Repudiating the Past
Payer, Cheryl
Skilled craftsmen seeking work, Mexico City A FEW DOZEN COUNTRIES IN THE THIRD World owe hundreds of billions of dollars to the banks of the industrialized world. The failure of several Latin...
...Only a few exceptional countries are capable of meeting interest payments and repaying the capital.25 Capital is nearly always rolled over on maturity...
...38 (October 1959), pp...
...Business Week quotes an adviser to Venezuela's central bank on a foreign loan for a steel plant whose products would have been priced twice as high as those of the Japanese competition...
...221-28...
...First, the quantities of capital needed just to keep the system limping along are awesome...
...What Have We Learned About It," in Third World Affairs 1985 (London: Third World Foundation for Social and Economic Studies, 1985...
...In some countries, notably Mexico, Brazil and South Korea, many productive investments were made...
...2 8 The country's refusal to service its debts led the IMF to install its own man in a key position in the central bank in 1978...
...There are many problems with this scenario...
...production of goods-from 9% in 1970 to 19% in 1980-and the growth of ex"U.S...
...3 Although an extreme example, Zaire is not too different from many other countries which have been less than punctual in servicing their debts but which the U.S...
...2 1 Some of this capital flight is illegal, but much of it is not...
...One means of meeting this strongly felt imperative of the 1970s is for the less developed countries (LDCs) to be provided the development finance to permit a continuing excess of their imports over exports...
...5. On the hardening terms of aid in the 1960s, see Charles R. Frank, Jr., "Debt and Terms of Aid," in Overseas Development Council, Assisting Developing Countries (New York: Praeger, 1972), pp...
...and world exports to Latin America in the wake of the debt crisis has been noted with alarm by many...
...they benefitted from the capital inflow...
...Another debt expert was similarly pessimistic...
...They are not free to reduce exports as part of a strategy to improve their terms of trade...
...On the contrary, shortly after Blumenthal's report was received in 1981, the IMF granted Zaire what was then the largest loan ever made to an African country...
...The banks are in no better position...
...copper producers...
...He concluded that in order to keep net levels of assistance constant over the decade of the 1970s, gross lending would have to increase 200%, or 12% each year...
...HERE IS A CRITICAL DIFFERENCE BEtween normal domestic credit and international loans...
...Robert McNamara radically expanded World Bank lending as soon as he was installed as president, and exhorted governments to expand their lending as well...
...The large banks and their supporters (including the U.S...
...Elite groups including the military were, however, unwilling to accept the cutoff of credit and other forms of retaliation which often followed when a country refused IMF-style austerity...
...Zaire's government preferred to use foreign exchange to feed Mobutu's overseas bank accounts, and to import luxuries...
...In Brazil, for example, the coup which ousted the democratically elected Goulart government in 1964 coincided with a debt crisis which could be "solved" only by a radical opening of the economy to foreign investment...
...72-79, 153-67...
...Funds required to service the debt continued to mount steeply because the U.S...
...2 2 WERE THE BORROWERS SHANGHAIED by forces beyond their control, as they now complain...
...government would have us believe that the difficulties which both banks and borrowing countries have suffered in the past three years are merely temporary, the facts belie this optimism...
...As the price for its approval, the IMF demanded "austerity programs" which forbade the use of exchange and import controls designed to ration scarce MARCH/APRIL 91985 15Repor o z4 Arcas DEBT foreign exchange, and required instead reductions in workers' living standards...
...One confidential bank report disclosed that for the five years ending in 1984, Argentines sent funds abroad equal to 60% of the foreign debt incurred in the same period...
...If a country stops paying its short, medium and long-term debt, all credit is suspended and the country must pay cash for its imports...
...And the U.S...
...jobs and factories with a reverse flow of goods...
...Bankers say the practice is so common among Latin American exporters that they are known as the 15 percenters, because their trade partners routinely deposit 15% of an export's value in Miami banks...
...the borrower agreed to pay interest rates which were a fixed "spread" above the rate the bank had to pay to borrow the money, and the rates were re-adjusted 17RTeor on z4 AmeLca DEBT periodically, usually every six months (in this way the banks guaranteed themselves a source of profit which could not be eroded as long as the loan was serviced punctually...
...Loans, rather than grants, became a growing proportion of the total, and the interest rates of the loans became higher as the terms of the loans and the grace periods (number of years before capital repayments begin) became shorter...
...However, since the borrowing countries had been led to believe that they should, by right, receive substantial net inflows every year, a crisis would occur by definition when the service on old borrowing began to exceed the proceeds of new borrowing...
...banks are acting as a destablizing force-as a tool of foreign policy.' According to Ugarteche, "Banks belonging to countries that have a friendly attitude towards Nicaragua are likely to be more open...
...that will save only the bankers' profits and dividends...
...Oil-exporting countries such as Indonesia, Venezuela, Algeria and Mexico got themselves just as indebted as the oil-deficit countries, if not more so...
...defaulted on its obligations to all holders of its paper-the U.S...
...Resourceful policy-makers in the developed MARCH/APRIL 1985 countries tried to meet the crisis by expanding government-guaranteed export financing, for which commercial banks provided most of the funds...
...The banks have acted all along as if they had received some secret assurance from the U.S...
...And the future, assuming this scenario continues, holds only heavier burdens of interest and service payments...
...In return, the FDIC demanded the replacement of the institution's top executives, placing the bank in virtual receivership...
...T HIRD WORLD GOVERNMENTS, SADdled with their own debts or those contracted by previous regimes, are seriously considering partial or total repudiation...
...Paul G. Hoffman, "Operation Breakthrough," Vol...
...Many countries have in fact defaulted, some because they were unable to pay, some-as the case of Zaire illustrates-because they were unwilling to pay...
...When the Sandinistas overthrew Somoza's dictatorship in 1979 they inherited debts which included many loans incurred chiefly to purchase arms and police equipment and to pad Somoza's overseas bank accounts...
...6 The rightward turn of government was rewarded by foreign governments with a debt rescheduling and new inflows of credit, but Brazilians suffered under austerity programs which favored capital over labor and foreign over domestic capital...
...One of the many ironies of the debt tragedy is that this inflation could have allowed the more efficient Third World exporters to break out of the debt trap...
...They had also provided export finance guaranteed by their home governments...
...Ten percent," he said...
...Some suspect that even more direct encouragement and implicit promises from the U.S...
...It was a perverse variety of international Keynesianism...
...The Mexicans shipped out 43%, Filipinos, 46% and Venezuelans supplemented their borrowings with oil earnings to export more than 117% of their new foreign borrowing...
...But they are proving tough bargainers, unwilling to shoulder the entire load of bailing out the banks...
...Michael R. Sesit in The Wall Street Journal, December 3, 1984...
...A NUMBER OF COUNTRIES SUFFERED debt crises between 1956 and 1973...
...Behind the fears of credit cutoff and legal harassment from the banks, a deeper anxiety lurks...
...A T THE OPPOSITE EXTREME IS THE case of Nicaragua...
...THUS EVEN BEFORE THE OPEC PRICEhike coup of 1973-74, the essential features of bank lending to the Third World were already in place...
...IDB, External Debt, p. 20...
...Internationally, it is much more difficult to collect a loan through legal processes...
...Debt repudiation is not, in itself, the significant issue...
...Their cleverest strategy has been to suggest that a 1930sstyle crash is the only alternative to a bail-out...
...See for example the comments quoted in Cheryl Payer, "Third World Debt Problems: The New Wave of Defaults," Monthly Review, Vol...
...economy of a bailout on this magnitude are incalculable...
...T HE CONVENTIONAL WISDOM ON WALL Street, in Washington, in most of academia and even within a large segment of the Left, is that the only solution to this Gordian knot is more money from creditor governments, reinforced by close supervision of the debtor countries by the IMF and the World Bank...
...2. Domestic anti-inflationary programs, including: a) control of bank credit...
...Frank notes that "A number of countries not included in this table rescheduled some very short-term debt (less than one year maturity...
...But what few seem to realize is that this massive expansion of exports in the 1970s was almost entirely an artifact of increased bank lending to the same countries in the same period, not a byproduct of genuine development...
...32 (July 1954), pp...
...For the new borrowing strategy of mining multinationals see Theodore H. Moran, Multinational Corporations and the Politics of Dependence: Copper in Chile (Lawrenceville, N.J.: Princeton University Press, 1974...
...The sharp fall-off of U.S...
...Such programs were very unpopular with labor unions, local businesspeople and all those whose income and consumption were reduced by the austerity measures...
...instead of financing the construction of dams and highways at home, governments financed them abroad...
...Likewise, the experience of Zaire and many others shows that failure to pay debts is not a sufficient reason for unleashing retaliation on countries that are otherwise amenable to U.S...
...Exporters became dependent on an aid-financed market which did not threaten U.S...
...The World Bank and the IMF have worked hard to introduce borrowing countries to private capital markets and to vouch for the credit worthiness of favorites who are facing debt problems...
...However, the moment that the debt is updated or restructured, credit is restored almost automatically...
...the precedents are numerous...
...But the heart of the problem is that the countries have to borrow to pay part of the interest...
...3. Greater hospitality to foreign investment...
...Assuming that this unwillingness can eventually be overcome, the conseA man who was in charge of Latin American lending for one of the world's largest banks tells a story he may have invented about junior deputy assistant finance ministers of Mexico and Argentina...
...Ironically, Institutional Investor reported that these sophisticated South American capital exporters now prefer to hold their accounts in U.S...
...7 Debt Reschedulings, 1957-1969 Years in which Country payments deferred Institutional arrangement Argentina 1957 Paris Club 1961-62 Paris Club 1963-64 Paris Club 1965 Paris Club Brazil 1961-65 The Hague Club 1964-65 The Hague Club Chile 1965-66 Paris Club Turkey 1958-63 OEEC Auspices 1964-67 OECD Donor Consortium 1968 OECD Donor Consortium Indonesia 1966-67 Donor Consortium 1968 Donor Consortium 1969 Donor Consortium India 1968 Donor Consortium under IBRD leadership Ghana 1966-68 IMF Auspices 1969-70 IMF Auspices 1969-72 IMF Auspices Peru 1968-69 U.K...
...Eager to qualify for new loans-from governments of the industrial world or from commercial banks-the countries conform to austerity programs approved by the International Monetary Fund (IMF...
...It was argued that since real interest rates were actually negative, given the high inflation rate, it was irrational not to borrow...
...E XPORTERS WHO ENJOYED THE BENEfits of this international Keynesianism in its heyday are suffering now from its collapse...
...In several countries, notably the Dominican Republic last spring, protests against price hikes and wage freezes triggered riots and loss of life...
...XXVI, no...
...and -the loans were not secured by the goods they financed, as in short-term trade credits...
...after 1982, part of it), the banks must borrow these funds from other sectors of the economy...
...418-36...
...IMF programs require a reduction in wages and con- sumption, severely hurting the poorest...
...36 (July 1958), pp...
...As the decade of the 1970s came to an end and the debt burden grew steadily, a rapidly increasing proportion of the money borrowed each year had to be devoted to servicing previous debts, as the following table illustrates: Latin America: Gross Capital inflows, Debt Service, and Net Transfer of Resources, 1976-83 Gross Disbursements (Millions ofDollars) Amortization Interest Net transfer 1976 1977 1978 1979 1980 1981 1982 1983 31,387 29,812 52,638 53,326 64,336 72,069 62,421 49,630 8,551 11,791 16,913 21,108 19,475 21,426 27,758 27,760 6,643 7,711 10,870 16,745 21,128 32,527 38,545 39,051 16,193 10,310 24,855 15,473 20,733 18,116 -3,882 -17,181 Total debt service as 48 65 53 71 63 75 106 135 percent of gross disbursements Interest as percent 21 26 21 31 33 45 62 79 of gross disbursements Source: Adapted from External Debt and Economic Development in Latin America, Inter-American Development Bank, 1984, Table 4, page 19...
...What will be the response of the creditor governments, and above all of the U.S...
...The U.S...
...She is the author of The Debt Trap-The IMF and the Third World and The World Bank-A Critical Analysis...
...The crisis is real, but it will not be solved by "laundering" taxpayers' money by routing it via Rio de Janeiro, Buenos Aires and other indebted capitals...
...Anxious for a bailout, Zaire acceded...
...37 (October 1958), pp...
...Source: Martin Mayer, Op-Ed page, The New York Times, June 12, 1984...
...abolition of consumer subsidies...
...it may also be a political weapon forged outside the norms of banking...
...The problem began when the U.S...
...Only after one forgets every reasonable assumption about lending is it comprehensible that foreign banks gave credit to some of the companies they gave credit to," he remarked.'` When money was invested in such blatantly noncompetitive factories, one must wonder whether corruption was not the motivation...
...The ideology of economic development for the Third World was forged in the early postwar years, and its handbook was W. W. Rostow's The Stages of Economic Growth.' Rostow argued that all (noncommunist) countries follow essentially the same route to development, and that the more backward countries would benefit by importing capital, investment goods and expertise from the advanced industrialized countries...
...6. See Thomas Skidmore, Politics in Brazil 19301964: An Experiment in Democracy (New York: Oxford University Press, 1967...
...The floating interest rates in Third World loan contracts also rose...
...After a certain point, foreign aid, which was designed to create net inflows of capital for development, began to produce net outflows...
...assets in May 1984...
...The failure of several Latin American countries to service their debts punctually threatens to cause a collapse of several, if not all, of the largest U.S...
...This preserved for a time the net inflows-and the import surpluses they financed-but at the price of the sanctity of the loan contract...
...Using their own money to pay even part of it is felt to be a severe blow to their economies, although before 1982, most of them had paid all of their interest with borrowed money...
...The Mexican waved at the hills...
...Lord Salter, "Economic Strategy of the West," Vol...
...Business Week, October 3, 1983, p. 133...
...Ah-ha...
...a. Rescheduled arrears with major creditors except the United States...
...8. Ibid., p.31...
...It could work only as long as the countries didn't have to use their own export earnings to service their loans...
...Somehow, the U.S...
...John Deverell and the Latin American Working Group, Falconbridge: Portrait of a Canadian Mining Multinational (Toronto: James Lorimer and Company, 1975), pp...
...Nicaragua today is treated by most banks as if it had not renegotiated its debt...
...The success of the U.S...
...leadership...
...A succession of military cabinets ruled until early 1985, accomplishing what had not been possible within the Brazilian electoral system...
...XXVIII, no...
...Their calculations indicated that even if total flows rose by 8% per year, debt service would consume 60-89% of gross lending in 1977...
...36 (April 1958), pp...
...A NUMBER OF SIGNALS ARE WARNING that new capital will not be made available in the quantities necessary to "reward" good debtors in the same fashion that co-operative Third World governments were rewarded in the 1960s and early 1970s...
...In Latin America as in other parts of the world, the wave of military coups, martial law declarations and suspension of elections were closely connected with such debt crises...
...The region's exporters were now getting more for their goods, enhancing their "credit worthiness...
...interest rates were "floating," i.e...
...An OECD publication asserts that it was in the early 1970s, "essentially before the first oil shock, that the decisive increase in the role of bank lending occurred, both in absolute terms and proportionally...
...any Ponzi scheme collapses when the inflow of new money falls short of the required outpayments...
...59-68, and John Cuddy, "Assessing Liquidity Requirements of Developing Countries 1984-86," Third World Quarterly (October 1983), pp...
...56-60...
...Auspices Liberia 1963 Bilateral United Arab Republic 1967-68 Bilateral" Yugoslavia 1965-66 Bilateral Source: Charles R. Frank, Jr., Debt and Terms ofAid (Overseas Development Council, 1970), p. 27...
...But that flow of funds, and the IMF programs which enforced "free trade" policies, tended to worsen, not resolve the fundamental problem of debt buildup...
...International Monetary Fund, World Economic Outlook 1984, Occasional Paper 27 (Washington,D.C.: IMF, 1984), Table 36, p. 206...
...government aid had not increased in the 1960s...
...According to one explanation, "Stupid bankers made stupid loans to stupid countries...
...Two years later, the meeting was in Mexico City, and the Mexican reciprocated...
...This default, and the eventual adoption of floating exchange rates in 1973, removed the discipline of the gold exchange standard and ignited a lending explosion at home and abroad...
...This new form of lending had several significant features: -large loans were "syndicated," with dozens of different banks taking a slice of the pie...
...Kai Bird and Max Holland, The Nation, February 26, 1983...
...10-12...
...3. Overseas Development Council, New Directions in Development, (New York: Praeger, 1974), p. 9 7 . 4. Poul Host-Madsen, "What Does It Mean: A Deficit in the Balance of Payments," Finance and Development, No...
...I don't see any dam...
...The credit expansion financed a massive expansion in world trade, and as long as the system continued to expand, all the major players were happy...
...In any case, they say, countries must service the debt because failure to do so will lead to a refusal of new funds which are essential for development...
...The system is inherently unstable, and it was al- ready in crisis by the end of the 1960s...
...If we go, we're taking your savings and your jobs with us," they threaten...
...Not only the Third World, but the United States itself was in a debt crisis at the beginning of the 1970s...
...Instead, sovereign lending was guaranteed only by the future income stream of the borrowing government-export earnings or more borrowing...
...It was instead governments and the international institutions they controlled, the IMF and the World Bank, who borrowed from the cash-rich oil exporters and lent to the impoverished oil importers...
...It was perfectly legal to export dollars from Argentina, Mexico and Venezuela before these countries imposed exchange controls in the wake of their debt crises...
...This inflexible demand for (mostly) dollars keeps the value REPORT ON THE AMERICAS 20of the dollar and dollar interest rates high, regardless of other economic forces...
...The U.S...
...exports to the region...
...On the other hand, when all but two Latin American nations defaulted in the 1930s, the United States sent no gunboats, directing instead the Export-Import Bank to finance U.S...
...Because the banks have been lending the countries money to pay interest back to themselves (before 1982, all the interest...
...4 In fact, the "oil shock" was only one of the traumatic events which fed the explosion of bank lending in the 1970s...
...Part of their legacy is the region's looted credit which they have tossed to their democratic successors like a grenade with the pin pulled...
...Variations on this scenario occurred throughout Latin America and the Third World...
...Military and other forms of retaliation certainly cannot be ruled out...
...There are compelling economic arguments in favor of repudiation, but economic arguments are not always decisive...
...Two years later that official, Erwin Blumenthal, resigned in frustration, reporting to the fund that "sordid and pernicious corruption" was so serious that "there is no chance, I repeat, no chance that Zaire's numerous creditors will ever recover their loans...
...Neither military governments which implemented IMF schemes nor their domestic allies suffered austerity...
...And in their rush to make profitable loans, bankers sabotaged the very credit worthiness that attracted them...
...But examined carefully, it seems that default and repudiation are at most pretexts, rather than serious reasons, for such punishment...
...Foreign aid was a cornerstone of this approach and was supposed to help these countries come to the point of "takeoff" into self-sustaining growth...
...dollar-when Nixon reneged on the pledge made at Bretton Woods to keep the value of the dollar equal to that of 1/35 of an ounce of gold...
...9 Direct investment, the other major source of foreign capital, was on the decline...
...The banks do not care, as long as interest continues to be paid at market rates...
...Congress and taxpayers are extremely unwilling to come up with even small sums of extra money, let alone the many billions that would be required to grant even short-term relief...
...Every dollar of debt service paid to banks is a dollar that is not available to pay for imports...
...The extremely low price of copper-exported mainly by heavily indebted Chile, Peru, Zambia and Zaire-is one example which has drawn desperate protests from U.S...
...political and commercial policy toward the Third World for the last 40 years...
...But as the old adage holds, bankers lend only to borrowers who don't need the money...
...Nor do the borrowers see any advantages from the new accumulation of debt, which goes entirely to pay for part of the interest due...
...Their industries have become dependent on running an export surplus, and accepting instead the import surpluses which debt builddown implies would cause a crisis of production and employment...
...Outright repudiation, however, is more likely to occur as a byproduct of thoroughgoing political changes, a step taken by a debtor wishing to make a political statement...
...Hyman Minsky, Can "It" Happen Again...
...exports during the 1970s, the growth of exports as a proportion of total U.S...
...c) control of wage rises, so far as within the government's power...
...The borrower's need for a continued good relationship with the creditor is the latter's best guarantee that any loan will be serviced and eventually repaid...
...The borrowing countries reap no benefits from their new trade surpluses, won only by painfully cutting consumption and halting all new investment...
...Countries, as well as individuals, corporations and municipalities were encouraged to borrow...
...In no case could they solve the fundamental problem, and the sums required to buy temporary relief for even a decade are probably beyond the capacity of the present system...
...W HY DID THE BANKERS MAKE SUCH huge loans which turned out so badly...
...Ibid., p. 57...
...Z AIRE AND NICARAGUA ARE TWO EXtreme examples...
...In Argentina, the figure was nearly 150...
...As a U.S...
...The percen- tage of gross new lending eaten up by debt service in 1965-67 had reached 87% in Latin America, and would exceed 100% by 1977 for most areas of the world-unless gross flows were radically accelerated...
...They were even encouraged to believe that the process of development virtually required such an unbalanced flow of goods and capital...
...State Department official explained, "it is not MARCH/APRIL 1985 0 C t nl 23Repo44 rT O4 Ame DEBT in our interest to contribute, directly or indirectly, to destabilization" in Zaire...
...The purpose of such austerity programs was to reduce domestic consumption, freeing resources for export so that hard-currency export earnings could be applied to the debt service...
...Christine A. Bogdanowicz-Bindert and Paul M.Sacks, "The Role of Information: Closing the Barn Door...
...Worse yet, it is treated as if it was not currently meeting its obligations...
...Banks have been able to keep nominal interest payments up to date only by increasing exposure to these extraordinarily dubious credit risks...
...They are forced to lend their debtors new money with which to pay interest on the old debt-money which could MARCH/APRIL 1985 21DEBT otherwise be lent to new borrowers...
...A trader from a Third World country-with the collaboration of foreign suppliers or customers-prepares inflated invoices for the goods he imports or underpriced invoices for the goods he exports...
...The obstacle is that the costs have become so great that the major players cannot agree on how to divide them...
...Government sanctions against a country-economic, political or militaryare apt to be used when the United States is displeased with a country's political changes...
...For accounts of the dependence of capitalism on credit-created demand see Alexander Paris, The Coming Credit Collapse: An Update for the 1980s (New York: Crown, 1980...
...He made a gesture with thumb and forefinger...
...Jorge Sol, "Origins of the Crisis," Summary Report of Meeting on the International Debt Crisis, Washington, D.C., September 26, 1984...
...The debt problem cannot be understood in isolation from the totality of U.S...
...63-4...
...Ponzi schemes, named after an early twentieth cen- tury con man-Charles Ponzi, the "Boston Swin- dler' '-are phony investment schemes which do not build real wealth but depend on new investors' de- posits to pay dividends to earlier investors...
...International Herald Tribune, December 31, 1979...
...Edward S. Mason and Robert E. Asher, The World Bank Since Bretton Woods (Washington, D.C.: Brookings Institution, 1973), pp...
...Although the banks and the U.S...
...Congress became weary of grant aid and insisted on repayment of their appropriations on steadily hardening terms...
...16 REPORT ON THE AMERICASI T HE WHOLE SYSTEM WAS BASED ON what economists call "Ponzi financing...
...31-45...
...UT THE FINEST IRONY OF ALL IS THAT commercial bankers came in near the end of the confidence game...
...525-40...
...Analysis suggests that a crisis was inevitable in any case...
...government does not wish to destabilize: the Philippines, Chile, Uruguay, Brazil, Mexico and others...
...For one, banks have tended to lend the most to regimes which are friendly to their home governments...
...They were to be disappointed...
...Some governments and opposition movements are toying with an attractive variant of repudiation, under which they would advise creditors to help themselves to the "capital flight" funds stashed abroad by corrupt leaders...
...Cheryl Payer is a political economist based in New York City...
...If conditions after 1979 hastened the crisis, it is also true that conditions up to that year had succeeded in postponing it...
...200-01...
...citizens...
...and other Western governments must provide or guarantee the funds necessary to ensure debt service and development investment in the Third World...
...Even so, a handful of countries have fallen behind...
...After some internal debate (and, rumor has it, some advice from Fidel Castro), the new government decided not to repudiate the debt, negotiating instead with its creditors for better terms...
...In the year preceding the big Latin American defaults, the gross lending first leveled off and then declined as lenders began to find the U.S...
...Ibid...
...M.F.Millikan and W.W...
...Debt service theoretically consumed the equivalent of 64.6% of export earnings of all Latin American countries in 1983...
...The new manufactured exports of countries like Brazil and South Korea also suffered as recession in the U.S...
...Home turned out to be the penthouse of the fanciest condominium in Buenos Aires, where the Mexican found an elegant group nibbling Iranian gray caviar and drinking Dom Perignon...
...On debt and the strong dollar, see Ivor F. Pearce, "Dollar's Fate Linked to World Debt," Asian Wall Street Journal, November 5, 1984...
...One hundred percent...
...You see that bridge over there, over the river...
...As cited in Edward S. Mason and Robert E. Asher, The World Bank Since Bretton Woods...
...market depressed demand and provoked protectionist tendencies...
...The money, most of which was borrowed by governments, flowed back to the industrialized countries in assets held by private citizens and corporations...
...Bank lending to the Third World expanded throughout the 1970s, although not at a steady rate...
...2 4 And this does not even refer to the amount of money needed for total debt service-interest plus amortization-at any rate, a mythical figure...
...b) reduction of the government deficit: curbs on spending...
...While the banks did increase their lending after the oil shock, the money did not go to the countries most damaged by the higher oil prices...
...We may well have come to the end of the post-World War II era in economic relations with the Third World, and serious choices lie ahead...
...References REPUDIATING THE PAST 1. W.W...
...4. Reduction of arrears on foreign debt...
...The reality was different...
...Oscar Ugarteche, an adviser on debt problems to several Latin American governments, has stated: There is an understanding between banks and countries...
...29 Zaire's problem was not a lack of foreign exchange, but a low priority assigned to debt service...
...The undeclared war against Nicaragua demonstrates that honoring the debt is not enough to defuse hostility...
...The defection of Algeria and Nigeria-both large debtors-from OPEC's late 1984 efforts to brake the decline in the price of oil is another...
...Do you see that V where the river cuts the mountain...
...The commonly accepted view of the debt crisis is that it began with the accumulation of "petrodollars" in the hands of lenders and the borrowing countries' need for loans to finance high-priced oil imports...
...If such relief from the creditors does not arrive soon, repudiation is definitely on the agenda...
...Both multinational corporations and host countries were beginning to find borrowing from banks more convenient, in the short run...
...The proposed solutions-more money to lend and IMFWorld Bank supervison-are precisely the factors which have brought the Third World to this current crisis because they were applied as panaceas in past debt crises...
...The two became friends in Buenos Aires, and the Argentine invited the Mexican home for dinner...
...Neither were they to be serviced by income from a specific source, as in funding for a mine or a factory...
...See for example, Charles Stabler, "Uneasy Money," The Wall Street Journal, May 21, 1973...
...Partners in Development, the 1969 report of the World Bank's Pearson Commission reveals a glimpse of a debt load hurtling toward imminent crisis...
...Foreign aid became a bottomless hole, and the amounts of taxpayers' money necessary to keep the system going rose steadily...
...He was shown the Black Angus cattle, the thoroughbred stable and the Roman bath, then he joined festive company in the formal gardens...
...d) dismantling of price controls...
...2 And even before the "oil shock," thoughtful analysts and bankers themselves were questioning whether the loans would ever be paid...
...In the late nineteenth and early twentieth centuries, gunboats were used to collect debts owed to U.S...
...government that such lending was in the national interest, and have assumed that they could expect a bailout...
...Food for Peace," Navarino Island, Chile ports to oil-importing Third World countries as a percentage of total exports in the same period...
...In the 1980-81 renegotiations, the new Nicaraguan government succeeded in winning what is by far the most lenient debt settlement in recent yearsinterest "capped" at 7% and a five-year grace period on principal repayments-because the creditors knew that repudiation was the alternative...
...government smoothed the way for bank lending, but proof of this may have to await the confessions of those directly implicated...
...But they will certainly exact a heavy price for such leniency: the continuation of the same international system which has produced the explosion of debt...
...Each year's new lending adds to the total debt on which interest has to be paid the following year...
...As James P. Grant, then president of the Overseas Development Council, wrote in 1974, "Virtually all developed countries insist on trade surpluses...
...3 Conversely, the aid recipients were encouraged to believe they could import more goods than they could pay for with export earnings by "importing capital...
...90104...
...bombed & mined by the CIA, 1980s The taxpayers' representatives in Congress succumbed to this threat of financial collapse when they increased appropriations for the IMF in 1983...
...B UT THE NECESSARY QUANTITIES OF new soft aid just were not there...
...Sharpe, 1982...
...Treasury Secretary Donald Regan when he lobbied Congress in 1983 for larger appropriations for the IMF...
...Glimpsing imminent collapse, the Federal Deposit Insurance Corporation (FDIC) arranged a $4.5 billion bailout package for the Chicago bank...
...Business Week, in a special report, estimated that in the three years 1980-82, a "staggering" $71 billion was spirited out of seven of the world's largest debtors (Mexico, Argentina, Venezuela, Indonesia, Egypt, the Philippines and Nigeria) even while their combined debt rose by $102 billion...
...109-19...
...Cheryl Payer, The Debt Trap: The IMF and the Third World (London: Penguin, 1974), chapter 7. 7. Frank, Terms of Aid, p.34...
...Rostow, The Stages of Economic Growth: A Non-Communist Manifesto (Cambridge, England: Cambridge University Press, 1960...
...It is probable that the creditor governments will eventually take more radical steps than they have so far to alleviate the burden of debt service, because they understand and fear the probable political consequences of not doing so...
...Indeed, some economists believe that the high interest rates and low export earnings Third World borrowers complain about are themselves caused in part by the debt overhang...
...Lenny Glynn and Peter Koenig, "The Capital Flight Crisis," Institutional Investor, International Edition (November 1984), pp...
...The only other choices are a massive repudiation by the debtors, or partial forgiveness by the creditors...
...One of the major "uses" of the borrowed money was capital flight...
...For a good discussion of external factors which exacerbated the debt crisis, see Inter-American Development Bank, External Debt and Economic Development in Latin America (Washington, D.C.: IDB, 1984), chapter 3. 23...
...The second objection is more fundamental...
...Organization for Economic Cooperation and Development, Development Cooperation (Paris: OECD, 1983), p. 53...
...capitalism has become so dependent on sales financed by the expansion of credit-in all sectors of its domestic economy as well as abroad--that it is hardly exaggerated to say that its very survival is in question.2 7 It is overwhelmingly in the interest of the major actors-the commercial banks, the banks' home governments and the borrowing countries-to wipe out the accumulated debt, at least partially, so that the old game can resume...
...2. For justification of this aid program as it was being constructed, see the following articles in Foreign Affairs: W. Averell Harriman, "Leadership in World Affairs," Vol...
...9. On the crisis see Pearson Commission Report, Partners in Development (New York: Praeger, 1969), pp...
...If a bank bailout is needed, it should be done directly, forcing bankers to take the punishment, as the virtual nationalization of Continental Illinois nicely illustrates.* "*Rumors about shaky loans led to a global run on Continental Illinois...
...9 (February 1975...
...61832...
...The drying up of bank credit is sometimes a normal commercial reaction to losses or the fear of Standard Components of an IMF Austerity Program: 1. Abolition or liberalization of foreign exchange and import controls...
...The Nicaraguans were eager to come to an agreement with the banks, hoping that they would avoid punitive sanctions by recognizing the debt and submitting to the usual renegotiation procedures...
...losses...
...He then collects and deposits the difference between the real and phony price outside the country...
...The Mexican said to his new friend: "You are a junior deputy assistant finance minister...
...For more on the IMF, see Cheryl Payer, "The IMF in the 1980s: What Has It Learned...
...Rostow, "Foreign Aid: Next Phase," Vol...
...Heavier taxes and rapid inflation are the very least that can be expected...
...The system of perpetual one-way capital flows which has kept exporters happy and recipient governments compliant since it was constructed in the 1950s is crumbling, as could be expected if that capital flow was also supposed to generate reverse flows...
...As one expert noted, "Liberal and continued renegotiation of rescheduling of debt may undermine the legal and institutional framework which ensures that payments on international debt are treated as serious contractual obligations and which encourages the flow of capital from rich countries to the poor...
...In addition, the political instability fomented by regressive IMF austerity programs has probably encouraged capital flight to countries perceived as more stable, such as the United States...
...Congress had become suspicious and increasingly reluctant to appropriate new funds for "foreign aid...
...But even when the money was inREPORT ON THE AMERICAS DEBT 18vested in mines and factories, it was not all spent efficiently...
...quences for the U.S...
...The Paris and Hague Clubs were groups of creditors who met in Paris and in the Hague...
...Banks that originate in countries with a bad relationship with Nicaragua tend not to have any relationship or want any relationship with the country...
...said the Mexican triumphantly...
...9-21...
...The sheer attempt to service the debt has led to severe hardships for the populations of those countries...
...The borrowing countries' demand for foreign exchange to service debts means that they are forced to export whatever they can at whatever price they can get...
...But it provided a bonanza market-fueled by government money-for the firms which exported goods and services to the aid-receiving countries...
...L ENDING TO THE THIRD WORLD DID not begin with the banks, and many countries suffered debt crises before they made headlines in this decade...
...Banks: Skating on Thin Ice," Monthly Review, Vol...
...The banks themselves determined the year of default...
...The region's military rulers, their personal assets stored safely abroad, are now handing over power to civilians...
...It is important to remember, however, that government aid and loan programs, and governmentguaranteed official credit also expanded throughout this period...
...fight against inflation dealt another heavy blow to Third World borrowers as prices on their export commodities plummeted...
...higher interest rates and perhaps higher reserve requirements...
...different commodity prices and interest rates could only affect the timing...
...41 (October 1962), pp...
...W HERE DID THE BORROWED MONEY go...
...This lending in turn fed a general inflation, driving up the prices of Third World exports...
...The rapid growth of unguaranteed bank credits has been offset by the diminution of the share of direct investment...
...It cannot be solved within the basic assumptions of that system...
...Zairean President Mobutu Sese Seko is widely believed to be one of the most colossal grafters of all time...
...The explanation for the decline in exports from the United States to Latin America since 1982 is very simple: bank lending has fallen and debt service has gone up...
...This point was argued by U.S...
...White Plains, NY: M.E...
...REPORT ON THE AMERICAS 22Nicaragua's Corinto port: modernized & expanded with World Bank funds, 1960s...
...In the major borrowing countries, the debt is crippling economic development...
...government and, significantly, the IMF, have shown no hostility...
...Thus far the banks have been able to bluff governments and borrowers into paying most of the nominal costs...
...government, to a repudiation by the debtor countries...
...3 (September 1966), p. 174...
...An even more explosive inflation rate in the future is the only condition that would allow the borrowers to service their debt without pain...
...OECD figures indicate that private, commercial investment in the Third World has remained almost static as a proportion of total capital flows (about one-third...
...54-68...
...Oscar Ugarteche, "Nicaragua: The Risks of Renegotiation," in Jill Torrie, ed., Banking On Poverty (Toronto: Between the Lines, 1983), pp...
...Others believe that the situation is more serious, that the political strains caused by the demands of crisis management in the Third World threaten to bring political chaos...
...814-27...
...foreign aid programs have always been an amalgam of export promotion, anti-communism and humanitarianism, both genuine and bogus...
...The U.S...
...Any attempt to finance large capital flows to an average LDC over a period of 10 to 20 years, except on soft terms, results in debt service payments which soon threaten to become unmanageable...
...The era of negative real interest rates was a thing of the past, while the debts contracted in that era still hung over the world economy and fed on themselves through interest compounding...
...Vol...
...regional banks, avoiding the large banks which have been seriously weakened by the dubious loans extended to Latin governments.20 F ALSE INVOICING IS ONE WIDELY USED method of capital flight...
...2 3 Commodity prices are depressed and will remain so as long as the debt mountain remains...
...Dazzled, the young Argentine repeated the question that had been asked of him...
...5 Interest and principal payments mounted yearby-year, consuming an ever larger proportion of the new aid inflows which in turn had to be repaid with interest...
...Do you see the dam on the river...
...Federal Reserve, in a radical change of policy after 1979, forced interest rates sharply higher in an effort to stop inflation...
...The Argentine was picked up by a Mercedes limosine and driven up into the hills, out of the smog, to a glorious ranch...
...How can you afford this...
...Federal Reserve Board, which is supposed to regulate banks) assert that the difficulties of the early 1980s are only temporary liquidity problems which are almost "solved...
...The sys- tem works only as long as it expands steadily-in other words, as long as the con men can find new suckers willing to invest...
...The Argentine took him over to the terrace...
...On interest rates and the debt, see Paul Fabra, "General Indebtedness Keeps Rates Up," The Wall Street Journal, December 15, 1983...
...By the late 1960s, however, "sovereign lending," a new form of loan, had been invented and was becoming a fad with the banks...
...increases in taxes and in prices charged by public enterprises...
...MARCH/APRIL 1985 19Curundu shantytown, Panama City, 1981 ALTHOUGH A NUMBER OF SMALLER countries (such as Peru, Zaire, Jamaica) had experienced debt servicing difficulties in the 1970s, the big debt crisis broke in 1982 as Argentina, Mexico and Brazil all fell into technical default on their payments...
...This resulted in a crisis of democracy in many countries, as electorates were unwilling to endorse governments which implemented such unpopular programs...
...Barbara Ward Jackson, "Foreign Aid: Strategy or Stopgap...
...Repudiation would only be a symptom of these changes...
...in Richard E. Feinberg and Valeriana Kallab, eds., Uncertain Future: Commerical Banks and the Third World (Washington,D.C.: Overseas Development Council, 1984...
...As a condition for the rescheduling of their repayment obligations, they had to go to the International Monetary Fund to borrow money and, even more important, to get its "seal of approval" which would unlock larger amounts of new finance from governments and private lenders...
...The only condition that might have postponed the crisis further was an extension and intensification of the explosive inflation of the 1970s...
...Two attempts to calculate the quantities needed are in IDB, External Debt, pp...
...Sir Robert Jackson, "An International Development Authority," Vol...
...Furthermore, he concurred with the Pearson Commission conclusion that it was imperative for the new money to be loaned on soft terms...
...The boom in commodity prices in the early 1970s must have played a large role in alleviating bankers' worries about the soundness of their Third World loans...
...And the debt feeds on itself...
...2 THESE AID PROGRAMS LED TO A PERmanent interdependency of exporting industrial nations and importing "poor" countries of the Third World...
...In reality, some of this debt was rescheduled, and new money was lent to help pay part of the rest...
...and European banks had long been financing the Third World's international trade, as well as projects undertaken by their corporate clients...
...If such massive sums are not forthcoming, and major borrowers do not repudiate the debt and somehow manage to begin to reduce the burden, other problems loom for the industrial nations which constructed this system...
...Darrell Delamaide, Debt Shock-The Full Story of the World Debt Crisis (Garden City, NY: Doubleday, 1984), pp...
...One of the major objectives of the International Monetary Fund is to remove government restrictions on international capital movements by private citizens, thereby contributing to this flow of capital by making it legal...
...Within a country there are legal remedies available to a lender when a borrower does not repay a loan...
...The large banks heartily agree there is a need for government aid to borrowing countries (which would help to resREPORT ON THE AMERICAS 14cue their own assets), and are confused and frustrated by the resistance of Congress and taxpayers to provide such funds in the vast quantities required...
...One of the greatest political issues of our time is the question of how to handle this crisis...
...market more attractive...
...An official 1966 IMF publication confirmed that "aid to developing countries constitutes a continuous source of financing . . . therefore, the recipients are not expected to adjust their balance of payments to do without the aid as were the European countries during the immediate postwar period...
...4 (September 1976), pp...
...By penalizing the successful countries and rewarding those who fail to meet the debt service obligations, the incentive for good performance is weakened...
...U.S...
...He presented charts illustrating the very rapid expansion of U.S...
...4 But Marshall Plan aid to Europe had been mostly nonrepayable grants...
...Brookings Institution, 1973), p. 224...
...Even so, IMF statistics show oil exporters borrowed significantly more relative to their export earnings and GNP than did the oil importers...
...U.S...
...In the global version of this con game, when the supply of fresh capital dries up, a country has no incentive to pay debt service on the old loans and repudiation becomes an attractive alternative...
...They saved-temporarilythe official "aid" system from its breaking crisis, but the new money which they provided was lent on terms that were even harder than the non-concessional official "aid" flows...
...The information about borrowers was limited and flawed, and under the pressure of excess liquidity-"too much" money-and intense competition, bankers did not pay much attention to the data that was available.' 6 But there is another factor to be considered, although thus far the evidence is only circumstantial...
Vol. 19 • March 1985 • No. 2
