The Business of America/Nagging Debtors
Stelzer, Irwin M.
THE BUSINESS OF AMERICA NAGGING DEBTORS by Irwin M. Stelzer T his past summer marked the 1 sixth anniversary of what is misleadingly called "the Third World debt crisis." In August 1982, Mexico,...
...And Venezuela's Carlos Andres Perez, also running for president, is taking a similar line...
...So it resumed interest payments on its debts and cobbled together a package of internal reforms that won the approval of the International Monetary Fund...
...The Soviet Union and its East European satellites, their economies in ruins, are looking to capitalist bankers for relief...
...In short, our government and the international agencies should pick up the tab, which Sachs estimates will cost U.S...
...Republican solicitude for the banks was matched by Democratic concern for the debtor nations...
...Czechoslovakia's rose 50 percent, while its economic performance deteriorated...
...The oil-producing countries, unable to use the huge surpluses the OPEC cartel's extortion was producing, were pouring cash into the world's banks...
...The banks will continue to negotiate their way through the "debt crisis"—unless a banker's equivalent of Lee Iacocca persuades a presidential equivalent of Jimmy Carter that the government should transfer the banks' losses to the taxpayers...
...It got the loan...
...American, British, and other banks cooperated...
...taxpayers "a billion dollars a year atmost, over a period of several years . . ." It remains to be seen whether a new American President—Republican or Democrat—will resist the arguments of academics, the threats of Third World politicians, and the whinings of bankers, and let the borrowers and lenders slug it out to a market-determined conclusion...
...Republicans, ever solicitous of their banker-constituency, wanted to avoid having their friends take an earnings hit...
...Some are swapping the notes they hold for equity in enterprises operating in the debtor countries...
...Others are selling their loans at discounts...
...The government should benignly neglect the entire affair...
...What Anna Schwartz calls "debtor country sympathizers" did not want the borrowers to be forced to reduce their welfare programs or cut back on subsidies to their loss-making state enterprises...
...or disappeared in "capital flight" induced by confiscatory government policies...
...And getting it...
...Its solution: to borrow $3 billion more to meet its obligations...
...All this makes nonsense of Mexico's efforts to blame its troubles on foreign lenders...
...No, they are attracted by the Catholicism of the ages, the Magisterium, and the inspiring leadership of the current Pope...
...Five years later Mexico's deficit came to 17 percent of GNP...
...Better to let the bank/lenders and the nation/borrowers know, now, that they are on their own...
...So the banks agreed to lend Mexico et al...
...Hungary's debt obligations will consume 70 percent of its hard currency earnings this year...
...Argentina's Peronist candidate for president, Carlos Saul Menem, is doing the same, despite the fact that Argentina's problems are clearly of its own making: only 50,000 of the country's 30 million people pay income tax, public-sector enterprises lose billions every year, and Argentina has the only oil industry in the world (state-owned, of course) that regularly loses money...
...The banks recycled these funds—lent them to Latin American and other countries at seemingly profitable interest rates, on the theory that sovereign countries pay their bills...
...On the debt, if on nothing else, Mr...
...Lenders who take losses will stop throwing good money after bad...
...Among them, it may be hoped, is another Chesterton, another Maritain, another Newman, another Ronald Knox, another Dorothy Day, another Gerard Manley Hopkins, another Edith Stein — converts all...
...And we cover the full range of issues of concern to today's reflective and believing Christian...
...Cardenas is not the only Latin politician who blames his country's plight on its onerous interest payments...
...So confident were the banks on this score that they made no effort to distinguish between countries that had paid past debts and those that had defaulted...
...Eastern Europe's net debt rose from $70 billion to almost $100 billion between 1985 and 1987...
...The new converts are not attracted to the diluted Catholicism of the Hans Kungs, the Charles Currans, or those who sign ads favoring legal abortion...
...The New York Times quotes a conveniently unidentified "foreign economic analyst" as saying, "If there is one thing the election showed, it was that Mexicans are no longer willing to go on repaying the debt at any cost...
...In August 1982, Mexico, richly endowed with natural resources, announced that it could no longer pay interest on its international debt, then $80 billion (now $107 billion...
...Among the converts to Roman Catholicism who write for the REVIEW are Paul C. Vitz, George William Rutler, Sheldon Vanauken, John C. Cort, Walker Percy, Thomas Howard, L. Brent Bozell, James J. Thompson Jr., and Peter Kreeft...
...Brazil, for example, conceded in the spring that it could not run its economy (inflation is 900 percent a year) without help from the banks whose loans it had repudiated...
...banks continue lending, having been warned by Cardenas that Mexico will "stop paying the foreign debt on the terms being demanded," it should be of concern only to the banks' shareholders, not the U.S...
...So they were delighted when bank regulators turned a blind eye to the obvious fact that the loans weren't worth anything like the figures shown on the banks' books...
...And the American government cooperated, too...
...This brought to a screeching halt the much-hailed process of "recycling...
...This option, which came to be known as "austerity" but really meant living within their means, was rejected in favor of a second—more borrowing...
...Mail to: NEW OXFORD REVIEW Room 263 1069 Kains Ave...
...When that time came, they had two choices...
...government intervention...
...Presumably, this is a warning that our government must 30 THE AMERICAN SPECTATOR OCTOBER 1988 intervene to avoid the wrath of the Mexican masses...
...After all, if interest payments were suspended, the banks' income would decline, reducing their profits and their capital bases...
...Amazingly, while the REVIEW is a lightning rod for "papist" pilgrims, it is also ecumenical in spirit...
...These new Catholics and the extraordinary Pope to whom they belong are a very present comfort when one is tempted to despair...
...Unfortunately, the borrower nations did not make productive use of the resources they borrowed...
...Catholics watched with a mixture of pity and amusement as the excellent Anglo-Catholic New Oxford Review argued and agonized itself into the [Roman] Catholic Church...
...After all, Sachs argues, Latin American debt was in most instances "incurred by military governments and is now being paid off by democratic governments...
...In quick succession Argentina, Brazil, and other debtors announced that they, too, could not service their debts...
...A 60 percent increase in oil revenues, in short, was accompanied by an 80 percent increase in foreign debt...
...Anne Roche Muggeridge, daughter-in-law of convert Malcolm Muggeridge, has said in her recent book, The Desolate City: Revolution in the Catholic Church (Harper & Row): "Because the integrity of its message has been betrayed, the Catholic Church is in ruins...
...Markets found the banks' recognition of reality encouraging: as bad loans were written down, banks' share prices went up...
...Those steps taken, Brazil's finance minister per-suaded first the London banks and, this summer, the Paris Club (representing government creditors) to stretch out the repayment period of old loans (reducing annual interest payments by $500 million), to convert some debt into equity participation in Brazil's economy, and to make new funds available...
...But market-induced solutions don't please politicians or most academics...
...Harvard's Jeffrey Sachs, perhaps the leading academic economist-expert on Latin American debt, warns that the region "is going sour...
...The first was to rein in public-sector spending and to privatize the bloated government-owned companies that were running huge deficits...
...M eanwhile, Latin American politicians denounced the banksthat had somehow forced them to borrow to finance their inefficiency and corruption...
...As Anna J. Schwartz, of the National Bureau of Economic Research, pointed out in her Presidential Address to the Western Economic Association, the money went to finance consumption, including "extravagant living by corrupt officials...
...It is playing well in the debtor countries—as well as in America's liberal universities...
...And promises to privatize large portions of the economy remain unfulfilled: some three-quarters of the economy is still in the public sector...
...Still others are simply writing off some bad debts...
...Since the borrowed funds had not been invested in a way that would generate earnings, it was only a matter of time before the borrowers had no inIrwin M. Stelzer, TAS's monthly business correspondent, is director of the Energy and Environmental Policy Center of the John F Kennedy School, Harvard University, and an American correspondent for the London Sunday Times...
...And Treasury Secretary James Baker did all he could to bail the banks out, exerting pressure on international agencies to step in, and on the banks to lend still more money to be used by debtor nations to pay interest on old debt...
...Repayments were made from further borrowing...
...Alexandre Lamfalussy, general manager of the Bank for International Settlements, was able to report recently that bank exposure to bad loans is falling, while debtor countries are improving their debt service positions...
...But now, a new wave of converts is entering the Church...
...The international financial system, we were warned, was tottering...
...These schemes have two interesting characteristics: they rely on the market's determination of the value of the loans, and they require no U.S...
...He calls for "a more balanced view" of "whether the debtor countries can be squeezed into paying their debts in full...
...Any hope that oil prices will increase enough to bail Mexico out seems forlorn—and not only because oil markets are soft...
...to meet the deficits of "inefficient and unprofitable state-owned enterprises...
...Borrowers who renege will find, as did Brazil, that they can't function as international financial pariahs...
...First Citicorp, and then others, reserved against or otherwise wrote down the value of the uncollectable loans...
...Most of our writers are cradle Catholics and a significant minority belongs to various other churches...
...I know a substantial number of recent converts like this and am much edified by their purity and ardour...
...So, bail out Latin American profligates today, and we may get to save East European Communists tomorrow...
...Orthodox Catholics: DON'T DESPAIR...
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...taxpayer...
...Forget for the moment that Mexico can't "go on" repaying its debt since it has never done so: debt has increased sharply since 1982...
...They forced their way past us anyway, thank God...
...Huge government bail-outs would be required...
...Make check payable to NEW OXFORD REVIEW...
...But the REVIEW isn't just for converts...
...Seven of them are my godchildren, and I must confess that some of us, to our shame, earnestly tried to delay them, on the grounds of the growing disorder in the Catholic Church...
...What's more, contrary to the shibboleth that Catholicism is a superstitious religion for the ignorant, an unusually high proportion of the new Catholics consists of writers and intellectuals...
...come stream from which to pay interest on their loans...
...But nothing much happened...
...it has begun to inquire about rescheduling...
...Today there is a new Oxford Movement afoot in America...
...So they joined in one proposal after another to transform the problem from one between a banker and a reneger to one of creating international institutions that would relieve the debtors of responsibility for repayment...
...In 1982, when the "debt crisis" began, Mexico agreed to reduce its deficit, then running at 16 percent of GNP, in return for a loan from the International Monetary Fund...
...But its foreign debt rose from $51.4 billion to $93.7 billion...
...Consider this fact: between 1980 and 1984, before oil prices collapsed, Mexico's earnings from oil exports rose from $9.4 billion to $15 billion...
...Clearly, basic economic reforms are required...
...Indeed, there are some signs that just that may be happening...
...And in February of last year, Brazil, Latin America's largest debtor, declared a debt moratorium: it would repay neither interest nor principal...
...True, American banks finally had to recognize what the markets already knew: the foreign loans would never be repaid in full...
...Not only banks but borrowers too have made some changes...
...If U.S...
...Encouraged by the markets' reaction to their (belated) willingness to solve their own problems, the banks developed other techniques to reduce their exposure...
...But the strong showing of leftist Cuauhtemoc Cardenas in the recent election promises to undermine any resolve newly elected President Carlos Salinas de Gortari might have had to push through such economic reforms...
...or only negotiations between borrowers and lenders can produce a lasting solution...
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...T]he electorate was in complete agreement on that point...
...But most debtors are stubbornly refusing to adopt the internal reforms that can solve their economic problems in a way that new borrowings most certainly cannot...
...Yet even now there are converts, of exceptionally high quality, and their number is increasing with the tenure of the present Pope...
...They come because at the highest level of Catholic teaching, the doctrine of the faith, though much embattled, remains uncompromised and is as fearlessly proclaimed by John Paul II as by Peter, Paul, Ignatius, or Augustine...
...Consider only that Mexico wants to keep borrowing so that it need not face down its trade unions or its bloated bureaucracy...
...still more money, to be used to pay the interest on the existing loans...
...If you want to recapture the excitement of when you first really believed, if you feel inundated by "bad news" about the Church, if you despair of all the moral laxity and doubt and dissension within her portals but seek a remedy for that despair, or if you're searching for a "face" of Catholicism that is spiritually vibrant, solidly prolife, doctrinally sound, and socially engaged, it's time for you to subscribe to the NEW OXFORD REVIEW...
...The forum for the new generation of converts is the NEW OXFORD REVIEW, a monthly magazine that takes its name from the 19th-century Oxford Movement in England...
...The cycle of debt-to-repay-debt will be broken...
...Over the last quarter century, the number of converts to Roman Catholicism slowed to a trickle...
...If he doesn't, he may find himself faced with aneven trickier problem—bailing out Communist countries that are borrowing from Western banks at a furious clip...
...Cardenas is right...
Vol. 21 • October 1988 • No. 10
