Going for Broke?
Watkins, Alfred J.
"Cautious optimism," IMF/World Bank meetings, September 1984 AS BANKERS AND FINANCE MINISTERS convened in Washington, D.C. last September for the IMF and World Bank's joint 1984 meetings, the...
...All this takes time, but for the banks, time is the one resource that is in critically short supply...
...And this happens even though loans to the government sector were kept within safe and prudent bounds and loans to the most creditworthy private sector borrowers were invested only in productive, profitable assets...
...The borrower simply goes to the central bank, converting his pesos or cruzeiros into dollars, and remits those dollars to his banker...
...Therefore, he concludes, "the debt will indeed be manageable and . . it would be counterproductive to adopt, out of unnecessary panic, sweeping debt reform measures...
...Redeploying resources on such a massive scale takes time...
...Unfortunately, this increases the vulnerability of the international financial system, for two reasons...
...See "Ecuador Says It Wants To Restructure Debts Owed To Governments," The Wall Street Journal, June 5, 1984...
...Argentina's ability to get so much new money is stark proof of how little leverage the banks really have...
...last September for the IMF and World Bank's joint 1984 meetings, the mood was one of cautious optimism, in marked contrast to the doom and gloom which pervaded the two previous annual meetings...
...The answer became clear last December, when the banks announced that Argentina would be given an additional 12 years to repay its bank debt, $4.2 billion of new loans from a consortium of 320 banks and $1.6 billion from the IMF...
...and Henry S. Terrell, "Bank Lending to Developing Countries: Recent Developments and Some Considerations For the Future," Federal Reserve Bulletin, Vol...
...international banking all have outstanding loans at least equal to their stockholders' equity, and, in many cases, the amount is much greater...
...34the 1980s is now in the hands of a few government officials in Rio and Buenos Aires...
...Thus it is not surprising that such sharp cuts in imports resulted in equally sharp cuts in the resources available for sustaining economic growth and standards of living...
...As the IMF points out in its 1984 World Economic Outlook, "What is crucial is not the current foreign exchange-earning ability of a country but its future prospects...
...For more than a year, the market had been pummeling bank stocks, in many cases pushing stock prices far below book value...
...The banks are now finding themselves hoisted with their own petard...
...GOING FOR BROKE...
...In virtually every case, imports are down sharply and exports are rising...
...If, as the bankers believe, the crucial variable is a country's capacity to earn dollars to pay interestand not some measure of project feasibility, it is not at all intuitively obvious that Citicorp's Walter Wriston and Chase Manhattan's David Rockefeller are the blunderers their critics make them out to be...
...With a little belt tightening, the banks explain, every debtor nation can slash imports and increase exports...
...41RDEBT 04o t4 Aerca DEBT and not some predetermined interest rate...
...The Blues At Manufacturers Hanover," The New York Times, October 14, 1984...
...Latin American officials have never claimed that their economies do not have the re- sources needed to produce the required trade surplus, only that doing so will be politically intolerable and economically disastrous...
...Banks would be hard-pressed to find many Fortune 500 companies that are so well capitalized and such sound risks...
...IDB, External Debt, Statistical Appendix 2. 17...
...A delay of even one day can do severe damage to a bank's bottom line, converting an otherwise profitable quarterly earnings report into a financial disaster...
...In a letter to Jacques de Larosibre, managing director of the IMF, then Economics Minister Bernardo Grinspun stated that "there is no question of nonpayment," but then went on to explain that the government has "decided to limit the volume of such payments to the resources available to it from exports, without reducing imports below the volume essential to maintain" satisfactory rates of investment and economic growth.26 Exactly what the Argentines had in mind was clarified a few pages later...
...In other words, nearly 85% of the increased debt represents borrowing to pay interest...
...3 Overall economic growth followed the same downward trajectory...
...But by 1982, in the midst of the worst post- war recession, there was a trade surplus of $9.7 billion and in 1983 of $31.2 billion...
...Accordingly, SELA recommends that Latin American debtors dedicate no more than 15% to 25% of their export earnings to servicing the debt...
...Trade Credits: Short-term loans granted either by banks, industrial corporations or government agencies to finance the purchase of specific goods...
...The exports will not be used to purchase needed imports and the resources consumed in the export sector will not be available to produce goods and services for domestic use...
...Beyond that, as is the nature of any Ponzi scheme, banks are going deeper in debt to fund loans which allow Third World borrowers to go deeper in debt...
...To the directors of the big money-center banks, this conclusion was a much-needed public relations triumph...
...After Argentina has satisfied its domestic needs, the banks can have whatever is left over, in this case only 13% of the additional export revenues...
...See for example, Leonard Silk, "Ending Latin Debt Crisis," The New York Times, May 2, 1984...
...Interest payments are now consuming an inordinate amount of export earnings...
...This past May, in a speech before the New York Society for International Affairs, Aldo Ferrer, former Argentine finance minister and current adviser to President Radil Alfonsin, stated the issue succinctly...
...The other major banks rounding out the top echelon of U.S...
...Borrowing to pay interest was the modus operandi in Brazil even before the 1979 jump in interest rates, the second oil price increase and the most recent recession-the usual explanations given for the onset of the debt crisis...
...24 For over a year, Latin American debtors have been trying to give Western governments an answer...
...Book Value: The face value of a bank's outstanding loans, for example, a $100 loan to a bankrupt borrower has a book value of $100 even though if the bank tried to sell the loan to another investor it would receive much less...
...Concern About Quality of Loan Portfolios of Many Major Banks is Likely to Increase," The Wall Street Journal, October 4, 1984...
...It requires banks to keep lending more money so that debtor nations will have enough cash on hand to keep paying interest on their old loans...
...Claiming that loan officers did not carefully evaluate each project also misses the point and, from a banker's perspective, displays profound ignorance about the type of risks inherent in domestic lending as opposed to international lending...
...755-63...
...Harold Lever et al., The Debt Crisis and the World Economy (London: Commonwealth Secretariat, 1984), chapter 2...
...Commercial Paper: A short-term corporate loan made by an individual or another corporation...
...Borrowing merely changes the timing-not the volume-of the resource drain...
...Beside feeling more financially secure, bankers also felt personally vindicated...
...SELA's constitution states it is a "permanent regional agency for joint consultation, co-ordination, co-operation and economic and social promotion...
...See for example, S. Karene Witcher, "Mexico, Volcker Allied on Debt Strategy," The Wall Street Journal, May 29, 1984, which reports, "Sources familiar with the Fed's strategy say it wants to reward countries with generous repayment terms if they follow strict economic austerity plans and stay current on their bank payments...
...Top management will be cashiered...
...banking system in REPORT ON THE AMERICAS Alfred J. Watkins is an economist working in Washington, D.C...
...All they need is time to make the necessary economic adjustments and the political determination to use the newly generated trade surplus to pay interest...
...This MARCH/APRIL 1985 43REo04T on t4 Amrcas DEBT gave Mexico immediate short-term relief, but only at the expense of a vastly bigger repayment burden in 1987...
...The chance that they will boycott an entire continent following a generalized debt moratorium is virtually nil...
...Foundry equipment, machine tools and electric turbines are capital goods...
...Thus, calls for lower interest rates and other forms of debt relief are met by bankers with steely eyed hostility...
...Therefore, if the banks' divide and conquer strategy is not to be exposed as a hollow threat, they will have to argue that the less co-operative debtors neither deserve to have their old loans rescheduled nor to get new loans to finance their continuing current account deficits...
...Inability to pay interest due to a shortage of foreign exchange-known as transfer risk--can transform "good loans" into virtually worthless IOUs...
...Exposure: The amount of loans that any lender has outstanding to a given borrower...
...In the first place, it is not entirely clear that, in this instance, punishment is even a meaningful concept...
...5. For some of the clearest and most forceful statements of this view see the testimony of William S. Ogden, vice chairman, Chase Manhattan Bank, William H. Bolin, vice chairman, Bank of America and George J. Clark, executive vice president, Citibank, all in U.S...
...Debt Service Ratio: The ratio of debt service payments (i.e., interest plus principal payments) to a nation's exports...
...9. "The Creditors' Club," The Wall Street Journal, June 20, 1984...
...Their analysis is based on the assumption that default will provoke a total credit blockade of the offending countries...
...C. Edward McConnell, "Argentina-Throwing Good Money After Bad," Keefe Bank Review (New York), October 4, 1984...
...Then U.S...
...As the price of its exports rose, making it easier to generate a given amount of export revenues, the percentage that would be paid to the banks would rise accordingly...
...HE PRECEDENT ARGENTINA IS TRYing to establish is quite radical...
...If, on the other hand, being a compliant debtor promises only years of additional pain and very few rewards, the incentives to adopt a more militant posture will increase dramatically...
...Aldo Ferrer, Debt, Sovereignty and Democracy in Latin America, Speech presented at the New York Society for International Affairs, May 10, 1984...
...Latin America's Gross Domestic Product, a measure of the region's total production of goods and services, fell 5% in real terms in just two years...
...No U.S...
...Even if the hypothetical penalties are doubled, the general conclusion is the same: repudiation would still be an attractive option for Argentina, Brazil and Venezuela...
...As it becomes increasingly evident that the solutions applied over the past two years by the banks and the IMF cannot possibly alleviate the debt crisis, Latin American governments will be impelled to embrace policies like those recommended by SELA...
...press was unmistakable: the banking system is not balanced on a knife-edge, collapse is not imminent, and the financial experts have the situation firmly in hand...
...3 6 This defiance, coupled with the recent Mexican and Argentine debt reschedulings, are vivid reminders of how rapidly the banks' bargaining power is eroding...
...Without some agency to monitor and limit the total foreign currency liability of every public and private entity in a country, one bank's loans will wreak havoc on the loan evaluations and collateral of its competitors...
...According to figures released by A.G...
...In the days before the crisis hit the front pages, it seemed as if bankers didn't want to let trivial concerns about repayment stand between them and a customer who wanted money...
...Yet when the time came to pay interest, the subsidiary defaulted...
...Also see "The War of Nerves Over Latin Debt," Business Week, June 18, 1984, pp...
...But when push came to shove, precisely because it had been so ornery, Argentina walked away from the bargaining table with a better deal than Mexico which was given more time to pay, but not more money with which to pay...
...Yes, they admit, there may be individual cases of bad management or just plain stupidity...
...In the case of Argentina, for example, Cline estimates that interest payments will consume at least 50% of its export earnings throughout the rest of the decade...
...Michael Moffitt, The World's Money (New York: Simon and Schuster, 1983), chapters 2 and 4. 4. See Lawrence Rout, "Bank Responsibility for Mexico's Woes," The Wall Street Journal, October 22, 1982, which quotes one banker: "We don't get promoted for not making loans...
...A country, just like any other borrower, is bankrupt when its liabilities exceed its assets...
...Today, banks and the IMF are locked in a symbiotic relationship...
...But top bank officials are paid six-figure salaries precisely because they are supposed to be able to get the money back with interest...
...Brazil (44...
...In order to launch the "go-go" environment of the 1970s, banks exploited loopholes in federal regulations designed to limit the amount of money they are permitted to lend any one borrower...
...Instead, their current account deficit would shrink, for the simple reason that interest payments, the one item looming largest in the current account balance, will also be shrinking...
...Will the banks refuse to play ball with the less compliant big debtors...
...Its adjustment programs serve as bond covenants...
...Instead, all the additional output will be sold overseas and the proceeds turned over to the banks in the form of interest payments...
...Reschedule: To revise or postpone dates on which capital repayments are supposed to be made...
...Central Bank: The "bankers' bank," the central government authority charged with managing a nation's currency, protecting its value and regulating the growth of the money supply...
...But as the Latin Americans begin to examine the effects of more borrowing and more exporting on their long-term development prospects, neither option appears to be particularly attractive...
...The result was a veritable frenzy of lending as credit officers, loan documents in hand, pursued any Latin American official willing to sign on the dotted line...
...Every penny they receive will be laundered through the debtor nation's treasury and returned immediately to the banks in the form of interest...
...Equity Capital: The value of the stockholders' investment...
...Argentina paid its suppliers $2 billion at the same time that it was balking at making much smaller payments to the banks...
...To their chagrin, they may well come away empty-handed...
...Overvaluation: A currency is overvalued if there is a general belief that its price in terms of other currencies is artificially high...
...3 2 As many smaller banks are beginning to understand, debtor nations will be excellent credit risks after they default...
...While bankers were quietly celebrating their selfproclaimed victories, the stock market was signalling its belief that some sort of banking crisis is still a distinct possibility...
...Inter-American Development Bank, External Debt and Economic Development in Latin America (Washington, D.C.: IDB, 1984), p. 26-27, 44...
...For the past year, the banks have been trying to impose a divide and conquer strategy on the debtors, giving minor concessions to compliant countries so they will have less incentive to join the more obstreperous ones...
...Between 1977 and 1979, Mexico's debt grew by $14 billion and interest payments amounted to $8 billion...
...NE COUNTRY PROBABLY WILL NOT act unilaterally, but as the pressures promise never to relent, and the punishment for declaring a moratorium promises to diminish, the ranks of the restless debtors are certain to grow...
...Bankers, of course, disagree vehemently...
...Ibid., p. 21 and Table 5. 13...
...Because bankers lent with such abandon during the 1970s, the stability of the U.S...
...In other words, banks have to dilute their shareholders' earnings per share for the privilege of allowing the Ponzi scheme to continue for a few more rounds...
...exporters will probably pick up the ball, providing the short-term credits where bankers fear to tread...
...Of this $60 billion increase, interest payments consumed $43 billion, or approximately 70% of the total borrowing...
...shoes and radios are consumer goods...
...Unless the IMF program is going to fail before it even gets off the ground, banks have to chip in with new loans and postpone, or "reschedule," payments coming due on old loans...
...With repudiation, they can take the money they were using for interest payments and spend it instead to boost economic growth and standards of living...
...Becker Paribas, a Wall Street investment house, writing off only 10% of their loans to Argentina, Brazil, Mexico and Venezuela would wipe out more than an entire year's profits at Bank of America and Manufacturers Hanover...
...When the value of bad loans exceeds the bank's equity capital, the bank is declared insolvent and closed by federal regulators...
...Latin American Economic System, Renegotiation of Latin America's External Debt: Proposals for the Implementation of the Quito Declaration and Plan ofAction, (Caracas: SELA), March 1984...
...In the international lending arena, these financial requirements and legal safeguards are both impossible to enforce and meaningless, for at least two reasons...
...IMF "adjustment" policies cannot possibly succeed without co-operation from the banks, but banks are reluctant to offer any assistance unless the IMF first assures them that a debtor country's economic policies are oriented exclusively to repaying outstanding loans...
...The message trumpeted in the U.S...
...With that assurance under their belts, banks will make enough new loans to protect the value of their old loans, lending debtor nations just enough so they can continue paying interest...
...Robert Bennett, "Burden for Bank Shareholders," The New York Times, October 24, 1984...
...prime rate since it is predetermined...
...regulations, not to mention common sense and prudence.' COMPOUNDING THE PROBLEM IS THE fact that several other banking safeguards were permitted to fall by the wayside...
...It is beside the point that current export revenues are not sufficient to pay principal and interest...
...If the costs of repudiation are equivalent to a 5% fall in export revenues and a 5% rise in import prices, Enders and Mattione report that Brazil, Argentina, Mexico and Venezuela would face hard times for the first year or two...
...T HE INTERESTING QUESTION NOW IS whether other countries will get similar treatment...
...1. For example, see Daniel Hertberg, "Big Bank Stocks Fall As Investors Challenge Worth of Foreign Debt," The Wall Street Journal, June 8, 1984...
...The country will appear bankrupt, even though not a single imprudent loan was made and every dollar was invested productively...
...And on the slim chance that countries cannot, or will not, pay, coercive vulnerability increases the probability that banks will get some sort of government bailout...
...3. See "How It All Went Wrong," The Economist, April 30, 1983, p. 11-14...
...3 8 But the problem from the banks' perspective is that none of these countries has been as compliant as Mexico...
...Unlike a bond or stock offering, these loans are not officially registered with the Securities and Exchange Commission...
...3 7 Since Mexico had been a compliant debtor, dutifully meeting and exceeding the financial targets of its IMF adjustment program, Volcker urged the banks to give Mexico a more lenient financial package, including more time to pay off old loans and lower interest rates...
...banks...
...On this point, see for example, Everett G. Martin, "Latin Debt Crunch Hurting U.S...
...In January 1984, Latin American debtors convened their first joint consultation, issuing the Quito Declaration and Plan of Action...
...As the exporters see it, every dollar a developing country spends to pay interest is one less dollar which it has to buy goods and services...
...In the Argentine deal, each bank in the lending syndicate promised to increase its loans to Argentina proportionately by 16.75%, a much bigger amount than any other debtor nation received since the crisis first erupted more than two years ago...
...M OST LATIN AMERICAN LEADERS have not stinted in their effort to play by the banking community's rules, despite the economic hardship it has caused...
...can be freely converted to other currencies...
...For all of Latin America, the savings would be $15 billion per year, an amount equal to 2% of the region's GDP and 20% of its net savings...
...And, they also admit, critics can always cite examples which "prove" that stupid loans were made and that incompetent managers were promoted...
...In many instances, banks were making loans to the Latin American subsidiaries of top-rated U.S...
...Alan Riding, "Pact on Peru's Debt Not Expected Soon," The New York Times, December 25, 1984...
...Economic Commission for Latin America, The Crisis in Latin America: Present Situation and Future Outlook (New York: ECLA, 1984), p. 75...
...And, they assert, given time and some temporary additional assistance, debtor nations will be able to repay completely every dollar they borrowed.' To a certain extent, these rebuttals might be discounted as a last ditch show of bravado...
...Under the terms of an IMF agreement, for example, a debtor nation cannot go on a spending spree, squandering scarce foreign exchange and leaving banks in the lurch...
...In addition, the banks have to borrow the money they are lending, usually by issuing Certificates of Deposits (CDs) or having their parent holding company issue commercial paper...
...At this point, the chief question for debtor nations is at what point will the benefits exceed the costs...
...Interest payments are rarely if ever rescheduled...
...Between 1981 and 1983, imports of capital goods declined by 49%, throwing Latin America's long-term investment programs into reverse...
...The government is willing to use this surplus to pay interest...
...At $29 a barrel, the current OPEC posted price, Mexico's assets are seven times greater than its liabilities...
...Their business acumen, which had been questioned in the press and at congressional hearings, had proved solid...
...The name of the game was to make loans and move on, leaving the collection problems to someone else...
...3 3 NTERESTINGLY, ARGENTINA, WHICH everyone concedes is the country that could best withstand the repercussions of a default, has been taking a number of precautions to reduce its vulnerability to any possible retaliation...
...and other Western governments will weigh in on behalf of the banks, telling debtor nations to tighten their belts and devote more resources to debt payments...
...This ensures that stockholders, rather than depositors or the Federal Deposit Insurance Corporation (FDIC), will absorb the initial losses on a bank's loan portfolio...
...Capital Goods: Heavy industrial products used primarily in the production of other goods...
...This unpleasant fact of life left the banks with only two choices: they could give Argentina new loans and extend its repayment schedule or they could refuse, recognizing that, irrespective of their decision, they weren't going to get paid...
...Over the same period, imports are projected to increase by MARCH/APRIL 1985 $650 million...
...Products that had previously been imported have to be produced locally...
...Also, "Export Bust," The Economist, March 31, 1984, p. 84...
...The borrowers prefer the LIBOR since it is at market rate...
...Gross domestic investment went from an 11% growth rate in 1980 to a 13% decline in 1982 followed by an additional 15.6% drop in 1983...
...20-21...
...Big Reprieve: Argentine Debt Pact Avoids Trouble Now, May Cause Pain Later," The Wall Street Journal, April 2, 1984...
...Instead of Marines in combat fatigues, the shock troops are international bureaucrats from the International Monetary Fund who arrive with three-piece suits and attach cases...
...I wouldn't be getting raises if I'm warning my home office to slow down while everybody else is charging ahead...
...O UNDERSTAND THE DEBT CRISIS from the perspective of bankers, start with the charge that bankers put all their eggs in one basket...
...MARcH/APRIL 198537 E C C 0 MARCHIAPRIL 1985 37DEBT on te Amer DEBT To give the adjustment program time to work, someone needs to provide debtor nations with enough cash to keep paying interest...
...Neither Cline nor the IMF would dispute this economic truism...
...As Aldo Ferrer explained, "As the principal debtors are living on their own means, they cannot be punished with the threat of being cut out of essential supplies...
...This can lead, among other things, to widespread expectations of a devaluation...
...Syndicated Loans: A consortium of banks offering a loan package, with each institution chipping in a portion of the loan...
...A debt service ratio below 20%, indicating that onefifth of export earnings are going to service the debt, is generally considered manageable...
...Simply put, Argentina was not paying the banks on time and there was very little the banks could do about it...
...42-44...
...As the economics of the payments burden pushes the financial system closer to a crisis, the banks' earlier strategy of coercive vulnerability will come back to haunt them...
...The question now before Latin America's debtors," he said, "is how much of their domestic resources should be appropriated to meeting their foreign commitments...
...bankers...
...In exchange for more time and nearly $6 billion in new money, Argentina promised to comply with the IMF's strict economic adjustment policies, pay immediately most of the $1.2 billion of overdue interest it owes to its bank creditors and not fall behind on future interest payments...
...Economic Commission for Latin America (ECLA), most of the so-called growth generated by additional exports is merely a statistical chimera...
...A growing proportion of the current account deficit of the non-oil developing countries has been primarily the result of higher interest payments on the external debt," the fund stated in a recent report...
...Creditors, especially the big money-center banks, are used to dictating terms...
...This practice does make it seem as if the financial system is still solvent, but only because one debt pyramid is being constructed for the express purpose of fueling a second debt pyramid...
...Salaries, bonuses and promotions were awarded on the basis of how many loans were made, not by how many loans were repaid...
...Today, gunboat diplomacy is out of fashion...
...6. See for example, prepared statement by Paul A. Volcker in the February 8, 1983 banking committee hearings...
...9 (December 1983...
...On this count, the market seems to be suggesting, bankers are singularly ill-suited for the task...
...They will tolerate a $4 billion drain...
...The text of the Quito Declaration and Plan of Action is printed as an annex in "Letter dated 9 February 1984 from the Permanent Representative of Ecuador to the United Nations addressed to the Secretary-General," General Assembly, Economic and Social Council, Document A/39/118 E/1984/45, February 29, 1984...
...Argentina is now giving the banks a taste of their own medicine...
...exporter is going to relinquish such a large market merely because his customer has chosen to pay him instead of someone else...
...F OR BANKS, THE DEBT CRISIS IS LITTLE more than a simple arithmetic problem...
...The drop in imports was especially sharp in Mexico, where a $17 billion turnaround in the merchandise trade balance was caused by a 62% fall in imports from $24 billion to $9 billion...
...uovrnmF1111n llluJurum, OUanN19UW, I oI A RECENT BROOKINGS INSTITUTION study by Thomas Enders, former assistant secretary of state for inter-American affairs, and economist Richard Mattione, tries to answer that question...
...In the production field, the decline in investment, the disMARCH/APRIL 1985 39REpti on t4 Amrca44s DEBT Catholic mass against IMF-imposed austerity, Sao Paulo, September 1983 mantling of installed capacity, and the discouragement rife in business circles gives grounds for fearing that the production potential likely to be achieved in 1990 will be less than that existing in 1980...
...To avoid this prospect, bankers showed that they are willing to go to almost any lengths to maintain the fiction that everything is for the best in the best of all possible worlds...
...During that same period, interest payments totalled approximately $48 billion...
...The benefits of radical action are the payments that would have gone to the banks but which can now be used for domestic consumption and investment...
...Mexico, Brazil, Argentina and Venezuela, the big four Latin American debtors, had all promised to repay the banks at the market rate of interest...
...Their current account deficits are not caused by gluttony or excess spending...
...Therefore, with increasing frequency, the officials are concluding that trying to pay all the interest that the banks are demanding is a futile exercise...
...Even the IMF admits this is the case...
...the trade surplus is still not sufficient to maintain financial equilibrium...
...The result, the ECLA study explains, is that "about 90% of the labor force incorporated in the 1980s would be out of work in 1990...
...Argentina's export earnings are projected to be $9.4 billion, generating a trade surplus of slightly under $4 billion...
...8. Robert Cohen, "Bank Financing of the Subsidiaries of Transnational Corporations in Latin America," unpublished mss...
...What they are saying, in a nutshell, is that they are prepared to pay much less than the banks are demanding...
...The $33 billion turnaround in the merchandise trade balance between 1981 and 1983 was due entirely to a dramatic fall in imports...
...And financial policy is conducted with an eye toward ensuring that banks get repaid, irrespective of what happens to the local economy or domestic standards of living...
...The speed with which they have converted trade deficits into trade surplusesgenerating dollars with which to pay interest-is nothing short of remarkable...
...And stockholders will be wiped out...
...As the current crisis would seem to indicate, anyone can lend billions of dollars...
...The actual cost of default may be much less than Enders and Mattione report...
...Other money-center banks, including Chase Manhattan, Citicorp, Chemical, First Chicago, Bankers Trust and Morgan Guaranty Trust, would all be seriously crippled, although each would still be operating in the black...
...2" FINANCING THE CURRENT ACCOUNT deficit with additional borrowing will do little to alter this gloomy prognosis...
...Similarly, in Argentina the debt jumped from $8 billion to $40 billion while interest payments consumed $19 billion, or approximately 60% of the $32 billion of new lending...
...The Federal Reserve System ("The Fed") is the central bank of the United States...
...In fact, they both cite the ability of Latin American debtors to export more and the willingness of banks to lend them more as conclusive proof that debtor nations will not have to default, that the crisis is not spiralling out of control...
...DURING DEBT CRISES EARLIER THIS century, U.S...
...The value of Latin American imports was reduced by over 40%, falling from $98.5 billion in 1981 to just over $56 billion in 1983...
...Bank earnings would fall, with several big banks operating in the red...
...The World Bank has a "soft window" from which "soft money" is available on easier terms...
...REPORT ON THE AMERICAS 36, ,I IDB-funded ranching on the Argentine Pampa What is true for Mexico is true for all the other Latin American debtors...
...LXX, no...
...N FOREIGN LENDING, IN OTHER WORDS, all loans are good until the country has too many outstanding foreign currency loans, at which point all loans suddenly become worth less, if not worthless...
...IMF, Outlook 1984, p. 61...
...The precise steps they adopt will be determined by a rather simple cost-benefit calculation...
...Second, smaller regional banks with limited exposure in defaulting countries will see little advanREPORT ON THE AMERICAS 0 g 0) 0 0 42tage in joining their crippled rivals in a hemispheric boycott...
...and Clyde Farnsworth, "IMF Issues Warning On Third World Debt," The New York Times May 9, 1984...
...This September, the banks complied...
...A devaluation can either be consciously implemented by governments or the unconscious result of trends in international currency markets...
...Heading its list of suggestions is a call to "harmonize the requirements of debt servicing with the development needs of each country...
...This Panglossian attitude is not without its costs, however...
...and "Bolivia: Government and Creditors At Impasse," Inter-Press Service, July 20, 1984...
...Similarly, in Mexico and Brazil, the ratio of interest payments to export earnings is not expected to fall significantly below the level which sparked the crisis in 1982 and 1983...
...multinational corporations.8 The subsidiaries used the borrowed dollars to purchase new factories and other productive assets...
...IMF, Outlook 1984, p. 73...
...The nation's productive capacity and raw materials become the de facto property of the banks...
...Ferrer, Sovereignty and Democracy, p. 12...
...This laundering process helps banks maintain the fiction that their previous loans are still worth 100 cents to the dollar...
...They too are facing a similar payments bulge, and without new reschedulings and interest rate relief, will be unable to meet their current payment schedule...
...Firms," The Wall Street Journal, May 8, 1984...
...3 Their calculations indicate that default may be the most viable and profitable option...
...Unless they receive interest payments every 90 days, banks are required by U.S...
...Normally, private borrowers expect to buy whatever dollars they need from their country's central bank...
...Both studies also forecast that current account deficits-the gap between the trade surplus and required interest payments-will remain extraordinarily high by historical standards, although somewhat below the levels reached in the late 1970s and early 1980s...
...They have no force of law...
...Over the same two-year period, Argentina cut its imports by 50% and Brazil slashed its by 30%.'2 Imports are also inputs...
...audience is less important than confronting harsh economic reality, these same reports provided incontrovertible proof that the debt has become a giant suction pump, siphoning resources from Latin America and deflating its economies...
...They agreed to postpone Mexico's principal payments falling due through 1990 and to repackage those payments into a new loan due in 14 years...
...T HE IMF NEEDS THE BANKS FOR THE simple reason that a national economy cannot generate the required trade surplus overnight...
...Hard Currency: Widely used in international trade and thus acceptable as a payment for imports or debt service...
...Ferrer, Sovereignty and Democracy, p. 11...
...By refusing to give Argentina more time to repay and more money with which to resume paying interest, banks would have had to declare their Argentine loans in default and remove them from their balance sheets...
...But required interest payments are projected to be approximately $6 billion...
...Principal payments coming due in 1983 and 1984, which Mexico had no hope of making on schedule, were rescheduled until 1987...
...Floating Interest Rates: Interest rates adjusted at regular intervals, usually every six months, in relation to the rate at which the bank is currently borrowing money itself...
...Costa Rica (44...
...Nicaragua is the only country in recent years to have obtained an interest payment rescheduling...
...To prevent this from happening, the banks had to act...
...When they signed the agreement with Argentina, for example, that country was already more than $1 billion behind on its required interest payments and $10 billion behind on its principal repayments...
...In 1981, the trade account still showed a deficit of $1.6 billion...
...bank regulators require them to raise fresh capital, usually in the ratio of $1 of capital to support every $16 to $20 of new loans...
...National sovereignty is diminished...
...6 With such high exposures comes the potential for crippling losses...
...Banks ignore transfer risk only at their own peril...
...William R. Cline, International Debt and the Stability of the World Economy (Washington, D.C.: Institute for International Economics, 1983...
...5 Nevertheless, most Latin American countries are still not earning enough to cover their required interest payments...
...Consequently, the production of goods and ser- vices available for domestic use is expected to be relatively stagnant, at best, and declining in per capita terms...
...As debtor nations know, the good will of suppliers is necessary to keep imports flowing...
...In recent years, the U.S...
...Liquidity: Generally, the degree to which an asset can be readily exchanged for cash money...
...According to a study by the U.N...
...2 5 To accomplish this, the Quito Declaration insists that "export earnings should not be committed beyond reasonable percentages...
...But if too many subsidiaries try to purchase dollars, their demand will soon outstrip the central bank's limited supply...
...Before they will agree to make loans to countries which cannot even pay interest on the old loans, banks want some assurance that they are not simply throwing good money after bad...
...REPORT ON THE AMERICAS 44Glossary Amortization: Repayment of the principal of a loan spread out over a period of years...
...But as far as the debtor nations are concerned, these new loans only increase the volume of raw materials and manufacturing output they must export in order to pay interest...
...10 (October 1984), pp...
...Even the sort of minor concessions that will almost certainly be necessary to keep debtor nations playing by the rules for a few more months can wreak havoc on the banks' balance sheets...
...2 7 Although Argentina is generally viewed as the country that is most eager to probe the limits of the financial system's tolerance, it may soon come to be viewed as one of the hemispheric moderates...
...Manufacturers Hanover Trust, which last year was threatened with a run on its deposits in the wake of rumors about its "unsound" international lending activities, has outstanding loans in Latin America equal to nearly three times its stockholders' capital...
...Already, Bolivia and Ecuador, relative small fry in the ranks of international debtors, have declared a moratorium on all interest payments, pending negotiations to arrange a more favorable payments schedule...
...More to the point, they deny that any significant number of imprudent loans were made...
...banks $21 billion, or Mexico, which owes $27 billion-fail to keep making timely principal and interest payments, all of the largest U.S...
...According to press reports, Argentina's reserves at the time were over one billion dollars...
...Between 1977 and 1979, before any of these events had taken their toll, Brazil's debt grew by $16 billion while its interest payments totalled more than $11 billion...
...They are not used to having their clients throw down the gauntlet and issue ultimatums...
...But that doesn't mean the banks have eschewed outside intervention...
...As long as a debtor nation can generate a trade surplus equal to its required principal and interest payments, that country is not bankrupt, no matter how much trouble it is currently having meeting its quarterly bank payments...
...New loans today mean higher interest payments tomorrow and a second round of additional lending to pay the rapidly exploding interest bill...
...For example, banks made loans to the Brazilian government and the government-owned oil company, Petrobras, arguing that they were legally distinct entities, each entitled to borrow up to the legally permissible limit...
...ECLA, Adjustment Policies, Table 1. 15...
...Proposals calling on the banks to lower interest rates and provide financial relief to debtor nations had proved unnecessary...
...Ibid., pp...
...House of Representatives, International Financial Markets and Related Problems, Hearings before the Committee on Banking, Finance and Urban Affairs, 98th Congress, First Session, February 8, 1983...
...Money-Center Banks: While not a technical term, an expression generally referring to the 11 largest U.S...
...Lawrence Rout, "New Study Indicates World Debt Crisis May Be Solved As Global Economy Spurts," The Wall Street Journal, May 26, 1983...
...Conclusions about the possible behavior of smaller, regional banks are drawn from private conversations with officers of several banks...
...2. The effect of bank earnings is discussed in Suzanne Andrews, "Accounting for LDC Debt," Institutional Investor, International Edition (August 1984), p. 61-66...
...3 )4 Just as ominous from the banks' point of view is the fact that Argentina recently announced that all of its suppliers have been paid in full, including any overdue interest...
...Bolivia Suspends Payments To Foreign Private Banks," The Washington Post, May 31, 1984...
...The lower interest rates the banks agreed to charge will save Mexico $400 million a year on its $12 billion annual interest bill...
...Of this $220 billion increase, $154 billion, or 76%, was consumed in interest payments.22 Between 1977 and 1983, for example, Brazil's total debt grew by approximately $57 billion, rising from $35 billion to $92 billion...
...Letter from Economy Minister Bernardo Grinspun to M. Jacques de Larosiere, Managing Director of the International Monetary Fund," June 9, 1984...
...2 " But to Latin American officials, for whom reassuring a skittish U.S...
...Gone was the fear that the banking system was on the verge of collapse...
...Both debtors and bankers have found ammunition in two recent studies--one released in 1983 by William Cline of the Washington-based Institute for International Economics,l' and the other in 1984 by the staff of the IMF.' 8 The studies report that by the end of the decade, debtor nations will have made significant progress in restoring economic growth and financial stability...
...4 In the same vein, loan applications were only cursorily reviewed to see if the project was economically sound and if the borrower could at least pay interest...
...Hard implies market rate terms...
...Their attitude toward today's pleas for leniency is reminiscent of Calvin Coolidge's response to European countries petitioning for relief from their World War I debts...
...Their solutions had worked...
...Whether Latin American nations will now redouble their efforts depends on their assessment of the future...
...As long as interest rates remain high, they explain, the debt will grow faster than export earnings, and bankruptcy will be a mathematical certainty...
...In 1980, Latin America imported $7.4 billion more than it exported...
...government regulations to start posting losses on their delinquent international loans...
...bankers did not believe that Latin American politicians could be trusted to impose the sort of pain that would be needed if the banks were to be repaid...
...The government is absolutely unwilling to slash imports by another $2 billion, on top of the 50% cut implemented since the crisis began, simply so they can pay every penny the banks are demanding...
...REPORT ON THE AMERICAS *For a discussion of Ponzi schemes, see Cheryl Payer's article in this issue...
...For Argentina's attempts to counter the Fed's divide and conquer strategy, see S. Karene Witcher, "Argentina Spoils 'Reward' Strategy," The Wall Street Journal, June 15, 1984...
...2 3 With this in mind, a growing chorus of Latin American officials is now demanding some limits on the amount of interest they are required to pay...
...Since Cline and the IMF expect that banks will be lending debtor nations only as much as they need to keep paying the market rate of interest, Latin American debtors will not really be receiving any new funds...
...Aldo Ferrer estimates that limiting payments to 15% of export earnings would save Argentina $1.5 billion annually...
...This regional average masks the exceptionally large 38REPORT ON THE AMERICAS 38 REPORT ON THE AMERICASburden recorded in such high debt countries as Argentina (51...
...But on the whole, bankers deny that the international financial system is rife with stupidity and incompetence...
...This is especially significant because even if each loan passes the most rigorous credit evaluation, each succeeding loan increases the number of claims on a country's limited supply of foreign exchange...
...MARCH/APRIL 1985 35DEBT Y ET FROM THE BANKERS' POINT OF view, putting all their eggs in one basket, in effect, overlending and deliberately avoiding steps to diversify risks, is a sterling example of "coercive vulnerability...
...IMF agreements cannot guarantee repayment...
...40MARCHIAPRLL 198541 ATIN AMERICAN DEBTOR NATIONS are now in the midst of a profound economic transformation...
...exports than Western Europe...
...To the extent that they can pay cash, the banking industry's threats to cut off trade credits sounds like increasingly hollow rhetoric...
...Their mission was to confiscate all export revenues and remit the proceeds to the banks...
...Perhaps the bankers know something that stock market analysts do not, and this explains why, despite the problems of the past two years and the market's pessimistic forecast, bankers don't experience heart palpitations every time they contemplate their Latin American loan portfolios...
...Other resources that were serving domestic needs have to be pressed into service-boosting exports...
...Banks prefer the U.S...
...Banks would simply not receive the difference between the predetermined rate and the actual payments made by each country...
...SELA's headquarters are at the Latin American Council in Caracas...
...Since at least the mid-1970s, banks and debtor nations have been co-conspirators in a giant Ponzi scheme.* Virtually all of the increased indebtedness has been consumed by debt service payments...
...Devaluation: The reduction of a currency's value in relation to another currency or currencies...
...Negative Real Interest Rates: Real interest rates equal nominal interest rates minus the expected rate of inflation...
...All statistics are computed from IDB, External Debt, Statistical Appendix 1 and 2. 23...
...Cline, Stability of the World, p. 73...
...If they do not have to pay so much to Chase Manhattan and Citicorp, virtually every heavily indebted country will have enough export earnings to service the new loans extended by the new creditors...
...7. As reported in "How Can American Banks Account For Those Latin Loans," The Economist, June 2, 1984, p. 87...
...His work has appeared in The Nation, Dissent, Working Papers, The New Republic, and The Texas Observer...
...All they have to do to justify these higher rates is cite the debtor's generally bad credit rating and recent history of default...
...2 Concerning the judgment of bankers, market analysts point out that the highest management echelons of the largest-and supposedly most sophisticated-banks countenanced a whole host of irresponsible lending policies...
...The exact percentage of export earnings each country would pay to the banks would vary with each country's terms of trade...
...But as The Wall Street Journal noted in a recent editorial, Mexico "could wipe out its foreign debt overnight by selling 20 billion barrels of oil at $4 a barrel...
...Also see, S. Karene Witcher, "Bankers Worry That Smaller Latin Debtors Could Be The Next To Face A Payments Crisis," The Wall Street Journal, October 17, 1984...
...Bankers are no more immune from these basic human frailties than anyone else...
...Even more to the point, borrowing to pay interest has been a chief cause of the debt crisis, so it is difficult to see how even more borrowing offers a way out of the morass...
...and "Major Banks Avoid Big Loan Write-Offs But Sharply Boost Their Loss Reserves," The Wall Street Journal, October 18, 1984...
...When a bank cannot collect its outstanding loans, the stockholders' equity bears the loss...
...If the analysts are correct, their gloomy prognosis raises serious questions about the soundness of the U.S...
...The IMF provides some assistance, but it does not have nearly enough funds to keep every country up-to-date on its interest payments...
...prime lending rate has been used instead...
...The key variable is the willingness to pay rather than the ability to generate the additional ex- port revenues...
...But as long as suppliers are getting paid, there is only a slim chance that they will boycott a country that has the temerity to anger the bankers...
...Mexico's old repayment schedule, negotiated with the banks and the IMF after the August 1982 collapse, had merely postponed the crisis...
...This is not merely a theoretical possibility...
...banks with the most extensive international financial operations-Bank of America, Citicorp, Chase Manhattan, Security Pacific, Bankers Trust, Morgan Guaranty, Irving Trust, Chemical Bank, Continental Illinois and First Chicago...
...A nation's (or a firm's) liquidity is the degree to which it is able to cover its current liabilities with current assets...
...Six months later, the Argentine government echoed those sentiments...
...Uninsured depositors face the prospect of large losses...
...Its main purpose is to promote collective efforts toward economic development, economic independence from the United States and improved terms of trade...
...In virtually every case, potential export revenues are many times greater than the outstanding debt...
...3 Or put another way, since they are already generating large trade surpluses, debtor nations do not need credit to finance essential consumption and investment...
...The proceeds were used to reduce Argentina's overdue interest bill...
...And it defaulted because it was producing for the local Latin American market-generating pesos or cruzeiroswhile its liabilities were denominated in dollars...
...Grace Period: The number of years before capital repayments (amortization) begin...
...In Mexico, the second biggest Latin debtor, the debt grew from $27 billion in 1977 to $87 billion at the end of 1983...
...When so many large banks make so many large loans to the same small group of borrowers, the slightest hint that a borrower is having trouble making payments means that it is not merely the survival of one bank that is at stake, but the survival of the entire Western banking system...
...As the press reported it, the Mexican debt rescheduling was a triumphant example of the divide and conquer strategy instigated by Federal Reserve Board Chairman Paul Volcker...
...Details concerning Argentina's payments to suppliers are based on private conversations with Argentine embassy officials...
...First, what matters to banks is not the economic feasibility of any individual project but the economic prospects of a country, that is, whether a nation can earn enough dollars by exporting goods and services to repay its loans...
...This reserve accumulation strategy was highlighted last March when Argentina received a $300 million loan from the governments of Brazil, Mexico, Venezuela and Colombia in addition to a $100 million loan from a consortium of 11 commercial banks...
...Latin America buys more U.S...
...The new civilian government has said it will not increase the amount of export earnings devoted to paying interest...
...As a first step, they have been systematically increasing their reserves, or cash in the bank, even when boosting reserves meant that they would be delinquent on their interest payments...
...For example, during the 1982-83 period, Latin America dedicated more than 35% of its export rev- enues to interest payments, three times greater than the proportion recorded barely five years earlier...
...7 If ever there was a case of bankers lending too much to too few borrowers, this would appear to be it...
...In this respect, the IMF is simply incapable of bailing out the banks...
...Typically, each domestic loan is secured with collateral and a legal contract dedicating a portion of that project's revenues to interest and principal payments...
...negative real interest rates are nominal interest rates which are lower than the rate of inflation...
...If only one or two of the largest Latin American debtors-Brazil, perhaps, which owes U.S...
...But by 1987, output and standards of living would have rebounded and they would all be better off than if they had followed the IMF's prescription...
...As debtor nations see it, the costs will probably be the same if the country adopts a relatively moderate posture and announces that it will not increase the percentage of export earnings devoted to paying interest, or if it takes the extreme step of reducing its payments dramatically...
...2 9 In addition, debtor nations would no longer be required to borrow more and increase exports simply to pay interest...
...If they believe that their financial problems are not intractable, they will continue playing by the rules of the game...
...Argentina's $2 billion trade surplus in 1983 was not nearly enough to pay the country's $5.5 billion interest bill...
...The costs are those associated with becoming an international financial pariah: assets will be seized, trade credits will disappear, the country will be forced to conduct its trade on a cash and carry basis, or, if the banking system refuses to clear its checks, the country may be forced on to a barter system...
...All statistics are from Ibid...
...Banks will become insolvent wards of the federal government...
...But perhaps their confidence isn't merely a show of bravado...
...Latin American officials do not deny hiring the money...
...Chile (38...
...International Monetary Fund, World Economic Outlook 1984, Occassional Paper 27 (Washington, D.C.: IMF, 1984), p. 63...
...As a result, imports will become more expensive and the profits from each dollar of export sales will be lower...
...Unless this "payments bulge" were eliminated with a second rescheduling, Mexico would be forced to default...
...Rather than relying on moral suasion, the United States dispatched Marines to occupy the customs houses of delinquent debtor nations...
...And to make matters even more enticing, small banks have come to realize that they would be able to charge much higher interest rates on their debtor nation credits...
...But from their perspective, whether or not to repay the debt at market interest rates is a political and economic question, not a mathematical prob- lem...
...For all of Latin America, the 1983 trade surplus totalled $25 billion, still far below the $38 billion of required interest payments...
...Seen from this vantage point, claims that the loans will never be repaid are nothing but the chant of modern day Cassandras...
...Banks to Take Heavy Charges," The Wall Street Journal, March 9, 1984...
...TO BUTTRESS THIS CONCLUSION, DEBTor nations need only cite the Cline and IMF studies which show conclusively that interest payments are not expected to decline to affordable levels, at least for the major debtors...
...But they are the only assurance banks have that their financial interests will be heard loud and clear in the highest councils of government...
...Only Mexico, with a $12.7 billion trade surplus has managed to earn enough to pay interest in full.' 6 AS THESE STATISTICS INDICATE, PROGress to date has been inadequate...
...They hired the money, didn't they," was his only com- ment...
...p UT THIS WAY, THE BANKS VIEWED their so-called choice as really no choice at all...
...The only thing that will vary are the benefits, which increase as the country adopts more extreme measures...
...Between 1977 and 1983, for example, Latin America's total external debt rose from $116 billion to $336 billion...
...But while the letter to the IMF is a bold departure from tradition, it still displays a remarkable willingness on the part of the government to play by the banking community's rules...
...Thomas O. Enders and Richard P. Mattione, Latin America: The Crisis of Debt and Growth, Brookings Discussion Papers in International Economics, no...
...It's all a charade anyway, and the banks know it, even if their critics do not...
...Also see, Lynda Schuster, "Argentines Risk Credit Cutoff," The Wall Street Journal, June 26, 1984...
...But no matter what the uniform, the process is the same...
...Although it is never explicitly spelled out in the text, the implication of these statistics is clear: virtually all of the future growth in export earnings will be dedicated to reviving the economy...
...As long as creditor nations like the United States do not erect new trade barriers and economic growth does not fall below 3% to 4% per year in the developed countries, debtor nations will have little trouble increasing their export earnings, explains Cline...
...The possibility of financial chaos virtually assures that the U.S...
...Yet despite all the lastminute heroics, there was never any question about Argentina's ability to pay, only its willingness to spend its reserves on interest payments...
...In per capita terms, the decline was even steeper, falling by nearly 10% over the same period.' 4 DESPITE ALL THE PAIN AND ECONOMIC dislocation, these adjustment programs had precious little effect on the region's current account deficit, primarily because higher interest payments more than offset the hard-won gains on the trade front...
...In reality, except for the interest rate concessions-which are too small to make any material difference to the Mexican economy's prospects for recovery-the banks had little choice but to sign an agreement with Mexico...
...banks would be operating in the red for years to come...
...While there are no official designations, the currencies of the strong developed countries-the dollar, mark, yen, Swiss franc, British pound-are generally considered "hard...
...3 " The result is that bankers are now the only creditors with an outstanding grievance...
...Economic Commission for Latin America, Adjustment Policies and Renegotiation of the External Debt (New York: ECLA, 1984), p. 4. 12...
...Persistent current account deficits caused by high interest rates and relatively insufficient trade surpluses must be financed by some combination of exporting more and borrowing more...
...Soft or Hard Terms: Soft implies conditions which are substantially below the market's norm with respect to interest rates, grace periods and the length of term of the loan...
...Brazil was not the only country to find itself in this predicament...
...The benefits to debtor nations of this plan are considerable...
...Spread: The difference between the rate a bank pays when it borrows money and the interest rate it charges when the money is lent out...
...As a result, banks may have no choice but to hold out for all or nothing...
...Similarly, Brazil's $11.5 billion of required interest payments totally swamped its $6.3 billion trade surplus...
...As a result of this selfserving, but ultimately self-defeating, interpretation, banks boosted their Latin American loans far above the limits prescribed by U.S...
...The IMF gives them that assurance...
...On the other hand, loans to build an economically productive, highly profitable steel mill may present severe repayment problems if the country runs out of dollars, perhaps because food imports are draining dollars from the economy faster than steel exports can replace them...
...But since there are no controls, why go through the motions of performing loan evaluations...
...See S. Karene Witcher and Gary Putka, "Argentina's Inability to Meet Terms of IMF Seen Forcing U.S...
...However, this is far more generous to the banks than a proposal formulated by the Latin American Economic System (SELA),* calling for steep reductions in the volume of export earnings committed to interest payments.28 The SELA plan is based on the premise that "interest payments must be based on the ability to pay *SELA was founded on the initiative of Presidents Carlos Andr6s P6rez of Venezuela and Luis Echeverria of Mexico, and was endorsed by 23 Latin American and Caribbean nations-including Cuba-in October 1975...
...In other words, the current account deficit is negative, not because Latin American nations are living too well, but because interest payments are too high...
...After all, if the critics are correct, bankers have nothing to look forward to but capital punishment...
...The financial crisis had been weathered, as many bankers predicted, and the forecast was for smooth sailing...
...Since book value is a measure of how much of a company's assets each share represents, the market is saying, in effect, that many bank assets, such as loans to Latin America, are no longer worth 100 cents to the dollar.' As the stock market's evaluation suggests, financial analysts are betting that banks are not going to collect every dollar they are ow6d...
...Between 1975 and 1982, bank loans to Latin America more than quadrupled, rising from $23 billion at the beginning of the period to $97 billion when the crisis erupted eight years later...
...IMF Quota: Amount of money paid by a nation into the IMF which determines both its voting power and the amounts of money it can draw from the IMF...
...From the beginning of 1984 to the end of 1985, Argentina projects that export earnings will grow by $745 million...
...By accumulating reserves, the Argentine government was ensuring that it had enough cash on hand to pay for essential imports...
...First, debtor nations find themselves deeper in debt and no closer to being able to service their loans...
...banking system as well as the sound judgment of U.S...
...If it can, even loans for unproductive purposes, like luxury condominiums in Miami, are perfectly sound...
...Secondly, even if imports are not excessive, bankers have no way of controlling a country's total indebtedness...
...and Mexico (38...
...LIBOR (London Inter-Bank Offer Rate): The inter-bank lending rate in the Eurodollar market used as a reference point for floating rate loans...
...To the bankers' chagrin, talk of a financial quarantine may be wishful thinking...
...exporters are already beginning to chafe at the lost sales which they attribute to high interest rates charged by U.S...
...In the unlikely event that smaller regional banks will not want to get involved, U.S...
...If the projected revenues are not sufficient, the loan application will be rejected...
...In addition, more than two-thirds of its bank debt was coming due by the end of 1985...
Vol. 19 • March 1985 • No. 2
