Mortgaging a house of cards
Jameson, Kenneth P.
MORTGAGING A HOUSE OF CARDS THE ETHICS OF INTERNATIONAL DEBT KENNETH P. JAMESON During the humid summer of 1983, an unenvi able Midwestern bank found itself at the cen ter of the...
...But it should also be felt in the U.S...
...Such an approach deals with the solvency and liquidity problems, and clearly indicates that the poor and middle classes of debtor countries will no longer pay the costs of adjusting...
...Until a few years ago, Peru's railroads were owned by the holders of bonds defaulted on in the 1860s...
...The debt problem is clearly a major challenge of the next several years...
...So presumably any steps to deal with the debt problem must make an assessment of who is to pay the cost, and it should be those who are benefiting from the continued existence of this house of cards...
...The present system is simply pyramiding added debt on top of the existing debt...
...The Catholic bishops pointed this out quite clearly in their recent pastoral on the economy when they called for systemic change of international economic institutions...
...Another approach would share the current adjustment costs among the banks, the debtors, and the beneficiaries of capital flight...
...It could simply be sold to pay off the debt...
...Senator Bill Bradley's plan calls for a write-down of the loans by 3 percent per year over three years, so that the actual principal amount debtors have to pay is reduced, i.e., so that there is debt relief...
...in the first case they would still have to pay the international bank, presumably on the full value of the debt...
...The banks are the biggest winners, for although they would rather 27 February 1987: 105 be out from under the loans, they are still collecting something on what were bad loans, what should have been clear losses...
...The comic strip Bloom County actually anticipated this scenario some time ago, when Opus became dictator of Bolivia, and showed how ludicrous such an option is...
...Finally, there is no reason that a major beneficiary group, such as those who engaged in capital flight, should be protected from the required adjustments...
...The recent Mexican renegotiations for example, made some concessions to Mexico, taking into account the low price of oil and a low domestic growth rate...
...This will occur only if meaningful steps for dealing with the debt problem are undertaken...
...There are clear losers as well...
...Perhaps they stole it fair and square, to paraphrase former Senator Hayakawa, but there is no justification for allowing them to hide behind the faceless "international capital system...
...on moral grounds...
...If I were president of the bank, I'd be looking over my shoulder...
...First is the question of who is to blame...
...Pemex was unable to repay, even after the loan had been extended three times...
...Nor should the banks benefit from such deposits...
...Or the loans could be swapped for assets such as plants and equipment...
...Alan Garcia, the president of Peru, has declared that his country's payments will be dependent upon Peru's ability to pay, i.e., that payments will not exceed 10 percent of export earnings in a given year...
...Whether the loans were sold or swapped for assets, there would presumably be a write-down of the loans to reflect their current value...
...The loans could be sold to a new international bank at a discount, and that bank would then be the collecting agency, insulating present lender banks from the illiquidity problems of debtors...
...27 February 1987: 107...
...I dismiss muddling through, a process which at present allows the banks to benefit while the poor continue to pay...
...This would share adjustment between banks and countries...
...The argument is that the system has functioned since the 1982 Mexican debt crisis, and that policy should concentrate on continuing this experience with or without augmented financial flows...
...banks have third- world loans greater than their capital base, meaning that nonpayment would threaten the banks' survival...
...Clearly, this is a very good reason to interfere with capital markets and to bring them an order that will allow third-world countries to undertake development efforts with some assurance they won't be frustrated by capital drain to the safe haven of the U.S...
...Nonetheless, the tying of payments to domestic economic performance is clearly going to become more common...
...However, there would be no substantial change in the situation of the debtor countries...
...This is most acutely felt by the debtors whose economies are, for the most part, in disarray...
...Other winners are the private individuals and government officials of third-world countries who now have real estate or bank accounts outside of their own country as a result of their take from these loans...
...Observers said that the bank was going to feel a lot of heat...
...Muddling through...
...and second, that the disruption of the structure should be minimized, if not avoided...
...But the bank lost, and lost big...
...But redefinition of assets has the same problems as muddling through...
...Later, ostensibly for other reasons, Michigan National's president was forced to step down, and he at one point faced penalties in the six-figure range for irregularities subsequently uncovered...
...Perhaps his problems are unrelated to the loan affair, but the story illustrates very clearly that there are big stakes in the debt game, that it is a political game, and that the whole structure resembles more a house of cards than a Gibraltar of financial security...
...President Garcia's approach has not been particularly popular internationally, and Peru is an international pariah at this point...
...Fidel Castro has suggested this approach for Latin America, while at the same time paying his own debts...
...This would call upon the beneficiaries of capital flight to bear a portion of the burden...
...to the tune of some $30 billion per year as a result of the debt...
...Repudiation, on the other hand, would be too disruptive, focusing the cost too completely on the banks, or on the American public, the lenders of last resort...
...For example, one Washington Post article indicated that Chemical Bank's loans KENNETH p. JAMESON is professor of economics at the University of Notre Dame...
...I would suggest that a combination of cost sharing and linkage to domestic performance would be the most effective and fairest approach...
...That August, the Michigan National Bank sued Citibank...
...Repudiation...
...I could make the case that the banks are to blame, that the third-world governments are to blame, that the elites of the third-world are to blame, that the OPEC countries are to blame, and probably that you and I are to blame as well...
...A better way might be to ask who is benefiting at this point from the operation of the debt game...
...As the headlines read: "Swiss Bank Jeopardized Mexican Rescue but Relented after Pressure by the IMF" (Wall Street Journal, August 13, 1986...
...If we could ascertain that, and if we could agree that there is something wrong with the game, then we could move to deal with it...
...One study by Morgan Guaranty Trust estimated that the net debt of many of the Latin American countries would essentially be zero if extreme capital flight had not occurred...
...Some write-down of the obligations of the debtors is therefore essential...
...Perhaps there should be new flows of capital from the banks and international institutions, as in the Baker Plan...
...In Catholic terms, what about sin, guilt, and punishment...
...Rather than dwell on these rather well-known matters, however, I would like to deal with three issues which relate to the moral issues and obligations that are posed by the current third-world debt crisis...
...and in the second, they would lose control over the most profitable assets in their economy...
...Citibank attempted to renew the Pemex loan without permission...
...many major U.S...
...And even if they end up selling the loans at a discount of 30 percent for Chilean loans or of 75 percent for the Peruvian loans, they are getting back more than they should have expected had the firms they loaned to gone under and the loans simply been written off, or had the respective governments simply declared the loans unpayable...
...Perhaps a decline in real interest rates will relieve the debt burden in some degree...
...Michigan National Bank sued, thereby breaking the unity of banks in "muddling through" the crisis of unpayable loans...
...The economic interest of the United States lies with a prosperous and progressing third world, particularly in Latin America...
...However, repudiation is a direct affront to the international banking system, and has not become an avowed policy, though Bolivia quietly quit paying in 1984 simply because it did not have the resources, and Nicaragua currently is not paying...
...But the need for change must be recognized by a much broader economic and political constituency...
...Redefinition of assets...
...Michigan National had bought $5 million of a loan to Pemex, the Mexican state oil company...
...Some have suggested that the debtor countries, with the collaboration of the international banking system, simply call in the foreign assets of their nationals, as England and France did during World War I. Their citizens would be paid in bonds, but would certainly bear some of the costs of the adjustment...
...As such, it is neither fair nor realistic: the debts themselves are unlikely ever to be paid, and their cost to the poor is unfair...
...Perhaps changes in commodity prices will begin to aid the debtors...
...Finally the bank, whose president was a fervent Mormon, decided that principle prohibited throwing bad money after good and refused to renew...
...My second point is to examine the various ways that the debt problem can be confronted...
...Michigan National may have been correct legally...
...Share the cost...
...Link to domestic performance...
...to Mexico were 48.6 percent of its primary capital in 1986...
...Interest rates on the debt are also to be reduced, which would give liquidity relief...
...As one put it, "I wouldn't be surprised if the auditors are there tomorrow...
...For example, in Bolivia, the most valuable asset is the national oil company...
...This article is adapted from a talk given at the Woodstock Forum, sponsored by the Woodstock Theological Center at Georgetown University...
...Redefining the assets would be preferable, only because it would increase the stability of the financial structure...
...Perhaps the industrialized countries should stimulate their economies to aid third-world exports...
...Nor does this solution solve the real long-term problem, for the unpaid interest is simply being added to the overall debt bill that remains...
...The basic facts on debt are clear: third-world debt now amounts to around $1 trillion, about half of which is in Latin America...
...But don't do anything to pull out one of the cards...
...MORTGAGING A HOUSE OF CARDS THE ETHICS OF INTERNATIONAL DEBT KENNETH P. JAMESON During the humid summer of 1983, an unenviable Midwestern bank found itself at the center of the international debt crisis...
...The Cartagena Group of Latin American debtors will meet in April in search of a coordinated plan to limit the payment in some such way...
...But that would not be a particularly useful approach...
...Their access to services such as education and health is being diminished, and there is evidence that malnutrition and infant mortality are increasing...
...Even orthodox economic advisors have questioned whether new democratic governments should be required to pay debts contracted by militarycivilian dictatorships...
...This has been the traditional way of dealing with the issue, going back in Latin America to the 1820s and 1830s...
...the Latin American countries are now exporting capital to the U.S...
...A combination of lower interest rates and their linkage to the actual possibilities of a debtor country to pay in terms of its exports, would confront both the liquidity and solvency problems at a cost which would be more acceptable to the people of the indebted countries...
...This past August, Swiss Bank Corporation balked at putting up the money for the Mexican "rescue...
...106: Commonweal Which of these options might be most desirable and effective in dealing with this massive problem, particularly in light of the moral obligations that are involved...
...There are some clear winners in the present situation...
...The poor and middle classes of the Latin American countries have seen twenty years of growth and development stripped away, as their governments have undertaken the recessionary steps the international structure requires of them...
...There are five general approaches...
...My criteria for choosing are two: first, that those who have benefited should bear the costs...
Vol. 114 • February 1987 • No. 4
