LATIN AMERICA'S DEBT The Specter of a Debtors' Cartel

September 25, 2007

If 53 people died in the Dominican Republic, 53,000 people could die if the Mexicans remember that they are a people with a history of rebellion. If that happens, capitalism in Latin America will go to the devil. Felipe Pazos, Venezuelan Central Bank official, quoted in Business Week, May 28, 1984 Neither a borrower nor a lender be. Polonius, in Hamlet At first blush, the saga of the Latin American debt "crisis" is an old story. For the past three years at least, the problems of Latin debtors from Brazil to Costa Rica have grabbed periodic Sara Sleight is a journalist who spe- cializes in international economics and business. panic headlines. And bankers have been forced through semantic hoops to explain the dubious distinctions between "refinancing," "rescheduling" and "restructuring" Third World debt--all in a desperate effort to prove the essen- tial soundness of their lending deci- sions. Mexico's mid-1982 declaration of insolvency finally exploded the bank- ers' myth that sovereign nations simply don't "default." But no radical rethinking followed. Instead, the world seemed to settle down to a rather cozy system of case- by-case debt bailouts that salvaged the banks' balance sheets, left the debtor nations deeper in the red than ever, and established the International Monetary Fund (IMF), proverbial lender-of-last- resort, as the official nemesis of the Third World. This system meshed neatly with the conventional view that spendthrift borrowers, not myopic lend- ers, were primarily responsible for the worsening debt situation. And the bor- rowers must pay. In the past six months, however, a dramatic challenge to this dogma has been mounted. Last January, represen- tatives from all over Latin America met in Quito for the first time to discuss the collective economic crisis. The "Plan of Action" that emerged was presented to sundry national and multinational bodies, calling for more generous debt rescheduling terms as well as greater regional economic co-operation. At first, creditor banks and governments tended to dismiss the development as academic. But since then the Latin Americans have sharpened their cri- tique-and given it teeth. Bolivia, Ecuador, the Dominican Republic and, most significantly, Ar- gentina (which owes about $40 billion of the region's total $350 billion for- eign debt) have stopped debt payments in one form or another. The Dominican Republic and Argentina have directly challenged the system itself by trying to circumvent the IMF. This June, 11 Latin nations met again in Cartagena, True to the warnings, riots broke out in April as the Dominican Republic began its 2nd round of IMF-ordered "adjustments." JULY/AUGUST 5Colombia, having announced that they do not end there. More than any other "cannot indefinitely" accept the "haz- single factor, soaring international in- ards" to democracy and development terest rates, fuelled in turn by $200 posed by existing repayment terms. billion U.S. federal budget deficits, are Has the "debtors' cartel," long threatening Third World recovery. Yet feared by Western bankers, finally despite the entreaties of Latin debtors, emerged? Given the divergent debt Western European allies, the prestigious structures, economies and political ide- Bank for International Settlements (often ologies of the countries involved, it is called the "central bankers' central unlikely. But the character of the debt bank"), the IMF itself and even some crisis has changed fundamentally. It U.S. officials and bankers, Washing- has become politicized-inextricably ton refuses to acknowledge this linkage. bound up with the process of apertura that restored democracy to Argentina six months ago and is shaking the foun- dations of militarism throughout the Southern Cone. It is linked, too, with the crisis in Central America where the nations of the Contadora group, includ- ing such major debtors as Mexico- which owes $87 billion to Western banks and governments-have tried to carve out an independent alternative to the Reagan Administration's policy of military intervention. The implications for the United States Sentiment against IMF policies for Brazil tookthe form of a protest mass in front of Sio Paulo's cathedral, Sept. 25, 1983. 6 REPORT ON THE AMERICAS I .' 6 The contradictions of its "free-mar- ket" fetishism, however, are deepen- ing. The Latin debt crisis sent some nasty tremors through the U.S. bank- ing system last spring, forcing the Treasury to make a distasteful commit- ment to support shaky banks. Mean- while, U.S. banks are actively financ- ing the nation's huge balance of pay- ments deficits with funds from abroad, establishing the United States as a net borrower again for the first time in 10 years. As the London-based inter- national financial review, AGEFI, ob- served in early June: "As long as the U.S. is the biggest debtor in the world ... the [less developed countries'] problems will remain insoluble." Quality of Life Deteriorating The drama of Latin America's eco- nomic crisis is such that even political "moderates" have sounded the alarm. Writing in Foreign Affairs last Decem- ber, for example, Riordan Roett, pro- fessor of Latin American studies at REPORT ON THE AMERICASJohns Hopkins University, pulled no punches. "The quality of life has de- teriorated dramatically in most of the countries of South America," he stated, "largely as a result of stabilization pro- grams and austerity measures imple- mented in 1983." Last year, the re- gion's GNP declined by an inflation- adjusted 3.8% and per capita income fell for the third consecutive year to a level 8% below its 1980 peak. The debt burden greatly exacerbates the problem. In 1983, the region's big- gest debtors-Brazil, Mexico, Argen- tina and Venezuela-persuaded West- ern banks to postpone payment of prin- cipal coming due on their total $260 billion debt. Even so, interest payments on that debt still consumed over $20 billion. Indeed some analysts are sug- gesting that the principal on this debt will never be repaid. Moreover, to generate the foreign exchange needed to service interest on the two-thirds of its debt owed to pri- vate banks, the region as a whole had to mortgage 35% of its export earnings in 1983. This has happened at a time when Latin American exports have been dramatically curtailed by burgeon- ing U.S. protectionism. The impetus for protectionism in turn is driven by the overvalued dollar, largely caused by U.S. budget deficits. Compounding the problem, virtually no new private bank lending was forthcoming. Indeed, according to the Inter-American De- velopment Bank (IDB), even if Latin debtors continue the IMF-orchestrated austerity programs that would keep economic growth to an average of only 2.7% a year, their total external debt would still likely rise to $429 billion by 1990. Meanwhile, the prescribed belt-tight- ening has taken a monstrous toll on individual countries. In Brazil, for ex- ample, which owes a whopping $90 billion in foreign debts, IMF-induced average food hikes of 227% last year provoked widespread looting and riots. Some 25% of Brazil's workforce of 49 million is un- or underemployed and there is no social security or unemploy- ment insurance system. As veteran Brazilian economist Celso Furtado has remarked, "no matter how much we contort ourselves or the population goes hungry, we will not be able to produce many dollars to help the banks." For many months, in fact, the Latin nations have been persuasively arguing that by continuing to honor just their interest payments they're destroying their economies. And their predicament has evoked sympathetic responses from some unlikely sources. In early March, for instance, a special commission on debt of the Rockefeller-funded Ameri- cas Society concluded that "no respon- sible government can indefinitely im- pose measures that reduce growth, em- ployment and social programs." Yet the pleas fell on deaf ears in Washington. On January 4, Dominican President Salvador Jorge Blanco ad- dressed a personal warning to President Reagan: If his country accepted the IMF's terms for continued aid, it "could undoubtedly provoke social tensions so strong that it could alter the peace and the most important functional demo- cratic process in the Caribbean." Rea- gan took three months to reply, dis- missing the warning, as did the IMF itself. Then, in late April, as the Do- minican Republic dutifully began its second round of IMF-ordered "adjust- ments," riots erupted, leaving scores of Dominicans dead and hundreds in- jured. Financial Centers Gone Mad Worse was to follow. The IDB has warned already that a 1% increase in international interest rates adds $4 bil- lion to less developed countries' debt- servicing bill. And at its annual meet- ing in Uruguay in late March, it an- nounced that the rise in Eurodollar lending rates (the standard denomina- tion for international loans) in 1984 had wiped out the benefits gained by coun- tries such as Mexico, Brazil and Peru in their most recent debt reschedulings. Then, in early May, the interest rate behemoth struck again. The U.S. prime lending rate rose a further half percent to 12.5%--a hike of fully one and a halt percent since mid-March. It has been estimated that this most recent boost in the prime will increase Argentina's in- terest payments by $200 million year- ly, Brazil's by $350 million, Venezu- ela's by $150 million and Mexico's by $300 million. As Argentine President Ratil Alfonsin remarked with mounting indignation: "It seems as if madness has taken over in some financial cen- ters." Subsequently, events accelerated sharply. At the end of May, the Do- minican Republic suspended negotia- tions with the IMF, paralyzing tens of millions of dollars in aid from the U.S. Agency for International Development and the World Bank and halting re- negotiation of its $2.4 billion foreign debt-all of which were conditioned on a signed agreement with the IMF. A few days later, Bolivia, under strong pressure from striking labor unions, halted all payments on debts to foreign banks for four years and announced that it would limit repayment of its debt to international lending agencies, in- cluding the IMF, to 25% of its export earnings. (Bolivia's total foreign debt is about $2.4 billion.) In early June, Ecuador joined the dissident group, suspending payments on $247.5 mil- lion of its $6.7 billion debt due by the end of 1985. Most ominous of all, however, was the action taken by Argentina. On June 11, the region's third largest debtor announced its own terms for more than $1 billion of IMF loans in a letter addressed directly to fund director Jacques de Larosiere, thereby by-pass- ing the IMF negotiating team already in Buenos Aires. Declaring that unlike its military predecessor it was not in the business of repressing labor unions, the Alfonsin government proposed cutting the public sector deficit not by holding down wages, as the IMF wants, but by increasing petroleum and utility prices, reinstating employers' contributions to the bankrupt social security system, improving tax collection and selling some state-owned assets. Argentina's action not only surprised virtually everyone by its militancy, but it also directly challenged the "reward" system that Western creditors have tried to impose as a means of thwarting the much-feared debtors' cartel. In es- sence, this system--endorsed by the IMF, the U.S. Federal Reserve and most recently at the London "summit" meeting of Western nations-would lower rates and extend repayment peri- ods on a selective basis depending on how well debtor nations adhere to IMF austerity programs. Its "divide and rule" intent was made clear in early JULY/AUGUST 7Mexico, Brazil, Colombia and Vene- zuela-that contributed to a $500 mil- lion emergency loan to Argentina last March. That loan helped bail-out U.S. bank creditors facing heavy losses on overdue interest from Argentina that would have sent their first quarter earn- ings plummeting. Alfonsin, for his part, remains equally obdurate. He has accused Argentina's Western creditors of imposing. "a new form of colonial- ism" through the foreign debt and has vowed never to pay "with the hunger of the people." While the United States and other Western creditors grapple with the con- tradictions of their position, the eyes of Latin debtors remain on Argentina. If Alfonsin does manage to extract con- Srm h TT, V . 1A Multilateral loans enabled this Sao Paulo TV manufacturer to expand production. June when bankers, the Fed and the fund announced their willingness to stretch out repayment terms for Mex- ico, currently the darling of Western creditors because its economy appears to have made a comeback as a result of IMF-imposed measures. Mexico, of course, also enjoys a much-touted "spe- cial geopolitical relationship" with the United States and as a leading member of the Contadora group occupies a pri- ority position in U.S. foreign policy considerations. Restoring Faith in Banking Meanwhile, literally dozens of "so- lutions" to the debt crisis have been proferred by Western banks and econo- mists in recent months. They include the inevitable claims that if only the Latins would get off their nationalistic high horse and permit more direct for- eign investment (perhaps turning some of their debt into equity or share capital for foreign participation), the debt crisis would go away. And they have also encompassed proposals for an in- terest-rate "cap" or upper limit on Latin loans. The cap idea, however, presents the United States with a policy dilemma. Washington worries that such a two- tiered interest-rate system might pro- voke demands for similar special treat- ment from domestic interest groups. Moreover, although the Fed would dearly love to free its domestic money policy from the constraints of the debt crisis through such a scheme, the gov- ernment fears more bank-bailout ac- cusations from Congress. The markets registered a sharp vote of no confi- dence in the banks in late May, knock- ing 11% off the stock of Manufacturers Hanover which has the highest expo- sure to Argentina. For the moment, the government has decided that restoring confidence in the banking system takes priority and that the best way to do that is to acknowledge the reality that bank earnings will have to fall. In mid-June, the Comptroller of the Currency reaffirmed that banks must report loans as non-accruing as soon as funds are 90-days past due. As a result, Manufacturers Hanover esti- mates that its second quarter earnings will be reduced by at least 26%. As we go to press, the game of hemispheric "brinkmanship," precipi- tated by Argentina, is temporarily in abeyance. One day before a June 30 deadline on repaying $350 million in overdue interest to its bank creditors, the Argentine government announced an agreement to pay $225 million of that interest from its own reserves. In return, the banks have agreed to cough up the difference. But the measure is merely another stopgap. The United States insists that Ar- gentina must reach agreement with the IMF before it releases $300 million to reimburse the four Latin nations-- c,t-onsk IfLUil L11n LI1V, It coUUIU pro- voke more militant demands from other debtors. Already, Venezuela-certainly among the more conservative Latin governments-has announced that it too can do without the fund and is quite capable of imposing its own austerity measures. But if the shared experience of colonialism makes it relatively easy to galvanize Latin America around the issue of political sovereignty at a time when the clamor for democracy is growing louder, the region's creditors show few signs of developing a more sympathetic ear. On the contrary, the remarkably moderate statement of prin- ciples and demands that emerged from the Cartagena debtors was met with contempt: U.S. banks hoisted the prime rate yet again to 13%, adding a further $800 million to Latin America's annual interest rate bill. Shortly thereafter, the Dominican Republic gave in to IMF demands for hikes in the price of gaso- line. "It's clear we have to do it. We have no alternative other than to reach an agreement with the IMF," a presi- dential spokesman told The New York Times. Fifteen years ago, the Argentine novelist Manuel Puig wrote a bitterly ironic parody of his country's condi- tion whose English title is "Betrayed by Rita Hayworth." The lives of the novel's protagonists were determined by Hollywoodesque images of treachery and betrayal from which their own real- ity offered no escape. Today, it seems throughout Latin America, only the names have changed.

Tags: debt crisis, IMF, austerity, banking, refinancing

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