s P6rez of Venezuela and Luis Echeverria of Mexico, and was endorsed by 23 Latin American and Caribbean nations-including Cuba-in October 1975. SELA's constitution states it is a "permanent regional agency for joint consul- tation, co-ordination, co-operation and economic and social promotion." Its main purpose is to pro- mote collective efforts toward economic develop- ment, economic independence from the United States and improved terms of trade. SELA's head- quarters are at the Latin American Council in Caracas. 41RDEBT 04o t4 Aerca DEBT and not some predetermined interest rate." Accord- ingly, SELA recommends that Latin American debt- ors dedicate no more than 15% to 25% of their ex- port earnings to servicing the debt. Banks would simply not receive the difference between the pre- determined rate and the actual payments made by each country. The exact percentage of export earn- ings each country would pay to the banks would vary with each country's terms of trade. As the price of its exports rose, making it easier to generate a given amount of export revenues, the percentage that would be paid to the banks would rise accord- ingly. The benefits to debtor nations of this plan are con- siderable. Aldo Ferrer estimates that limiting pay- ments to 15% of export earnings would save Argen- tina $1.5 billion annually. For all of Latin America, the savings would be $15 billion per year, an amount equal to 2% of the region's GDP and 20% of its net savings. 2 9 In addition, debtor nations would no longer be required to borrow more and increase exports simply to pay interest. Instead, their current account deficit would shrink, for the simple reason that interest payments, the one item looming largest in the current account balance, will also be shrink- ing. As it becomes increasingly evident that the solu- tions applied over the past two years by the banks and the IMF cannot possibly alleviate the debt crisis, Latin American governments will be impelled to embrace policies like those recommended by SELA. The precise steps they adopt will be determined by a rather simple cost-benefit calculation. The benefits of radical action are the payments that would have gone to the banks but which can now be used for domestic consumption and investment. The costs are those associated with becoming an international financial pariah: assets will be seized, trade credits will disappear, the country will be forced to conduct its trade on a cash and carry basis, or, if the banking system refuses to clear its checks, the country may be forced on to a barter system. As a result, imports will become more expensive and the profits from each dollar of export sales will be lower. As debtor nations see it, the costs will probably be the same if the country adopts a relatively moderate posture and announces that it will not increase the percentage of export earnings devoted to paying in- terest, or if it takes the extreme step of reducing its payments dramatically. The only thing that will vary are the benefits, which increase as the country adopts more extreme measures. At this point, the chief question for debtor nations is at what point will the benefits exceed the costs. uovrnmF1111n llluJurum, OUanN19UW, I oI A RECENT BROOKINGS INSTITUTION study by Thomas Enders, former assistant se- cretary of state for inter-American affairs, and economist Richard Mattione, tries to answer that question." 3 Their calculations indicate that default may be the most viable and profitable option. If the costs of repudiation are equivalent to a 5% fall in ex- port revenues and a 5% rise in import prices, Enders and Mattione report that Brazil, Argentina, Mexico and Venezuela would face hard times for the first year or two. But by 1987, output and standards of living would have rebounded and they would all be better off than if they had followed the IMF's pre- scription. Even if the hypothetical penalties are dou- bled, the general conclusion is the same: repudiation would still be an attractive option for Argentina, Brazil and Venezuela. The actual cost of default may be much less than Enders and Mattione report. Their analysis is based on the assumption that default will provoke a total credit blockade of the offending countries. To the bankers' chagrin, talk of a financial quarantine may be wishful thinking. In the first place, it is not entirely clear that, in this instance, punishment is even a meaningful con- cept. As Aldo Ferrer explained, "As the principal debtors are living on their own means, they cannot be punished with the threat of being cut out of essen- tial supplies."" 3 Or put another way, since they are already generating large trade surpluses, debtor na- tions do not need credit to finance essential con- sumption and investment. With repudiation, they can take the money they were using for interest pay- ments and spend it instead to boost economic growth and standards of living. Second, smaller regional banks with limited ex- posure in defaulting countries will see little advan- REPORT ON THE AMERICAS 0 g 0) 0 0 42tage in joining their crippled rivals in a hemispheric boycott. 3 2 As many smaller banks are beginning to understand, debtor nations will be excellent credit risks after they default. If they do not have to pay so much to Chase Manhattan and Citicorp, virtually every heavily indebted country will have enough ex- port earnings to service the new loans extended by the new creditors. And to make matters even more enticing, small banks have come to realize that they would be able to charge much higher interest rates on their debtor nation credits. All they have to do to justify these higher rates is cite the debtor's gener- ally bad credit rating and recent history of default. In the unlikely event that smaller regional banks will not want to get involved, U.S. exporters will proba- bly pick up the ball, providing the short-term credits where bankers fear to tread. As debtor nations know, the good will of suppliers is necessary to keep imports flowing. But as long as suppliers are getting paid, there is only a slim chance that they will boycott a country that has the temerity to anger the bankers. No U.S. exporter is going to relinquish such a large market merely because his customer has chosen to pay him instead of someone else. The chance that they will boycott an entire continent fol- lowing a generalized debt moratorium is virtually nil. Latin America buys more U.S. exports than Western Europe." 3 3 NTERESTINGLY, ARGENTINA, WHICH everyone concedes is the country that could best withstand the repercussions of a default, has been taking a number of precautions to reduce its vulnera- bility to any possible retaliation. As a first step, they have been systematically increasing their reserves, or cash in the bank, even when boosting reserves meant that they would be delinquent on their interest payments. By accumulating reserves, the Argentine government was ensuring that it had enough cash on hand to pay for essential imports. To the extent that they can pay cash, the banking industry's threats to cut off trade credits sounds like increasingly hollow rhetoric. This reserve accumulation strategy was highlight- ed last March when Argentina received a $300 mil- lion loan from the governments of Brazil, Mexico, Venezuela and Colombia in addition to a $100 mil- lion loan from a consortium of 11 commercial banks. The proceeds were used to reduce Argen- tina's overdue interest bill. Yet despite all the last- minute heroics, there was never any question about Argentina's ability to pay, only its willingness to spend its reserves on interest payments. According to press reports, Argentina's reserves at the time were over one billion dollars. 3 )4 Just as ominous from the banks' point of view is the fact that Argentina recently announced that all of its suppliers have been paid in full, including any overdue interest. For the past year, the banks have been trying to impose a divide and conquer strategy on the debtors, giving minor concessions to com- pliant countries so they will have less incentive to join the more obstreperous ones. Argentina is now giving the banks a taste of their own medicine. Argentina paid its suppliers $2 billion at the same time that it was balking at making much smaller payments to the banks. 3 " The result is that bankers are now the only creditors with an outstanding griev- ance. NE COUNTRY PROBABLY WILL NOT act unilaterally, but as the pressures promise never to relent, and the punishment for declaring a moratorium promises to diminish, the ranks of the restless debtors are certain to grow. Already, Bolivia and Ecuador, relative small fry in the ranks of international debtors, have declared a moratorium on all interest payments, pending negotiations to ar- range a more favorable payments schedule. 3 6 This defiance, coupled with the recent Mexican and Argentine debt reschedulings, are vivid reminders of how rapidly the banks' bargaining power is eroding. As the press reported it, the Mexican debt reschedul- ing was a triumphant example of the divide and con- quer strategy instigated by Federal Reserve Board Chairman Paul Volcker. 3 7 Since Mexico had been a compliant debtor, dutifully meeting and exceeding the financial targets of its IMF adjustment program, Volcker urged the banks to give Mexico a more le- nient financial package, including more time to pay off old loans and lower interest rates. This September, the banks complied. They agreed to postpone Mexico's principal payments fal- ling due through 1990 and to repackage those pay- ments into a new loan due in 14 years. The lower in- terest rates the banks agreed to charge will save Mexico $400 million a year on its $12 billion annual interest bill. In reality, except for the interest rate conces- sions-which are too small to make any material difference to the Mexican economy's prospects for recovery-the banks had little choice but to sign an agreement with Mexico. Mexico's old repayment schedule, negotiated with the banks and the IMF after the August 1982 collapse, had merely post- poned the crisis. Principal payments coming due in 1983 and 1984, which Mexico had no hope of mak- ing on schedule, were rescheduled until 1987. This MARCH/APRIL 1985 43REo04T on t4 Amrcas DEBT gave Mexico immediate short-term relief, but only at the expense of a vastly bigger repayment burden in 1987. Unless this "payments bulge" were elimi- nated with a second rescheduling, Mexico would be forced to default. To prevent this from happening, the banks had to act. T HE INTERESTING QUESTION NOW IS whether other countries will get similar treat- ment. They too are facing a similar payments bulge, and without new reschedulings and interest rate re- lief, will be unable to meet their current payment schedule. 3 8 But the problem from the banks' per- spective is that none of these countries has been as compliant as Mexico. Therefore, if the banks' di- vide and conquer strategy is not to be exposed as a hollow threat, they will have to argue that the less co-operative debtors neither deserve to have their old loans rescheduled nor to get new loans to finance their continuing current account deficits. Will the banks refuse to play ball with the less compliant big debtors? The answer became clear last December, when the banks announced that Argentina would be given an additional 12 years to repay its bank debt, $4.2 billion of new loans from a consortium of 320 banks and $1.6 billion from the IMF. In exchange for more time and nearly $6 billion in new money, Argentina promised to comply with the IMF's strict economic adjustment policies, pay immediately most of the $1.2 billion of overdue interest it owes to its bank creditors and not fall behind on future interest pay- ments. But when push came to shove, precisely because it had been so ornery, Argentina walked away from the bargaining table with a better deal than Mexico which was given more time to pay, but not more money with which to pay. In the Argentine deal, each bank in the lending syndicate promised to in- crease its loans to Argentina proportionately by 16.75%, a much bigger amount than any other debt- or nation received since the crisis first erupted more than two years ago. Argentina's ability to get so much new money is stark proof of how little leverage the banks really have. Simply put, Argentina was not paying the banks on time and there was very little the banks could do about it. When they signed the agreement with Argentina, for example, that country was al- ready more than $1 billion behind on its required in- terest payments and $10 billion behind on its princi- pal repayments. In addition, more than two-thirds of its bank debt was coming due by the end of 1985. This unpleasant fact of life left the banks with only two choices: they could give Argentina new loans and extend its repayment schedule or they could re- fuse, recognizing that, irrespective of their decision, they weren't going to get paid. p UT THIS WAY, THE BANKS VIEWED their so-called choice as really no choice at all. By refusing to give Argentina more time to repay and more money with which to resume paying inter- est, banks would have had to declare their Argentine loans in default and remove them from their balance sheets. Bank earnings would fall, with several big banks operating in the red. To avoid this prospect, bankers showed that they are willing to go to almost any lengths to maintain the fiction that everything is for the best in the best of all possible worlds. This Panglossian attitude is not without its costs, however. It requires banks to keep lending more money so that debtor nations will have enough cash on hand to keep paying interest on their old loans. Unfortunately, this increases the vulnerability of the international financial system, for two reasons. First, debtor nations find themselves deeper in debt and no closer to being able to service their loans. New loans today mean higher interest payments to- morrow and a second round of additional lending to pay the rapidly exploding interest bill. In addition, the banks have to borrow the money they are lending, usually by issuing Certificates of Deposits (CDs) or having their parent holding com- pany issue commercial paper. Then U.S. bank reg- ulators require them to raise fresh capital, usually in the ratio of $1 of capital to support every $16 to $20 of new loans. In other words, banks have to dilute their shareholders' earnings per share for the privilege of allowing the Ponzi scheme to continue for a few more rounds. Beyond that, as is the nature of any Ponzi scheme, banks are going deeper in debt to fund loans which allow Third World borrowers to go deeper in debt. This practice does make it seem as if the financial system is still solvent, but only be- cause one debt pyramid is being constructed for the express purpose of fueling a second debt pyramid. The banks are now finding themselves hoisted with their own petard. As the economics of the pay- ments burden pushes the financial system closer to a crisis, the banks' earlier strategy of coercive vul- nerability will come back to haunt them. Even the sort of minor concessions that will almost certainly be necessary to keep debtor nations playing by the rules for a few more months can wreak havoc on the banks' balance sheets. As a result, banks may have no choice but to hold out for all or nothing. To their chagrin, they may well come away empty-handed. REPORT ON THE AMERICAS 44Glossary Amortization: Repayment of the principal of a loan spread out over a period of years. Book Value: The face value of a bank's outstanding loans, for example, a $100 loan to a bankrupt borrower has a book value of $100 even though if the bank tried to sell the loan to another investor it would receive much less. Capital Goods: Heavy industrial products used primarily in the production of other goods. Foundry equipment, machine tools and electric turbines are capital goods; shoes and radios are consumer goods. Central Bank: The "bankers' bank," the central govern- ment authority charged with managing a nation's cur- rency, protecting its value and regulating the growth of the money supply. The Federal Reserve System ("The Fed") is the central bank of the United States. Commercial Paper: A short-term corporate loan made by an individual or another corporation. Unlike a bond or stock offering, these loans are not officially registered with the Securities and Exchange Commission. Debt Service Ratio: The ratio of debt service payments (i.e., interest plus principal payments) to a nation's ex- ports. A debt service ratio below 20%, indicating that one- fifth of export earnings are going to service the debt, is generally considered manageable. Devaluation: The reduction of a currency's value in rela- tion to another currency or currencies. A devaluation can either be consciously implemented by governments or the unconscious result of trends in international currency mar- kets. Equity Capital: The value of the stockholders' invest- ment. When a bank cannot collect its outstanding loans, the stockholders' equity bears the loss. This ensures that stockholders, rather than depositors or the Federal Deposit Insurance Corporation (FDIC), will absorb the initial losses on a bank's loan portfolio. When the value of bad loans exceeds the bank's equity capital, the bank is de- clared insolvent and closed by federal regulators. Exposure: The amount of loans that any lender has out- standing to a given borrower. Floating Interest Rates: Interest rates adjusted at regular intervals, usually every six months, in relation to the rate at which the bank is currently borrowing money itself. Grace Period: The number of years before capital repay- ments (amortization) begin. Hard Currency: Widely used in international trade and thus acceptable as a payment for imports or debt service; can be freely converted to other currencies. While there are no official designations, the currencies of the strong developed countries-the dollar, mark, yen, Swiss franc, British pound-are generally considered "hard." IMF Quota: Amount of money paid by a nation into the IMF which determines both its voting power and the amounts of money it can draw from the IMF. LIBOR (London Inter-Bank Offer Rate): The inter-bank lending rate in the Eurodollar market used as a reference point for floating rate loans. In recent years, the U.S. prime lending rate has been used instead. The borrowers prefer the LIBOR since it is at market rate. Banks prefer the U.S. prime rate since it is predetermined. Liquidity: Generally, the degree to which an asset can be readily exchanged for cash money. A nation's (or a firm's) liquidity is the degree to which it is able to cover its current liabilities with current assets. Money-Center Banks: While not a technical term, an ex- pression generally referring to the 11 largest U.S. banks with the most extensive international financial opera- tions-Bank of America, Citicorp, Chase Manhattan, Se- curity Pacific, Bankers Trust, Morgan Guaranty, Irving Trust, Chemical Bank, Continental Illinois and First Chicago. Negative Real Interest Rates: Real interest rates equal nominal interest rates minus the expected rate of inflation; negative real interest rates are nominal interest rates which are lower than the rate of inflation. Overvaluation: A currency is overvalued if there is a gen- eral belief that its price in terms of other currencies is arti- ficially high. This can lead, among other things, to wide- spread expectations of a devaluation. Reschedule: To revise or postpone dates on which capital repayments are supposed to be made. Interest payments are rarely if ever rescheduled. Nicaragua is the only coun- try in recent years to have obtained an interest payment re- scheduling. Soft or Hard Terms: Soft implies conditions which are substantially below the market's norm with respect to in- terest rates, grace periods and the length of term of the loan. Hard implies market rate terms. The World Bank has a "soft window" from which "soft money" is avail- able on easier terms. Spread: The difference between the rate a bank pays when it borrows money and the interest rate it charges when the money is lent out. Syndicated Loans: A consortium of banks offering a loan package, with each institution chipping in a portion of the loan. Trade Credits: Short-term loans granted either by banks, industrial corporations or government agencies to finance the purchase of specific goods. GOING FOR BROKE? 1. For example, see Daniel Hertberg, "Big Bank Stocks Fall As Investors Challenge Worth of Foreign Debt," The Wall Street Journal, June 8, 1984; "Concern About Quality of Loan Portfolios of Many Major Banks is Likely to Increase," The Wall Street Journal, October 4, 1984; and "Major Banks Avoid Big Loan Write-Offs But Sharply Boost Their Loss Reserves," The Wall Street Journal, October 18, 1984; Robert Bennett, "Burden for Bank Shareholders," The New York Times, October 24, 1984; "The Blues At Manufacturers Hanover," The New York Times, October 14, 1984; C. Edward McConnell, "Argentina-Throwing Good Money After Bad," Keefe Bank Review (New York), October 4, 1984. 2. The effect of bank earnings is discussed in Suzanne Andrews, "Accounting for LDC Debt," Institutional In- vestor, International Edition (August 1984), p. 61-66. 3. See "How It All Went Wrong," The Economist, April 30, 1983, p. 11-14; Michael Moffitt, The World's Money (New York: Simon and Schuster, 1983), chapters 2 and 4. 4. See Lawrence Rout, "Bank Responsibility for Mexico's Woes," The Wall Street Journal, October 22, 1982, which quotes one banker: "We don't get promoted for not making loans. I wouldn't be getting raises if I'm warning my home office to slow down while everybody else is charging ahead." 5. For some of the clearest and most forceful state- ments of this view see the testimony of William S. Ogden, vice chairman, Chase Manhattan Bank, William H. Bolin, vice chairman, Bank of America and George J. Clark, ex- ecutive vice president, Citibank, all in U.S. House of Representatives, International Financial Markets and Re- lated Problems, Hearings before the Committee on Bank- ing, Finance and Urban Affairs, 98th Congress, First Ses- sion, February 8, 1983. 6. See for example, prepared statement by Paul A. Volcker in the February 8, 1983 banking committee hear- ings. Also see "The War of Nerves Over Latin Debt," Business Week, June 18, 1984, pp. 20-21; and Henry S. Terrell, "Bank Lending to Developing Countries: Recent Developments and Some Considerations For the Future," Federal Reserve Bulletin, Vol. LXX, no. 10 (October 1984), pp. 755-63. 7. As reported in "How Can American Banks Account For Those Latin Loans," The Economist, June 2, 1984, p. 87. 8. Robert Cohen, "Bank Financing of the Subsidiaries of Transnational Corporations in Latin America," unpub- lished mss. (1984). 9. "The Creditors' Club," The Wall Street Journal, June 20, 1984. 10. International Monetary Fund, World Economic Outlook 1984, Occassional Paper 27 (Washington, D.C.: IMF, 1984), p. 63. 11. Economic Commission for Latin America, Adjust- ment Policies and Renegotiation of the External Debt (New York: ECLA, 1984), p. 4. 12. Ibid., p. 21 and Table 5. 13. Inter-American Development Bank, External Debt and Economic Development in Latin America (Washington, D.C.: IDB, 1984), p. 26-27, 44. 14. ECLA, Adjustment Policies, Table 1. 15. Ibid., pp. 42-44. 16. IDB, External Debt, Statistical Appendix 2. 17. William R. Cline, International Debt and the Sta- bility of the World Economy (Washington, D.C.: Insti- tute for International Economics, 1983). 18. IMF, Outlook 1984, p. 73. 19. Cline, Stability of the World, p. 73. 20. See for example, Leonard Silk, "Ending Latin Debt Crisis," The New York Times, May 2, 1984; Lawr- ence Rout, "New Study Indicates World Debt Crisis May Be Solved As Global Economy Spurts," The Wall Street Journal, May 26, 1983; and Clyde Farnsworth, "IMF Is- sues Warning On Third World Debt," The New York Times May 9, 1984. 21. Economic Commission for Latin America, The Crisis in Latin America: Present Situation and Future Outlook (New York: ECLA, 1984), p. 75. 22. All statistics are computed from IDB, External Debt, Statistical Appendix 1 and 2. 23. IMF, Outlook 1984, p. 61. 24. Aldo Ferrer, Debt, Sovereignty and Democracy in Latin America, Speech presented at the New York Society for International Affairs, May 10, 1984. 25. The text of the Quito Declaration and Plan of Ac- tion is printed as an annex in "Letter dated 9 February 1984 from the Permanent Representative of Ecuador to the United Nations addressed to the Secretary-General," General Assembly, Economic and Social Council, Docu- ment A/39/118 E/1984/45, February 29, 1984. 26. "Letter from Economy Minister Bernardo Grinspun to M. Jacques de Larosiere, Managing Director of the International Monetary Fund," June 9, 1984. 27. All statistics are from Ibid. 28. Latin American Economic System, Renegotiation of Latin America's External Debt: Proposals for the Im- plementation of the Quito Declaration and Plan ofAction, (Caracas: SELA), March 1984. 29. Ferrer, Sovereignty and Democracy, p. 12. 30. Thomas O. Enders and Richard P. Mattione, Latin America: The Crisis of Debt and Growth, Brookings Dis- cussion Papers in International Economics, no. 9 (De- cember 1983). 31. Ferrer, Sovereignty and Democracy, p. 11. 32. Conclusions about the possible behavior of smal- ler, regional banks are drawn from private conversations with officers of several banks. 33. U.S. exporters are already beginning to chafe at the lost sales which they attribute to high interest rates charged by U.S. banks. As the exporters see it, every dol- lar a developing country spends to pay interest is one less dollar which it has to buy goods and services. On this point, see for example, Everett G. Martin, "Latin Debt Crunch Hurting U.S. Firms," The Wall Street Journal, May 8, 1984. Also, "Export Bust," The Economist, March 31, 1984, p. 84. 34. See S. Karene Witcher and Gary Putka, "Argen- tina's Inability to Meet Terms of IMF Seen Forcing U.S. Banks to Take Heavy Charges," The Wall Street Journal, March 9, 1984; "Big Reprieve: Argentine Debt Pact Avoids Trouble Now, May Cause Pain Later," The Wall Street Journal, April 2, 1984. 35. Details concerning Argentina's payments to suppliers are based on private conversations with Argen- tine embassy officials. Also see, Lynda Schuster, "Argentines Risk Credit Cutoff," The Wall Street Jour- nal, June 26, 1984. 36. See "Ecuador Says It Wants To Restructure Debts Owed To Governments," The Wall Street Journal, June 5, 1984; "Bolivia Suspends Payments To Foreign Private Banks," The Washington Post, May 31, 1984. Also see, S. Karene Witcher, "Bankers Worry That Smaller Latin Debtors Could Be The Next To Face A Payments Crisis," The Wall Street Journal, October 17, 1984; Alan Riding, "Pact on Peru's Debt Not Expected Soon," The New York Times, December 25, 1984; and "Bolivia: Government and Creditors At Impasse," Inter-Press Service, July 20, 1984. 37. See for example, S. Karene Witcher, "Mexico, Volcker Allied on Debt Strategy," The Wall Street Jour- nal, May 29, 1984, which reports, "Sources familiar with the Fed's strategy say it wants to reward countries with generous repayment terms if they follow strict economic austerity plans and stay current on their bank payments." For Argentina's attempts to counter the Fed's divide and conquer strategy, see S. Karene Witcher, "Argentina Spoils 'Reward' Strategy," The Wall Street Journal, June 15, 1984. 38. Harold Lever et al., The Debt Crisis and the World Economy (London: Commonwealth Secretariat, 1984), chapter 2.
