INTRODUCTION: TREND TO PRIVATIZATION The dominant trend in U.S.-Latin American financial relations during the 1970's has been "privatization." After 40 years of hovering in the wings while bilateral aid and multilateral agencies played the key role, the private banking sector has once again stepped into the spotlight. The governments of Latin America (and other third world countries as well) have been granted massive loans from private capital markets at the same time that multilateral aid has slowed its climb and U.S. bilateral aid has actually fallen off. The result is that private bank participation in total development financing has climbed from less than 20% in the late 60's to over 50% in the mid 70's.(1) Additionally, bilateral and multilateral funding agencies have begun to bring the private banks into their own loan arrangements in such a way that even the public sector loans are being privatized. This trend toward privatization in Latin American finance has three main features which will be examined in greater detail: 1) Privatization has enabled private banks to maintain and bolster their profits during the most serious global recession since the 1930's; 2) While certainly not eliminating public sector loan activity, privatization has meant a shift in emphasis for institutions such as U.S. government agencies, the World Bank and the International Monetary Fund (IMF), which now play a support role for the private sector in addition to directly providing funds. When necessary this extends to support for the stabilization of the international financial system as a whole. 3) Far from benefiting Latin American countries, privatization has squeezed them, and especially their working classes, even more than before. Terms on the new private loans are more stringent than on loans from the World Bank, IDB and AID, and the private lenders are less patient about repayment. PRIVATIZING PERU'S DEBT Of all Latin American countries, Peru provides the sharpest illustration of these trends and their effects. There, in 1976, a consortium of six U.S. banks imposed a set of conditions for the management of the economy and undertook to monitor their implementation. In return, the banks extended a large loan to tide the beleaguered Peruvian government over a growing balance of payments crisis. The following year, in response to widespread criticism of such direct intervention, the banks retreated and called in their ally, the IMF. The policies imposed since then have turned Peru into a battleground. The principal antagonists are the Peruvian workers and peasants, driven to the streets by cuts in their wages and living conditions, and the giant international banks, which see their profit margins threatened by possible default on Peruvian government loans. The IMF's own position is also on the line over whether it can force debt ridden third world countries to "put their economic houses in order." Buffetted about by these forces is the Peruvian military government, itself divided over how to proceed. There are those who genuinely want to defend workers' interests, others who only want to pacify the workers in order to maintain the government's own position, and still others whose main concern is to appease the banks and the IMF. The small industrial bourgeoisie too has ambivalent responses to stabilization. While favoring the immediate effects of wage curbs and freed prices, they are harmed by the resulting general drop in demand. To understand these current struggles in Peru, it is necessary to look back on the events of the past decade and examine the seeds of the 1976 economic crisis, the intervention of the private banks at that point, and the participation of the IMF in the 1977-78 negotiations. An exploration of the Peruvian case will also highlight the more general implications of the growing role of private banks in Latin American finance - implications for the context of struggle by the masses in Latin America for decent lives. BACKGROUND Capitalism had yet to make major inroads in the Peru of the 1960's. In socioeconomic terms, the country was unintegrated. About half the population worked in subsistence agriculture, mostly under semi-feudal conditions in the sierra. The capitalist sector was limited to an enclave near the coast, consisting of export agriculture, mining, a small industrial sector (employing only about one-eighth of the workforce), and attendant commercial and financial services. Although only beginning to move into industry, foreign capital was very important in the export sectors (agriculture and mining) and in banking. Two of the largest "domestic" banks, Banco Continental and Banco Internacional, were controlled respectively by Chase Manhattan and Chemical Bank, and both Bank of America and First National City operated branches. Politically Peru was also underdeveloped. The old agrarian oligarchy and its military allies were still the dominant political force. The only important opposition group was the Alianza Popular Revolucionaria Americana (APRA), a party which started out in the 20's as a radical force, advocating major structural changes in Peru, but which over time had shifted decisively to the right. In 1962, a mildly reformist government, under Fernando Belaunde and the recently formed Accion Popular party, took control of the executive branch. They represented the incipient domestic industrial bourgeoisie and certain professional-technical sectors who wanted to modernize Peruvian society. Even assuming that Belaunde desired significant changes, he was unable to achieve them because of resistance from the oligarchy. The Belaunde government was also pressured from below in the form of peasant rebellions and guerrilla conflicts led by Trotskyist Hugo Blanco. Called in to fight the guerrillas, the military learned firsthand of the miserable standard of living endured by most Peruvians. The experience had a radicalizing effect on the armed forces, which took power in October 1968 after the Belaunde government proved itself both corrupt and unable to implement its policies. THE THIRD WAY The resulting government, led by General Juan Velasco Alvarado, was not a typical military regime ruling in support of the established socioeconomic structure. Much has been written exploring the origins of the unique military political formation, emphasizing their guerrilla experience, the social composition of the military (where even officers tended to come from lower middle class sectors), and most particularly, the broad training they received by left liberal social scientists at CAEM (Centro de Altos Estudios Militares.)(2) Under an ideology that promised a "third way" between capitalism and communism, the government began to radically restructure Peruvian society. The program included an extensive agrarian reform centering on the creation of cooperatives, an industrial and mining reform introducing worker participation and profit-sharing (the comunidades industriales y mineras), and the nationalization of some key foreign holdings including branches of Standard Oil, ITT, W.R. Grace, Cerro and Chase Manhattan. Thegovernment was not opposed to foreign capital, but wanted to change the nature of foreign investment, so that it would correspond to the plans for development. Furthermore, the government planned to have the state itself become, the major investor and thus looked to foreign loans more than direct investment. Rhetoric notwithstanding, the reforms actually benefited only a small part of the population - recipients of land, workers in those production units where the comunidades were introduced, and elements of an incipient industrial bourgeoisie fostered as another part of the government strategy. Unable to consolidate a strong political base or to modify its militaristic "top down" tendencies, the project remained very much a "revolution from above."(3) During the first five years, however, in spite of the disruptive changes and the lack of political support, the Velasco government managed to maintain a "healthy" economy by capitalist standards. Peru's gross domestic product (GDP) grew at an average annual rate of 5.5% between 1969 and 1973, outpaced by industrial growth which averaged 7.1%. Over the same period, unemployment fell from 5.9% to 4.2%, while real wages and salaries averaged 6.6% annual gains and inflation was still held to an average of 7.2% per annum. The trade balance remained positive and, even though debt service generally dragged the current account into deficit, the latter was not large enough to cause any serious problem with financing. Indeed, during this period Peru's net reserves increased $280 million to $411 million.(4) PROBLEMS EMERGE Under this prosperous surface, however, lurked potential problems. One was that inflation threatened to accelerate. A warning signal was that the food supply was increasing slower than real wages. Another was the state's budget deficit which averaged 15-20% of central government expenditures between 1971 and 1973. Such a deficit was not surprising, of course, for a government increasing its role in capital accumulation. Expenditures rose, but taxes could not be increased sufficiently to offset them due to the resistance of local property owners, managers and the emerging bourgeoisie. Rising inflation, besides making economic planning more difficult, tends to cut real wages and thus create political unrest as well as human privation. Yet from the government's point of view a more serious danger was the tenuous balance of payments situation. The outlook appeared hopeful, but it rested on what proved to be overly optimistic forecasts about mineral exports. Peftoleum was increasingly emphasized as a source of export revenue by Peruvian and foreign analysts alike, though few would have gone as far as the state oil company spokesperson, who declared when Petroperu struck oil with its first well in 1971 that "Peru's economic future is now assured." Similar emphasis was placed on the expectation of major volume increases in copper exports. The volatility of prices for primary exports, traditionally one of the key problems for third world countries, was seemingly ignored. Stress would be put on the balance of payments picture due to a strategy for industrial development which relied heavily on capital-intensive technology. In the end, not only would this reduce the job-creating potential of industrialization, but it would also necessitate large amounts of imported capital goods and intermediate inputs. Furthermore, the Peruvian military was importing large amounts of expensive military equipment from the Soviet Union as well as various Western countries. These imports,together with debt service payments which will be discussed below, would lock Peru deep into a balance of payments crisis when the anticipated export boom failed to materialize. Meanwhile the government had to find a way to finance the initial expenditures for equipment necessary to produce the additional exports as well as for the industrialization program. The U.S. government and its allies in the multilateral agencies were not possible sources of funds. Velasco's regime had already incurred their wrath by nationalizing Standard Oil's subsidiary, International Petroleum Company, as well as by public denunciations of capitalism, both domestic and international. In concrete terms, this meant the drying up of private direct investment and the virtual cessation of loans from the U.S. AID program or the Export-Import Bank (EximBank) between 1969 and March 1974.(5) Loans from multilateral agencies were equally scarce. Between 1968 and late 1973, Peru received only one loan from the World Bank. Credits were slightly more available from the Inter-American Development Bank (IDB), but a significant portion of these loans were in response to a serious earthquake in Peru in 1970.(6) There appeared to be only one source to which the government could turn to finance its investment projects - the private capital market. Realizing that Peru was going to need good relations with the international bankers, the government took steps to bring this about. To implement its nationalization program for domestic banking, for example, it gained favor with Chase - and presumably the rest of the financial community - by buying Banco Continental in 1971 for over three times its book value.(7) In 1972 Peru was able to raise loans worth $147 million on the private Eurocurrency market. In 1973 this figure jumped to $734 million, a year in which Peru became the third largest borrower among third world countries.(8) The banks saw Peru as a good credit risk, despite its leftist rhetoric, on the basis of its copper and oil. Moreover, Peru's need for finance coincided with a drop in loan demand among large U.S. and European corporations, the banks' traditional customers. The resulting excess liquidity was exacerbated by the Petrodollar glut after 1973 when the OPEC governments deposited their huge new revenues with the major international banks. Thus was made possible what appeared to be mutually advantageous deals between Peru and the banks.(9) Peru's foreign debt, swollen with these new loans, nearly doubled between 1968 and 1973, and by the following year almost tripled the 1968 figure, reaching $3 billion. Service on the debt (interest plus amortization) surpassed 20% of export earnings by 1973. Neither borrowers nor lenders were overly concerned, though, since it was presumed that Peru's mineral wealth would provide repayment. THE EXPENSIVE PHASE In 1974, the problems hinted at above began to surface. Although growth rates continued high and unemployment low, inflation shot up to 17%, causing real wages to fall. Moreover, for the first time since the 1968 coup, the trade balance became negative; while exports increased 35% between 1973 and 1974, imports almost doubled. In percentage terms, the big culprit was the oil price increase; Peru's fuel and lubricant import bill nearly tripled. Of greater significance in absolute terms were the volume and price increases of industrial inputs and capital equipment. The former was accounted for mainly by increases in international prices, and the latter by big increases in the government investment program. Between 1969 and 1973, capital formation by the central government and state enterprises had increased by an average of 15.6% per year; in 1974, this figure jumped to 56.5%. Major investment increases went to agriculture (44%), Petroperu (oil, 88%), 1978 Mineroperu (mining, 139%), Sideroperu (steel, 1,016%), and Pescaperu (fish products), which increased from nothing to $32 million.(10) Most of the equipment involved in this investment spurt was produced abroad. This period marked a qualitative change in the government program. The "cheap" phase of the reforms (expropriation of agriculture and some industrial enterprises) was over, the "expensive" phase (creating new heavy industry) was just beginning. In addition to the trade deficit, the deficit for services also increased, e.g., transportation costs doubled and interest payments on the public debt went un 20%. Thus, the current account deficit soared from $174 million in 1973 to $725 million in 1974. This deficit was financed by returning to the Euromarket for another $366 million in medium term loans, plus a large amount of short-term money. In addition, with the signing of the so-called Greene Agreement in February 1974,(*) the credit blockade was lifted and AID, EximBank and the multilateral agencies poured inlarge sums of money. _____________________________________________ (*)The Greene Agreement was negotiated between the United States and Peru by James Greene, former official of Manufacturers' Hanover. In a feat of economic diplomacy, it resolved the long-standing disagreement between the two countries over compensation for Standard Oil's subsidiary Inter- national Petroleum Company. A lump sum was agreed on as compensation for all companies nationalized by Peru, with separate lists of recipients presented by the U.S. and Peru. See dis- cussion in Latin America Economic Report, II, 9, March 1, 1974. _____________________________________________ But 1975 saw both inflation and the balance of payments deficit worsen, while the government's budget deficit doubled. The expected oil bonanza had failed to materialize, the anchovies which had provided a major Peruvian export disappeared, and copper prices fell. The situation was critical enough that by the end of June a series of emergency measures was introduced. The most important of these was an average increase of 20-30% in prices of basic consumer items as many subsidies were removed in an attempt to lower the budget deficit and thus eventually cut the inflation rate. To forestall opposition from the workers and partially offset the fall in demand, the government announced a general wage increase. The minimum wage, however, was increased by only 20%, and the poorest groups (the unemployed and the "informal" sector) were not affected at all.(11) As the result of the June measures, demand fell, unemployment rose and the growth rate faltered. COUP WITHIN THE COUP The growing economic crisis provided justification for the "coup within the coup" which followed in August 1975. General Francisco Morales Bermudez, Velasco's Prime Minister, took over as President. Although he tried to make it appear that his regime was merely a continuation of the Velasco government, it was obvious that the change meant a move to the right. Repression increased, leftist military officers were forced to resign, and more orthodox economic policies were introduced. Balance of payments problems nevertheless remained, in spite of $433 million in loans from the Euromarket and the World Bank, and net reserves fell from $693 million to only $116 million by the end of 1975. An escalation of the austerity came the following January when Luis Barua Casteneda, the new Finance Minister, announced a new round of measures similar to those of the previous June. Further price increases on basic consumer items including fuel and transportation were introduced, and again partial wage increases were authorized to try to limit opposition and maintain demand. A second set of measures - tax increases and budget cuts - were designed to reduce the government deficit. Attempts were made to lower imports through a system of licensing, and a set of production incentives was promised, although no details were given. The aims of the measures were threefold: to increase production, control inflation, and keep the balance of payments deficit from getting out of hand. If the economy could manage to limp through the year, it was vainly hoped that the balance of payments would improve through increasing the volume and value of copper and oil exports and that other difficulties would thus be mitigated.(12) Meanwhile, further international credit would be needed to cover the deficit. 1976: THE BANKERS INTERVENE By early 1976 then, the Peruvian economy was in a serious crunch, owing to a combination of bad luck, bad planning and the inevitable dilemnas of dependent capitalist development. Bad luck had to do with the smaller than hoped for oil find, depleted anchovy schools and falling copper prices. Bad planning reinforced these problems through over-fishing and borrowing money to build a billion-dollar pipeline before the extent of the oil reserves was known. As mentioned earlier, however, fluctuations of export revenues always exert a disproportionate influence on the economy of small dependent countries which specialize in raw material exports. From the government's point of view, the key problem was still the balance of payments. It could not be brought into equilibrium in the short run because exports could not be increased, and imports could not be cut without bringing the economy to a standstill. The only possible flexibility seemed to center on manipulating debt service payments (which were about $500 million compared with the trade deficit of $740 million). Outright suspension of payments would end access to. the international capital market, so refinancing was necessary. The traditional solution for Peru's balance of payments crisis would be to sign a Letter of Intent with the IMF, promising to abide by a typical stabilization program. This would give access to IMF funds, and more important, would open further doors to bilateral, multilateral and private banking sources who wanted an IMF "seal of approval" before lending. The problem was that the IMF would demand a drastic stabilization program which even the Morales government could not and would not accept. The results would alienate the workers through wage and employment cuts, the industrialists through a fall in demand and thus profits, and the military through curbs on the purchase of arms. Given the regime's lack of support in any case, the potential was too explosive: the government might be brought down. Instead the government approached the major U.S. banks themselves in March 1976 and asked for a large balance of payments loan without having made a prior agreement with the IMF. The bankers finally accepted the Peruvian position because, in early 1976, they too feared the potential outcome of a further economic crunch. Minister of Mines and Energy, General Jorge Fernandez Maldonado, and the leftwing faction of the government could conceivably come out on top in a confrontation, thus leading Peru back toward a radical nationalist position. It seemed safer to support the new Morales government, with its rightist tendencies, rather than risk such an outcome. One New York banker involved in the negotiations put the point very clearly. He said the "main reason" for the loan was "to perpetuate Morales Bermudez in power" since the banks considered this the best bet for get. ting their money back.(13) The banks wanted to refinance the Peruvian loans for several additional reasons. First, Peru was important not only in real terms but also symbolically. Its debt, $3.7 billion, had become one of the largest in the third world, and half of it was owed to private banks, including $1.5 billion to U.S. banks alone. Second, a Peruvian default might have triggered a chain reaction among other third world countries in trouble with their foreign debt. Third, default would have created animosity among the smaller U.S. banks and international banks involved in earlier Peruvian loan syndicates, making them highly reluctant to participate in future third world loan syndicates. Nonetheless, the banks had no intention of making it easy for the Peruvians. For one thing, they had to avoid the reputation of being a "soft touch." Thus they needed to construct a set of requirements that would provide their pound of flesh. This was especially the case since Peruvian officials had been parading around the world denouncing imperialism and capitalism for the last seven years. Also, a formula had to be devised to mollify the banks' clients who were at that very minute being threatened by the Peruvian government. These included the Marcona Mining Company, still negotiating compensation for its iron mines nationalized in mid- 1975, and the Southern Peru Copper Corporation (SPCC), which faced problems over depreciation allowances and tax delinquency. Finally, a way had to be found to make sure Peru generated sufficient foreign exchange to be able to pay the service on its past loans without resorting to further international credits for this purpose in the future. The resulting deal between Peru and the banks was a three-part program which dealt with all of the banks' problems. It included: 1) an orthodox stabilization program, though of a milder sort than the IMF would have imposed, involving a 44% devaluation, price increases, and minor budget cuts; 2) better treatment of foreign investment, including reopening the jungle and coastline to private oil companies, favorable agreements with Marcona on a price to be paid for its mine and with SPCC on payments due; 3) partial withdrawal of the state in favor of local private enterprise, beginning with sale of Pesca peru's anchovy fleet to private interests and changes in labor legislation to attract more private investments.(14) All the loan conditions, of course, were described by the bankers as essential for guaranteeing Peru's economic future. They argued, for example, that SPCC's immediate repayment of the $50 million in back taxes, depreciation allowances and penalties would have meant postponement of completion of the Cuajone mine, and therefore Peru's loss of an estimated yearly output of $250 million of copper, a key foreign exchange earner. In the Marcona case, they rationalized that if the company were not compensated, U.S. legislation prohibiting assistance to nations which expropriated U.S. property without compensation (e.g. the Hickenlooper amendment) could be invoked, cutting off essential U.S. aid and other funds. Finally, the bankers expected more favorable treatment of the private sector to increase private investment so the government would not have to run up huge deficits and borrow abroad to finance its projects.(15) The most controversial aspect of the program was that the banks were to monitor the Peruvian economy to make sure that the agreed-upon inflation, budget and other targets were met. Not since the 1920's had private banks become so involved in the domestic affairs of foreign governments.(16) The loan was divided into two equal installments; the first was drawn immediately, the second was held for several months. Release of the second part was to be contingent on 75% of the lenders (by dollar participation) agreeing that Peru was making satisfactory economic progress. Even the bankers admitted the weakness of this monitoring arrangement in comparison to the IMF, which would have divided the loan into more installments, set more precise targets, and made repeated on site inspections to make sure its conditions were being fulfilled. As one banker stated: "We won't be seeing any major changes. This second drawdown is just something to keep some sort of control."(17) THE STEERING COMMITTEE The package was put together by Citibank, with the participation of Bank of America, Chase Manhattan, Manufacturers' Hanover, Morgan Guaranty and Wells Fargo. These six banks comprised the "steering committee" for the loan, since no bank was willing to take total responsibility as lead manager. Bankers' Trust and Continental Illinois had also been invited to join but refused because they disagreed with the banks assuming the monitoring function. The banks agreed to provide $200 million, contingent on a further $200 million to be raised from private banks in Western Europe, Canada and Japan. The steering committee banks would themselves sell half of their share to smaller U.S. banks, with the aim of spreading Peru's debt as widely as possible. Above and beyond the special conditions described above, the terms of the loan itself were quite stiff. The interest rate was 2.25% above LIBOR (London Interbank Offer Rate), and the maturity was only five years. Completing the negotiations proved difficult. The original announcement was made on July 26, but final signing was not until nearly the end of the year. One of the complications was the disclosure in mid-August that the Peruvians had bought a large number of Soviet aircraft worth approximately the same amount as the international loans. Rumors that the loans would.therefore be withdrawn proved groundless, but the bankers were not pleased.(18) NEGATIVE ECONOMIC RESULTS The effects of the stabilization program on the Peruvian economy were dramatic and negative. Production, which had already dropped sharply in 1975 due in part to the earlier emergency measures, slipped further. Thus GDP growth, which had averaged 6.3% over 1972-74 and fallen to 3.5% the following year, plummeted to 2.8% in 1976. This drop took place despite a very strong recovery in fishing, mining and agriculture. That is, the declines occurred in those sectors most susceptible to government manipulation of internal demand - manufacturing, construction and services. Not surprisingly, this production slide only magnified Peru's unemployment problems. Unemployment, already up from 4.1% during 1972-74 to 5.2% in 1975, hit 5.3% in 1976, while underemployment rose from 41% to 45% the same year. And, as we shall see, even this dismal employment picture deteriorated markedly during the next two years.(19) By far the largest effect of the 1976 measures was on workers' incomes. Real wages and salaries in the Lima area had peaked in 1973, 33% above their 1968 level. Having fallen somewhat in 1974 but held constant in 1975, their 1976 drop was so serious that it wiped out all the gains of the preceding eight-year period.(20) The World Bank, for instance, calls attention to mid-1976 as a watershed in incomes policies. Before that point, the policy had been "to maintain and even increase real wages;" afterwards a drop was accepted.(21) In addition to these negative effects on economic growth, unemployment and workers' incomes, structural changes also resulted. Specifically, private enterprise in general and foreign capital in particular began to regain much of the economic and political power they had lost during the Velasco years. 1977: ENTER THE IMF The Peruvian drama repeated itself in 1977, but with an important change in its cast of characters. Though the balance of payments was expected to improve, a huge trade deficit still threatened, and service payments on the debt remained oppressive. Thus Peru had to seek foreign financing once more. This time, however, the banks refused to negotiate without IMF participation. WALL STREET IMPERIALISM Why did the bankers change their minds? One set of factors centered on internal opposition to their monitoring role. Opposition from the Peruvian Left had certainly been expected, but the banks were probably unprepared for the opposition which emerged within their own ranks. As mentioned, Bankers' Trust and Continental Illinois, both major U.S. institutions heavily involved in Peru, refused to join the steering committee or to participate in the 1976 loans. One of their objections focused on the damage to the banks' image which could result from meddling in the internal affairs of a sovereign nation.(22) European bankers likewise expressed concern about the "politicization" of the deal. They pointed out that by being identified with the stabilization program, the banks ran the risk of becoming scapegoats for its unpleasant results.(23) Even G.A. Costanzo, vice-chair of Citicorp, fretted aloud: "I don't think the banks can play the role of appearing to intervene in the affairs of a country. Whether they like it or not, it could be considered Wall Street imperialism."(24) Others doubted the banks would have as much clout as the IMF because of their large exposure in Peru. As one critic suggested, "the banks have a vested interest in Peru, and they've got to think of their commercial lending relations in the country. What are the Peruvians going to think if they start snooping around and delving into the books?"(25) Meanwhile, the steering committee banks had themselves become discontent with the 1976 arrangements. They were agitated by Peru's Russian plane purchase over which they had no control and which had made them look foolish. Frequent switches in ministerial and financial personnel had made the steering committee hesitant to rely on any given agreement's implementation, a hesitancy exacerbated by the cabinet's continuing discord over economic policy. During this period, new and closer ties were developing between international banks and the IMF. Many prominent bankers, including then Federal Reserve chair Arthur Burns, publicly advocated these developments. Proposals ranged from greater information sharing to joint loans, allowing banks greater influence on the Fund's activities and recommendations, while avoiding the pitfalls of the Peruvian deal. Burns himself apparently pressured the banks to stop acting independently with respect to the debt problem. In a February 1977 speech, he made this position public, declaring, "We need to develop the rule of law in this field, and the only instrument for this is the IMF. Unless we have the rule of law, we will have chaos."(26) Finally, Peru's political climate itself had changed. Unlike 1976, when the banks had been fearful of forcing the government to the wall, subsequent events had made them more confident that the outcome of such a ploy would produce a shift to the right rather than the left. The most important indication was the July 1976 ouster of left-leaning Cabinet Ministers Jorge Fernandez Maldonado, Miguel Angel de la Flor, and Enrique Gallegos. No public protest resulted. In addition, the government's ability to disperse the demonstrations and break the strikes protesting the mid-1976 stabilization measures was comforting to the bankers. They drew the conclusion (soon to be severely challenged) that the Peruvian political situation was not as explosive as they had believed the previous year. THE IMF NEGOTIATIONS: A HARDER LINE Given the banks' insistence on involving the IMF, the Peruvian government acquiesced, and a Fund mission arrived in Lima in March 1977. The mission decided that Peru should reduce its 1977 inflation rate to 15%, its budget deficit to no more than 20 billion soles, (*) and that its balance of payments be equilibriated with no new loans. In a typical set of stabilization demands, the IMF "suggested" that Peru: - Cut all subsidies to public enterprises, leaving them to acquire necessary financial resources through price increases; -Raise gasoline and other fuel prices sufficiently to not only eliminate the Petroperu deficit (16 billion soles) but even provide a surplus for the central government; -Eliminate the purchase of capital goods for public sector investment and sell off firms to the private sector, thus cutting another 10-20 billion soles from the deficit; -Tighten up the tax system by eliminating all tax exemptions (including those on traditional exports), creating an emergency "wealth tax," and indexing tax payments; -Eliminate non-economic restrictions on imports (e.g. quotas); -Devalue the sol by 30% (i.e. to 90 soles/dollar); -Limit wage and salary increases to 10-15%.(27) _____________________________ (*)The sol in 1976 was valued at 65 per dollar. _____________________________ The political implications of this program were intolerable even to Peru's conservative financial officials. The Central Bank's president, Carlos Santistevan, and several of its directors sent a letter to Finance Minister Barua, threatening to resign if the IMF program were accepted. The letter stated that the IMF was "seeking to balance the economy in an extremely short term, and its measures would have excessive and unnecessarily depressive effects which can, and should, be avoided."(28) Santistevan and the Central Bank countered the IMF with a more flexible set of proposals, but at the same time other members of the government (especially Industry Minister General Gaston Ibanez, a populist with presidential ambitions) even proposed measures to expand the economy. They wanted to increase government spending, peg the exchange rate, reinstate food subsidies and cut the price of gasoline. Facing this spectrum of resistance, Morales Bermudez failed to make any decision and, in May, Finance Minister Luis Barua resigned in frustration. The new minister, Walter Piazza, was the first private businessperson appointed to a Cabinet post by the military government. His proposals were quite similar to those of the IMF, the main exceptions being a larger budget deficit and a higher expected inflation rate. On this basis, Piazza negotiated a deal with the IMF, but when it was rejected by the Cabinet he too resigned. " Nevertheless certain elements of his program - mainly price rises - were put into effect arousing strong popular opposition, including the nation's first general strike since 1919.(30) GENERAL STRIKE: 1977 The strike, which followed weeks of localized demonstrations, was organized by the Comando Unitario de Lucha, a coalition of various leftist groups including the Communist Party. The latter had been a key supporter of the military government since the beginning, but was forced by pressure from its membership to participate in the strike. The 48-hour stoppage, called for July 19-20, was a resounding success at first, despite government attempts to persuade the strikers to report to work. On the second day, however, the Communist Party and its labor confederation, the Confederacion General de Trabajadores del Peru (CGTP), withdrew their support. This enabled the police and army troops to attack openly, arresting hundreds of workers and killing at least nine people. Subsequently, labor laws were suspended to allow factory owners to fire strike participants, and some 6,000 workers lost their jobs. In addition to attacking the strikers, the government also tried to mollify them and other workers by increasing wages and salaries; the increases, however, were not enough to cover price increases in food and transportation.(31) Three months later, the Peruvian government signed an agreement with the IMF which was very similar to the Piazza proposals. The agreement would mean a real crunch in 1978 when the government was to cut the 1977 budget deficit by one third and inflation by one half, further increasing unemployment and reducing the purchasing power of wage-earners. In return, Peru was to receive $100 million to be disbursed in bi-monthly installments over two years. THE FEBRUARY MISSION: AUSTERITY PREVAILS The first installment of this loan was disbursed in December, but in February the IMF mission returned and declared Peru in massive violation of the agreement. In refusing the second drawdown and ultimately cancelling the agreement, it focused special attention on the budget deficit (reportedly already over the yearly total agreed upon), Peru's pegging of the sol at 130/dollar, and some dubious accounting procedures designed to help cover up the shortfalls."' When the banks heard the report, they called off a $260 million loan then under negotiation. The U.S. government also refused further assistance. This meant that Peru's only debt relief still on line was the Soviet Union's agreement to postpone 80% ($100 million per year) of the payments for arms purchases between 1978 and 1980. The dilemna of the Morales Bermudez government at this point was dramatic. The Peruvian public sector foreign debt had reached $4.8 billion (private debt added another $3.4 billion), on which Peru was scheduled to repay over $1 billion in interest and amortization during 1978 alone. This constituted 55% of export revenues, and the government estimated that the figure could increase to 70% by 1980. The Central Bank had virtually no foreign exchange, and lines of credit were shut off.3a Without quick action, Peru's imports would have to be drastically cut, throwing tens of thousands of people out of work and cutting the food supply. The banks and the IMF nevertheless insisted on further austerity measures as the absolute prerequisite of extending any relief. Although some members of the local bourgeoisie as well as the Left suggested a moratorium on debt payments rather than further austerity, there is no indication that Morales Bermudez or any of his top economic officials seriously entertained this idea. Their own inclinations and the overwhelming financial power of the banks and IMF pushed in the same direction. Thus, on May 15, 1978, prices were doubled on fuel, public transportation and basic food-stuffs as government subsidies were eliminated. Coming after workers had already lost one-fourth of their purchasing power to inflation in the first quarter of the year, the measures quickly produced clashes in the streets of Lima and strikes in provincial cities. After more than a dozen persons were killed, the government placed the country under martial law, jailed hundreds of leftist labor leaders, and postponed for two weeks the elections for the constituent assembly which would draw up a constitution to return Peru to civilian rule. This did not stop a two-day general strike on May 22-23, again called by the multi-organization Comando Unitario de Lucha. GENERAL STRIKE: 1978 The strike was almost total in Lima and in most central and southern provinces (where, in some cases, it was merely a continuation of strikes already underway). Less success was obtained in the northern areas, long dominated by APRA. Roads into Lima were blocked and all public transportation stopped. Several branches of foreign banks and warehouses of U.S. transnationals were burned. The government declared the strike illegal, once again gave owners permission to fire those involved, and of course called out the army and police, resulting in more deaths, injuries and arrests.(34) Several days later, twelve labor leaders and leftist organizers were deported to an isolated military base in northwestern Argentina. Given the history of the notorious "ley de fuga" (escape law) in that country, there has been mounting international concern for their lives.(35) SHORT TERM REWARDS What did the Morales Bermudez government gain from the price increases apart from the enmity of the Peruvian masses? Apparently it gained the support of the IMF, the banks and the U.S. government for debt relief. Within days of the new austerity measures, and with the sounds of strikes and rioting still echoing in the streets, the international banks had tentatively agreed to postpone some $200 million in amortization owed them during the rest of 1978. Interest was still to be paid, however, and the deal was tied to a new agreement being signed with the IMF by September.(36) Other aid was forthcoming from the U.S. government, which agreed to give a $15 million agricultural credit.(37) But the relief is only temporary and partial; the basic question still remains. Can the Morales government actually pull off an austerity program that calls for further declines in workers' incomes, plus a drop in military imports and inputs for local industry? The task may be even more difficult this time around since opposition has now been institutionalized in the Constituent Assembly just elected. The Left won 28% of the 100 seats, and even the rightwing Popular Christian Party has said it will oppose the military government. Thus, the only way that an austerity program can be implemented is by greatly stepping up the existing level of repression and probably closing the Assembly. CONCLUSION: IMPLICATIONS OF THE TREND The Peruvian case is important in itself, but it also. sheds light on a number of more general problems and questions about private bank financing in Latin America and elsewhere in the third world. These can best be seen by returning to the three characteristics of the privatization of finance mentioned earlier. EXPANDING BANK PROFITS The first characteristic of this process is its role in helping to sustain the growth of bank profits. In the early 70's, the banks' U.S. and European loan demand began to falter; in response, they began to look to a select group of third world countries as desirable clients. Although adequate published data are lacking to verify the importance of these loans, an indication lies in the fact that the international share of the profits of the top dozen U.S. banks rose from 17% in 1970 to 49% in 1977.To take the example of Citibank, their South American profits went from less than 2% of total profits in 1971 to 27% in 1977. In the latter year Brazil alone accounted for 20% of Citibank's profits and 13% of Chase's.(38) Peru was an early participant in the new loan market, entering in 1972. A year later, Peru represented 8% of all Euroloans to third world countries, surpassed only by Mexico and Algeria.(39) The importance the banks attributed to the Peruvian loans can be deduced from the fact that they broke the informal blockade which the U.S. government and the multilateral agencies had established against the Velasco government. The prospect of immediate and longer run profits outweighed political factors. When problems arose with the Peruvian loans, the banks' initial solution was to intervene directly, but the reaction has probably eliminated direct intervention as a future option. The criticism which arose, especially inside the financial world, was decisive. The banks do not want the publicity and controversy that come with setting macroeconomic conditions for loans and monitoring their implementation. They are still inexperienced in dealing with countries as clients. Not only do such clients differ from individuals and private corporations in size, source of income, and political considerations, but the setting is different as well. Rather than behind-the-scenes negotiations with no one knowing the details, the new-style negotiations become front-page news when the press and political opponents dig for information. After the Peruvian experience, it became clear that some official agency would have to be brought in; the IMF was the obvious candidate. CHANGING PARTNERS The second characteristic of the privatization process refers precisely to the changing role of the IMF and other public lending agencies. An especially close collaboration has developed between the banks and the IMF. Although the Fund was never important in terms of the size of its loans, it had been crucial in drawing up stabilization programs to assure repayment of multilateral and bilateral loans. Now it took on this same function vis-a-vis the private banks. This does not mean that they are always in agreement, nor is it correct to view the IMF as the "tool" of the banks. The Fund has its own ideas about how an economy should be run and does not need any coaching from the banks. In fact, one of the disagreements between the two seems to center on the banks' view that the IMF is too rigid in its prescriptions.(40) Those agencies which had been large lenders also took on a new relationship through "co-financing" loans with private banks. Co-financing was first introduced by the EximBank in 1970. Today Exim frequently provides only part of the credit for an export financing deal, dividing the package between itself and the private banks. In addition, for a small fee, Exim provides a financial guarantee which covers all commercial and political risks and guarantees full repayment plus most interest payments. In 1976, the co-financing plan was adopted by the World Bank and IDB.(41) In general, opinion within the U.S. government also supports privatization. Thus, EximBank went into co-financing and AID funds fell dramatically in favor of private finance. Treasury officials also favor this trend. As C. Fred Bergsten (now Assistant Secretary for International Affairs) said at the time of the banks' Peru operation: "I think it is better in international political terms that a Morgan Guaranty - or hopefully a consortium of international banks - makes the loan. It's better for them to put tight controls on than to have a national government have to do that. It can then be portrayed as coming through market pressures, and judgments on the economic merit of the country's position, rather than being laden with political overtones."(42) On the other hand, some members of Congress are intent on imposing controls to prevent the government from "bailing out the banks." In the Peruvian case, the government gave less help than the banks and Peruvian officials urged. Both the State and Treasury Departments stressed, however, that if the situation became critical, they would reevaluate.(43) A major question, now that Peru has to reschedule its debt, is who will have first claim on the available resources - the public lenders or the private banks? Support for the private banks also implies support for the international financial system as a whole. One of the key issues raised by the subject of private loans to third world countries has revolved around the question of stability, with some arguing that sooner or later, an important country will default on its debts. Others may then follow - a new version of the domino theory - but even if they do not, a single default may bankrupt some of the weaker banks and trigger a chain reaction throughout the banking system. In historical terms, an analogy is posed to the heavy Latin American borrowing during the 20's and fears of defaults similar to those of the 30's. Short of a recession much more serious than that of 1974-75, this does not seem likely. First, the institutional changes brought about partly in response to the upheaval of the 30's - creation of the IMF and the World Bank as well as the greatly increased economic role of capitalist governments - militate against a repeat of the chain defaults. Second, the bankers themselves are aware of the potential problems and are taking steps to avoid them. Specifically, they refuse to accept a default. Rescheduling has replaced default as the worst possible scenario from the banks' point of view, with both banks and countries (for different reasons, to be sure) wanting to avoid even rescheduling in order to maintain the countries' creditworthiness. Refinancing loans provide one alternative to rescheduling.(*) Another is increased funds from the U.S. government, and herein arise the foreign policy implications of the debt problem. Will the U.S. government sit by and watch some of the major U.S. banks endanger themselves - and thus the system as a whole - because of repayment problems on loans? Or will it come to their rescue, either positively (public loans to third world governments so they can repay their private loans) or negatively (forcing the governments to pay, through a credit blockade or other means)? __________________________________ (*) The difference between rescheduling and refinancing has both economic and psychological aspects, although both mean that the country cannot pay its debts. A rescheduling involves a lengthening of the period during which the country will repay its loans and usually a grace period as well. Refinancing, on the other hand, means that a new loan is given to enable the old one(s) to be repaid. In the latter case, the interest might be increased and commissions will be earned by the banks, so this method is preferable from the bank's point of view. In psychological terms, a rescheduling is considered more damaging to a country's credit-worthiness. __________________________________ A HIGHER PRICE The third characteristic of the privatization process has to do with the price paid by third world countries. The most concrete change is the stricter terms of payment on private bank loans. Even leaving aside the decreasing availability of grants and soft (or long-term, low-interest) loans from the multilateral and bilateral agencies, there has been deterioration of two kinds. While the maturity of hard loans from multilaterals averages about 20 years, the new private loans average 8-10 years. Also the new loans carry floating interest rates which create planning problems, and probably make overall payments more costly than the old fixed rate system. In addition, the profit-making character of the banks makes them less patient with repayment problems than the public lending agencies. Ultimately both public and private loans have tended to lead to IMF austerity programs. Just as the IMF "seal of approval" was the lynchpin of the system of public development finance in the 50's and 60's, so it has come to be under the privatized system of the 70's. In both cases, the political and economic costs imposed on the beleaguered countries are tremendous, as the Peruvian case well illustrates. In economic terms, stabilization programs play utter havoc with domestic economies. A few groups profit - those connected with the banking and primary exporting sectors - while the vast majority bears the burden. Those who suffer most are workers who see their wages cut or who lose their jobs. In Peru, even official statistics admit that average incomes in real terms are now only 60% of their 1973 level and that less than half the work force has "adequate employment."(44) In structural terms, the industrial sector as a whole seems to be in danger. On the one hand, credit and demand have fallen as a result of the stabilization measures. On the other, if imports are cut to provide foreign exchange to service the debt, those cuts must fall heavily on capital goods and inputs for domestic industry. In any case, growth will have to be much slower than in the past as increasing proportions of export earnings go for debt service. The political consequences of stabilization programs are equally dramatic. Such programs have proved impossible to implement in third world countries without highly authoritarian regimes. The growing repression in Peru since 1976 - curfews, arrests, deportations, deaths, suppression of strikes and demonstrations, dissolution of workers' organizations - is not mere coincidence. It is an integral part of stabilization as workers refuse to passively accept the burden of maintaining the banks' profits. Under these circumstances, many doubt that Morales' plan to return Peru to democratic rule by 1980 will prove feasible. A COMPLEX DYNAMIC Such typically drastic results of stabilization measures are often viewed as the result of heavy-handed villains (whether IMF or the banks) unilaterally imposing stringent conditions on beleaguered countries in exchange for loans. But in the Peruvian case, as in most, the dynamics unleashed within the country during and following negotiations over the program were much more complex. The banks had a set of conditions in mind, but these were not dissimilar from those favored by Morales and his top economic officials. They definitely favored private enterprise and foreign capital more than the Velasco regime, furthermore they had announced stabilization measures even before the 1976 loan negotiations were begun. It also must be remembered that Morales was de facto head of government when the first such measures were introduced in June 1975. Thus it seems likely that Morales would have tried to push through many of the changes even if the IMF had not threatened financial blackmail in the international capital markets. Nonetheless, Morales found the programs demanded by the banks and the Fund to be useful since they helped overcome internal opposition from cabinet members and others who felt the social and economic costs of a stabilization program were too high. That is to say that the IMF bore the brunt of criticism that otherwise would have been heaped on the government, and in addition offered the reward of its "seal of approval," the magic word for additional loans from the international capital markets. A WAY OUT? Are there any alternatives for a Latin American country too small to impose conditions on the world's banking giants and their allies? A few can be examined briefly: 1) More grants and soft loans could be sought instead of private loans. This would lessen the debt burden, but it is not a realistic expectation in a period when foreign aid (except from Japan and the OPEC countries) is becoming more scarce. Such grants and soft loans as there are go to the poorest countries, few of which are located in Latin America. 2) Third world countries could unite to declare a debt moratorium or at least to demand concessions from their creditors. Again this is unrealistic, as witnessed by the failure of the UNCTAD proposal along these lines, due to lack of unity within the third world. (The U.S., of course, has done its best to help foment disunity.) 3) The previous alternatives relied primarily on actions by groups outside a given country; others are unilateral. A nation could declare a moratorium on its own. This would eliminate service payments but would also totally isolate it for an uncalculable period of time from all kinds of financial flows from capitalist countries (see point 5 below). Most important would be the cutoff of trade credits, seriously jeopardizing import flows. 4) A more labor-intensive development strategy could be tried, lessening the burden on the balance of payments. This would probably imply a slower growth rate, and thus a widening income gap with respect to other countries, and would subject such a government to heavy pressures from groups linked to the production and sale of capital goods and industrial inputs in the advanced countries. Such a strategy appears more viable than the other three, but it is unclear if a capitalist government could implement it. 5) This then poses a final alternative. All of the others have presumed a capitalist system; how would a transition to socialism (given propitious internal conditions) affect debt problems? Assuming that the Soviet Union would not be willing to underwrite another Latin American country, some of the external problems would remain, especially fluctuating prices for exports. But the ability to plan should help adjust to external problems and would also permit experiments with strategies such as the fourth alternative. Furthermore, some trade credits and capital flows could be obtained from other socialist countries. Given the concrete circumstances of Peru, only the fourth alternative seems to have been viable, and that only during the early Velasco years. There is no indication that it was considered, however, and the highly capital-intensive strategy that was implemented helped produce the debt crisis. Further discussion of these and other alternatives must quickly go beyond this level of generality and look in much more detail at the implications of each. Furthermore, they can only be examined with respect to the concrete situation of individual countries. Such an investigation is vital if IMF-type "solutions" are to be avoided in the future. _____________________________________ About the author: Barbara Stallings teaches political science at the University of Wisconsin and works with the Center for Research in Politics and Society. This article is a revised and shortened version of one to appear in Richard R. Fagen, ed., United States Foreign Policy and Latin America, Stanford University Press, 1979. _____________________________________ REFERENCES I. PRIVATIZATION AND THE PUBLIC DEBT: U.S. BANKS IN PERU 1. Calculated from World Bank, World Debt Tables, 1976. This publication is the most complete and readily available source on foreign debt of third world countries, but unfortunately the data are usually about two years old when they are published. 2. Analyses of the special characteristics of the Peruvian military can be found in Victor Villanueva, El CAEM y la Revolucion de la Fuerra Armada, Instituto de Estudios Peruanos, Lima, 1973; Villanueva, Nueva Mentalidad Militar en el Peru, Editorial Juan Mejia Baca, Lima, 1968; and Luigi R. Einaudi, "The Peruvian Military: A Summary Political Analysis," May 1969. Rand Corp., Santa Monica. 3. For background information on Peru and the military government, see Abraham Lowenthal, ed., The Peruvian Experiment, Princeton University Press, 1975; E.V.K. Fitzgerald, The State and Economic Development, Peru Since 1968, Cambridge University Press, 1976; Anibal Quijano, Nationalism and Capitalism in Peru, Monthly Review Press, New York, 1971; and Latin American Perspectives, IV, 3, 1977 (issue on Peru). The most complete political-economic history of recent Peru is the forthcoming volume: E.V.K. Fitzgerald, The Political Economy of Peru, 1956-77, Cambridge University Press, 1979. 4. Data are from the Central Reserve Bank of Peru as reported in the Bank's documents and IMF and World Bank reports. 5. For an analysis of U.S.-Peruvian relations during this period, see Jessica Einhorn, Expropriation Politics, Lexington Books, Lexington, Mass., 1974. 6. See annual reports of all four organizations over this period. 7. Shane, Hunt, "Direct Foreign Investment in Peru," in Lowenthal, op. cit., pp.316-317. Two years later, Chase returned the favor by agreeing to head an international syndicate to find funds for the Cuajone copper mine - a key project whose financing had been stalled for two years. 8. OECD, Development Cooperation, 1976. 9. For an analysis of these loans in terms of differently timed cycles in the advanced and third world countries, see Michael Kuczynski, "Semi-developed Countries and the International Business Cycle," BOLSA Review, January 1976, pp. 2-13. On the OPEC deposits, see U.S. Senate, Committee on Foreign Relations, Subcommittee on Foreign Economic Policy, International Debt the Banks, and U.S. Foreign Policy, 1977. 10. Calculated from Banco Central de Reserva, Memoria Anual, 1975. 11. See accounts in Latin America Economic Report, III, 27, July 11, 1975. 12. The Andean Report, January 1977. 13. Washington Post, March 14,1978. 14. Accounts of the package can be found in various places. See, among others, The Andean Report, August 1976; Latin America Economic Report, IV, 30, July 30, 1976; New York Times, July 24, 1976 and August 4, 1976; Financial Times, July 27, 1976; and Nancy Belliveau, "What the Peruvian Experiment Means," Institutional Investor, October 1976. 15. Belliveau, op. cit. 16. Two good sources on the role of private banks in Latin America in the 1920's are Scott Nearing and Joseph Freeman, Dollar Diplomacy, B.W. Huebsch and The Viking Press, New York, 1927 (reprinted by Monthly Review); and Margaret Marsh, Bankers in Bolivia, Vanguard Press, New York, 1928. 17. Belliveau, op. cit. 18. Financial Times, August 1, 1976. 19. Banco Central de Reaerva, Memoria Anual, various years. 20. Caretas (Lima), April 5, 1977. 21. World Bank, "Peru: Informe Socioeconomico," mimeo, January 1978, p. 13. 22. Belliveau, op. cit. 23. Ibid 24. Harvey Shapiro, "Monitoring. Are the Banks Biting Off More than They Can Chew?," Institutional Investor, October 1976. 25. Belliveau, op. cit. 26. Business Week, March 21, 1977. 27. Details are presented in Caretas, April 5, 1977. 28. Latin America Economic Report, V, 15, April 22, 1977. 29. For a more extensive account of the contradictory sequence of events surrounding the IMF negotiations, see Nicholas Asheshov, "Peru's Flirtation with Disaster," Institutional Investor, October 1977. 30. Bill Bollinger, "Workers' Militancy Grows in Peru," The Guardian, April 26,1978. 31. Ibid 32. Latin America Economic Report, VI, 10, March 10, 1978. 33. Information comes from television speeches by Morales Bermudez and Finance Minister Javier Silva Ruete. See Wall Street Journal, May 22, 1978, for the former and Latin America Economic Report, VI, 24, Jung 23, 1978, for the latter. 34. Bill Bollinger, "Peruvian Workers Stage General Strike, "The Guardian, May 31,1978. 35. Bill Bollinger, "Peru Junta Cracks Down on Left," The Guardian, June 7,1978. 36. The one major bank which is holding out on this latest agreement is Chase Manhattan, lead bank for the huge Cuajone copper mining project. Chase sent a telex to the Peruvian government, demanding that a law be approved immediately, guaranteeing continuation of the current practice of setting aside money from copper sales to service the Cuajone loans. Chase threatened to interfere with new loans if such a law were not forthcoming. See Financial Times, May 24 and June 1, 1978 and New York Times, June 10, 1978. 37. Wall Street Journal, June 2, 1978. 38. Information is from the annual reports of the banks. 39. OECD, op. cit. 40. For an analysis of differences of opinion between the banks and the Fund, see Cary Reich, "Why the IMF Shuns a 'Super' Role," Institutional Investor, September 1977. 41. On the EximBank, see Richard Feinberg, "The Political Economy of the Export-Import Bank," Ph.D. dissertation, Stanford University, 1978. On World Bank and IDB cofinancing, see their annual reports. Although co-financing projects involving the multilateral agencies have been slow to materialize, recent OECD proposals give heavy emphasis to this technique. See New York Times, July 2, 1978. 42. Shapiro, op. cit. 43. Interviews with State Department, Treasury Department and private bank officials. 44. Silva Ruete speech, op. cit.
