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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