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
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.
I .'
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
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-
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-
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
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
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
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
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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