TOO LITTLE, TOO LATE A Debt Balance Sheet

September 25, 2007

I'm no financial wizard, Colombian novelist Gabriel Garcia Marquez told a journalist at the Havana debt confer- ence in August. "But even I know that the sheet is too short, and if we pull the sheet up over our heads, our feet will stick out." It does seem abundantly clear to almost every- body-most of all Latin American consumers-that the region's heavily indebted nations are not going to come up with the cash to repay their loans. Even the Reagan Administra- tion, which has acted as if there were no debt problem, has been spurred to action by the desperation expressed in various messages coming from Latin America's largest debtors. One of the clearest and most vocal messengers is Peru's youthful new president, Alan Garcia P6rez. The 36- year-old social democrat chose the oc- casion of his inaugural last July to openly challenge Peru's creditors. The victory of Alan Garcia's APRA party signals a shift to the center-Left in Peruvian politics that is unpre- cedented in the postwar era. APRA, the country's largest and best or- ganized political force since the 1920s, had until now been effectively blocked from power by the military in alliance with ruling right-leaning par- ties. An impressive line-up of leaders gathered in Lima for the inaugural. Regional attention firmly focused on Peru, Alan Garcia announced that his country would limit interest payments on its $14 billion foreign debt to a maximum of 10% of export earnings. With exports expected to net $3.1 bil- lion, payments should amount to about $300 million under this new plan-a far cry from the $5.5 billion which falls due this year. Garcia later clarified that the 10% would not mean equal treatment for all creditors. In fact, Peru has made no payments on its debt to private banks since July 1984 and, although the figures tend to vary, is about $425 million in arrears. The country's debt service ratio-the ratio of interest plus principal pay- ments to a nation's export earnings- is among the highest in the region, and foreign currency reserves are among the lowest. In an act that illustrates the cautious course Alan Garcia is charting, the new president met with representa- tives of Peru's creditors three weeks before his inaugural, warning them of his pending announcement on debt payments. He hoped, Garcia is re- ported to have said, that they would not consider his "a confrontational approach." Garcia also called for "dialogue with our creditors without using the International Monetary Fund (IMF) as an intermediary." In a speech colored with rhetorical excess, Garcia di- rected his most biting commentary to- ward such multilateral lenders as the IMF, charging that "they were accomplices in the squandering and unproductive use" of borrowed funds. Addressing the UN General Assembly on September 23, Garcia threatened to pull out of the IMF if it did not respond to his "demand [for] decisions on the reform of the mone- tary system and the distribution of world liquidity in a fair manner." IMF letters of intent, said Garcia, "are in reality letters of colonial sub- mission to the prevailing injustice." Honeymoon is Over Painfully aware of the unpopularity of IMF-mandated austerity programs, no government eagerly seeks out the IMF. But until recently, no nation had succeeded in getting new money out of the banks without an IMF accord. Bankers may well find this part of Garcia's challenge more threatening than a cap on interest payments. In June, Peru was spared a "value-im- paired" ruling by U.S. bank reg- ulators, mainly as a friendly gesture toward the new regime. By October, the honeymoon was over. U.S. bank- Alan Garcia ers are now required to set aside 25% of their Peruvian loans against a possi- ble default. All eyes are on Peru to see if a medium-sized debtor can get away with it. "This is the first time some government has tried to change the rules," a government minister told The New York Times. "The banks have the problem now. The ball is in their court." While hardly true- Bolivia declared an ad hoc default in July 1984, and had been in arrears on its private debt since the previous spring-it is the first time a nation has openly announced its defiance within the international arena, and with such fanfare. The money involved in Peru's case is not at the level of a Mexico or a Brazil. Non-payment or non-cooperation by these large debt- ors is widely believed to be capable of seriously rocking the system to the point of collapse. In an attempt to place Alan Gar- cia's announcement in proper per- spective, a New York Times news analysis pointed out that it was "im- portant mostly as a symbol and a pre- cedent." The symbolism was not lost on the Reagan Administration, which decided to invoke the seldom-used Brooke-Alexander Amendment. The amendment calls for suspension of REPORT ON THE AMERICAS I 4new U.S. aid programs to any country in arrears in payments on its debt to the U.S. government. Peru had failed to meet a 15 July deadline on U.S. military assistance loans. The new government quickly brought its pay- ments up to date, only to fall behind again in September. Also at odds with the Brooke-Alexander. Costa Rica has been repeatedly granted waivers. "The Administration just doesn't un- derstand the threat that the debt poses to Peruvian democracy," a congres- sional source told NACLA. Acting In Concert The other major voice coming out of Latin America is that of Fidel Cas- tro, who in numerous interviews with the foreign press and at a series of in- ternational conferences held in Havana has put forth his own scheme of things. The Castro solution is sim- ple: repayment is a political and economic impossibility. Castro says Havana's Debt Conference: "a four-day rally." regional debtors need no new money and should apply funds earmarked for debt service to domestic development. No reprisals could be worse than the status quo, the Cuban leader told Con- gressman Mervyn Dymally and Pro- fessor Jeffrey Elliot in an interview last spring, and besides, who's going to gang up on an entire bloc of nations acting in concert? Castro is quick to point out that wiping the slate clean will not solve the Third World's development prob- lems, and proposes that the step serve as a bridge for finally creating a New International Economic Order (NIEO). The Cubans have proved the most tireless proponents of the NIEO, endorsed by the United Nations Gen- eral Assembly in 1977 and largely ig- nored by the developed world ever since. But the need for fundamental over- haul of the world economic system is lost on few in the developing world. The Cubans have had a large measure of success in amplifying the concerns of regional debtors, convening five in- ternational conferences between May and August. Journalists, youth, women and trade unionists all jour- neyed to Havana to consider the re- gion's $360 billion debt. The most widely publicized of the Cuban summer conferences was the Debt Conference itself, drawing 1200 participants from throughout the re- gion and 300 accredited journalists. While many of those who attended could be identified as left of center, there were numerous notable excep- tions, indicating how the issue cuts across political lines. Former heads of state from Peru, Venezuela and Co- lombia were present, along with former Dominican president Juan Bosch. Michael Manley of Jamaica, a leader with his own turbulent history with the IMF, was given a hero's wel- come. Miguel Angel Capriles, the somewhat maverick owner of a con- servative Venezuelan newspaper chain, was there, calling for a summit to discuss a temporary moratorium. Citing Nicaraguan Vice President Sergio Ramirez as the conference's highest-ranking participant, conserva- tive observers pronounced the event a failure, somewhat missing the point. Not envisioned as a high-level work- ing conference, the initiative suc- ceeded in providing an open forum for discussion, and in creating a media event, thereby increasing momentum around the issue. Anybody and every- body had access to the podium-a 12- minute maximum-and the entire pro- ceedings will be published. Castro himself made good on his pledge to sit through every speech, nodding and taking notes from his spot on the dais. "It was really a four-day rally, rather than a conference," said economics professor Arthur MacEwan, of the University of Massachusetts in Bos- ton, who attended the gathering. NOVEMBER/DECEMBER 1985 Castro's admonition to his neigh- bors on debt repayment seems a case of "do as I say, not as I do." Cuba has a good repayment record on its $3.4 billion Western debt, and has re- portedly counseled the Sandinistas twice to stay on the banks' good side. Not willing to let Castro steal the limelight or the initiative, Alan Garcia has repeatedly emphasized Cuban hypocrisy in urging others to re- pudiate their obligations. He also re- fuses to frame the issue in East/West terms, as Castro does, saying the debt is strictly a North/South matter. Gar- cia's pronouncement and his calls for a summit of regional heads of state has so far fallen on deaf ears. Judging from the rhetoric on both sides, Gar- cia and Castro will both try to remain on center stage with the debt issue, each with his own role to play. "The governments of other Latin American countries know they are in debt to the Cubans," says MacEwan. "The Cu- bans' position has improved their bar- gaining power. Suddenly their calls for leniency seem moderate." Confidence to Gloom Well before September's earth- quakes gave the most recent jar to Mexico's economy, creditors had begun to speak of Latin America's second largest debtor in worried tones. Since the infamous weekend in August 1982-when the government announced its inability to meet foreign obligations-Mexico has been consid- ered the barometer of regional debt performance. When the Mexican economy is doing well, and the gov- ernment in compliance with its IMF agreement and interest payments, op- timism reigns in international finan- cial circles. But last year's confidence has given way to gloom. Mexico began to fall short of IMF targets last fall, holding up release of the remain- ing $908 million on its $3.4 billion fund program. In early October, Mexico's advisory committee-repre- senting some 600 banks--granted a six-month deferral on $950 million due in the next two months. The pay- ment was part of an agreement ham- mered out in the fall of 1984; the re- scheduling covered $50 billion due between 1985 and 1990. Citing "recent developments," the 5committee said it would use the next six months to stuuy the situation. 1 he de la Madrid government recently told creditors it needed an estimated $4.5 to $4.8 billion in new money during 1986, up from its $2-3 billion pre- quake estimate. Earthquake clean-up is expected to cost $3-4 billion, a size- able sum for an already overextended federal budget. The IMF has re- opened talks on a new letter of intent, and granted an emergency $300 mil- lion; the World Bank stepped up dis- bursal of a $300 million commitment. Getting new money out of the com- mercial banks may require a fair amount of arm-twisting, or what is known as "forced lending." Less than a year ago Mexico was considered the pride of the interna- tional financial community, an exam- ple of a cooperative debtor who was willing to squeeze interest payments out of the economy, regardless of cost. But after a brief spurt of growth, exports, investment and savings have all taken a downward turn; inflation, capital flight, imports and the domes- tic deficit are up. Mexico has lowered the price of oil-which provides 70% of export earnings-twice in the last year in an effort to bid out other pro- ducers. But with oil prices still drop- ping, Mexico looks like a shaky in- vestment. The country's much-lauded trade surplus has dropped 46% in the first seven months of 1985 over the same period in 1984. Even before the earthquake, Mexican officials were beginning to sound less like compliant debtors and more like their more con- frontational neighbors. The rapid deterioration in Mexico's situation is said to have finally opened the Reagan Administration's eyes to the severity of the crisis. Until now, the Administration has considered the problem something to be worked out on a case-by-case basis between debt- ors and their creditors. Treasury Sec- retary James A. Baker unveiled his "Program for Sustained Growth" at the joint meeting of the World Bank and IMF in Seoul, South Korea, in early October. The Administration's approach is three-pronged. The Third World is to receive $29 billion in new money over the next three years: $20 from com- mercial banks and $9 from multilat- eral lenders such as the World Bank anIIu L In ter-AJmerican Development Bank. To qualify for this new money, debtors must adopt market-oriented policies designed to promote growth. Emphasis is on trade expansion and reducing the state sector. Finally, the Administration envisions a greater role for the World Bank and its long- term structural adjustment loan pro- gram. Increased multilateral lending, it is hoped, will serve as an induce- ment to commerical banks to re-open lending windows. "Too Little, Too Late" Observers point out that for the first time, the United States has taken an "activist" stance, pledging to bring together all three parties, encouraging each to do its part. Interviews with fi- nancial officers at several Latin Amer- ican embassies indicate that "until the blanks are filled in," debtors are tak- ing a wait-and-see attitude. Several welcomed what they consider key de- partures from the U.S. position: an admission that the problem can only be solved through economic growth, and that fresh loans are needed to spur this growth. Yet the money in- volved-$29 billion--"doesn't seem like enough," according to a Brazi- lian. The combined interest payments of Mexico and Brazil alone during 1985 should amount to about $25 bil- lion. Similarly, a spokesman for the American Bankers' Association called Baker's initiative "constructive and thoughtful . . . but no details are available. We're awaiting additional information." Based on what is known at this point, it seems unlikely the Administration's proposal is enough to change the banks' stance. The stakes are high for the largest in- stitutions; they have little choice but to stay in the lending game. Smaller regional banks, however, are more apt to cut their losses now, rejecting further Third World lending. "Too little, too late," is how one critic described the plan. Transfering Reaganomics to the developing world is hardly the answer, yet some find solace in the fact that the Administra- tion has admitted publically that there is a debt crisis and that it should play some role in its resolution. "It de- REPORT ON THE AMERICAS pends a lot on how the program is to be implemented," said a spokesman for a South American debtor. "If it's the same thing with a different name, it will just be treating the patient's fever, not the illness." What can we expect over the next year on the Latin American debt scene? A survey of recent develop- ments suggests a few trends: 1. Most importantly, we can expect more of the same. Countries will skate in and out of the debt crisis cycle. Some will continue to go it alone for a while, without an IMF pro- gram, as Brazil is now doing. The region's biggest debtor, Brazil's obligations exceed $100 bil- lion. Talks with the IMF were sus- pended in July when the two sides were unable to find common ground. With the new civilian government of Jos6 Sarney still testing the waters, the Brazilians have refused to imple- ment further austerity measures. "Brazil will not pay its foreign debt with recession, nor with unemploy- ment, nor with hunger," Sarney told the UN General Assembly in Sep- tember, "for a debt paid for with pov- erty is an account paid for with de- mocracy." The banks have given Brazil until January 17 to firm up the country's eighth letter of intent in three years, before they will consider another re- scheduling. The government's economic plan-to be presented to Congress in the next few weeks--will serve as Sarney's bargaining position for the new round of negotiations. Brazil's experience is not unusual. Most countries, sadly, come back to the IMF at some point. At the invita- tion of Bolivia's new conservative Administration, an IMF mission ar- rived in La Paz in late November for preliminary talks. Under intense pres- sure from organized labor, the former center-Left government -of Hernin Siles Zuazo went without an IMF ac- cord for several years. The new presi- dent, Victor Paz Estenssoro, quickly announced a severe austerity plan, and showed his intolerance of public dissent by declaring a state of siege to end a 16-day general strike. Bolivian labor remains in the forefront of those pushing to ensure that the costs of aus- terity are divided among all social 6groups. Further, it appears that "deals"-- bail-outs, reschedulings, refinanc- ings, restructurings-are getting in- creasingly difficult to put together. Smaller regional banks-which form the majority of U.S. lenders--are exerting themselves more in relations with the larger, money-center banks such as Chase Manhattan and Citicorp. It required a major lobbying effort by Brazil's financial team to get the banks to roll-over the debt which fell due at the end of August. 2. It is increasingly clear that old so- lutions are not adequate for the mag- nitude and complexity of today's problems. Debtors and creditors are grasping for ever more "creative" solutions. To take a few examples: * Colombia was the first Latin Ameri- can country to receive new money without an IMF support program since the debt crisis "began" in 1982. Fi- nance Minister Roberto Junguito Bon- net was quick to point out that Colom- bia's was a special case. * In 1980, Nicaragua became the only country in recent history to achieve a rescheduling of interest payments. Reschedulings are usually reserved for payments on principal only. * Chile's June rescheduling agree- ment included $1.1 billion in new money from private banks, part of it co-financed by the World Bank. Con- sidered controversial, the co-financ- ing was further evidence of how dis- tinctions between the World Bank and the IMF are getting fuzzy. While the IMF provides balance of payment support, the World Bank has focused on development projects, money for a dam or cement plant. In some ways these case-by-case solutions reinforce the creditors' "di- vide and conquer" approach, ignoring the debtors' plea for one regional so- lution. But the "creativity" of the agreements indicates the desperate situation in which the system finds it- self, and the need for ever-more radi- cal solutions. 3. We can expect more political and social unrest as "remedies" to the debt burden are imposed from with- out-by the IMF-or from within, by governments seeking to stay on good terms with international financiers. A new wave of "IMF riots" is not un- likely; the Dominican Republic, Brazil, Bolivia, and Peru have all ex- perienced IMF-related violence. In many countries the debt has become a major domestic political actor, in some cases toppling governments and causing political realignments. Sep- tember's ouster of Panamanian Presi- dent Ardito Barletta, a former World Bank official, is in part attributed to political ineptitude in handling the debt problem. Calls for a debt moratorium are coming from a broad political spectrum as domestic entre- preneurs also feel the squeeze. 4. More quiet repudiation: "It's not a good example to debtor nations," said a spokesman for a British bank of South Africa's announcement that it was suspending foreign payments, "but the circumstances are clearly un- usual." Within the creditors' scheme of things, South Africa is clearly an unusual case, but there is an increas- ing tendency to make everything "special" in an attempt to accom- modate unorthodox solutions and rationalize leniency. The Mexican earthquake may well provide that op- portunity. "Now, because of the earthquake it's possible to do some rearranging," says economist Arthur MacEwan. "It creates some pos- sibilities and opens new doors." 5. Increasingly, calls will be heard from unlikely quarters--centrist and even some conservative politicians and academics-for concessions from the banks. As it becomes apparent that the Latin economies have been squeezed to their limit, we can expect increasing intensity in the debate at elite financial and political levels about whether government or the pri- vate sector should bear the costs of a bail-out. Speaking in June to a lunch- eon gathering of New York corporate officials and bankers, Sally Shelton, the Carter diplomat turned banker, complained of "a wave of anti-bank sentiment" sweeping the country. "There's a terrific insensitivity to banks' efforts to help Latin America out of this," said the Bankers Trust vice president. The Reagan Adminis- tration was not doing its share to solve the problem, said Shelton, calling for more sensitivity to "the plight of the debtors as well as the plight of the banks." And we can expect Third World debt to surface in discussions of U.S. domestic issues. We've already seen linkage on various trade issues, most recently on tariffs on shoe and textile imports. Another likely issue is U.S. agriculture, a sector with an enormous debt problem of its own, not unlike the Third World's dilemma. Signing Up Argentina Economic predictions made in the annual reports of the IMF and the Inter-American Development Bank (IDB) give no cause for optimism. The IDB, Latin America's major de- velopment bank, says previous solu- tions to the debt crisis are inadequate. Salvadorean economist Jorge Sol-an original staff member of the IMF at its inception in 1947 and now a fellow at the Institute for Policy Studies- paints a gloomier picture. Speaking recently in New York City, Sol out- lined two possible scenarios. A moratorium by a major debtor could cause a run on a few key European banks and on money-center banks in the United States. It could be triggered at any moment, depending on domestic political developments in debtor countries such as Brazil or Mexico. Widespread bank failures in the United States would follow, de- manding a major federal bail-out. Alternatively, Sol said, if more debtors choose the "less noisy" form of non-payment, a la Bolivia, the U.S. government may wake up to the very real threat of the collapse of the world economic system. The Carta- gena group repesenting 11 regional debtors appealed to the Bonn summit last May. But the Reagan Administra- tion managed to close ranks with like- minded European allies, keeping the debtors' issues off the agenda. With the Cartagena group sched- uled to gather again before year end, it is clear that the debt will remain squarely on Latin America's agenda for some time to come. U.S. officials are now consulting with bankers, try- ing to sell their "new" approach. At press time, the Argentine Embassy confirmed that an assistant treasury secretary had been in Buenos Aires to interest President Alfonsin in signing on to the Baker Plan.

Tags: debt crisis, banking, Alan García, IMF, austerity

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