TOO LITTLE, TOO LATE A Debt Balance Sheet
Doggett, Martha
I'm no financial wizard, Colombian novelist Gabriel Garcia Marquez told a journalist at the Havana debt conference in August. "But even I know that the sheet is too short, and if we pull the...
...But after a brief spurt of growth, exports, investment and savings have all taken a downward turn...
...The symbolism was not lost on the Reagan Administration, which decided to invoke the seldom-used Brooke-Alexander Amendment...
...Regional attention firmly focused on Peru, Alan Garcia announced that his country would limit interest payments on its $14 billion foreign debt to a maximum of 10% of export earnings...
...the rescheduling covered $50 billion due between 1985 and 1990...
...Finally, the Administration envisions a greater role for the World Bank and its longterm structural adjustment loan program...
...The banks have the problem now...
...No reprisals could be worse than the status quo, the Cuban leader told Congressman Mervyn Dymally and Professor Jeffrey Elliot in an interview last spring, and besides, who's going to gang up on an entire bloc of nations acting in concert...
...Yet the money involved-$29 billion--"doesn't seem like enough," according to a Brazilian...
...To qualify for this new money, debtors must adopt market-oriented policies designed to promote growth...
...The banks have given Brazil until January 17 to firm up the country's eighth letter of intent in three years, before they will consider another rescheduling...
...military assistance loans...
...Considered controversial, the co-financing was further evidence of how distinctions between the World Bank and the IMF are getting fuzzy...
...The Cubans' position has improved their bargaining power...
...The region's biggest debtor, Brazil's obligations exceed $100 billion...
...Garcia later clarified that the 10% would not mean equal treatment for all creditors...
...Citing "recent developments," the 5committee said it would use the next six months to stuuy the situation...
...What can we expect over the next year on the Latin American debt scene...
...Judging from the rhetoric on both sides, Garcia and Castro will both try to remain on center stage with the debt issue, each with his own role to play...
...At the invitation of Bolivia's new conservative Administration, an IMF mission arrived in La Paz in late November for preliminary talks...
...But even I know that the sheet is too short, and if we pull the sheet up over our heads, our feet will stick out...
...The government's economic plan-to be presented to Congress in the next few weeks--will serve as Sarney's bargaining position for the new round of negotiations...
...A new wave of "IMF riots" is not unlikely...
...Castro himself made good on his pledge to sit through every speech, nodding and taking notes from his spot on the dais...
...One of the clearest and most vocal messengers is Peru's youthful new president, Alan Garcia P6rez...
...Former heads of state from Peru, Venezuela and Colombia were present, along with former Dominican president Juan Bosch...
...The most widely publicized of the Cuban summer conferences was the Debt Conference itself, drawing 1200 participants from throughout the region and 300 accredited journalists...
...In an attempt to place Alan Garcia's announcement in proper perspective, a New York Times news analysis pointed out that it was "important mostly as a symbol and a precedent...
...A survey of recent developments suggests a few trends: 1. Most importantly, we can expect more of the same...
...Miguel Angel Capriles, the somewhat maverick owner of a conservative Venezuelan newspaper chain, was there, calling for a summit to discuss a temporary moratorium...
...bank regulators, mainly as a friendly gesture toward the new regime...
...aid programs to any country in arrears in payments on its debt to the U.S...
...An impressive line-up of leaders gathered in Lima for the inaugural...
...Anybody and everybody had access to the podium-a 12minute maximum-and the entire proceedings will be published...
...they have little choice but to stay in the lending game...
...The ball is in their court...
...Chile's June rescheduling agreement included $1.1 billion in new money from private banks, part of it co-financed by the World Bank...
...At press time, the Argentine Embassy confirmed that an assistant treasury secretary had been in Buenos Aires to interest President Alfonsin in signing on to the Baker Plan...
...But until recently, no nation had succeeded in getting new money out of the banks without an IMF accord...
...Finance Minister Roberto Junguito Bonnet was quick to point out that Colombia's was a special case...
...Michael Manley of Jamaica, a leader with his own turbulent history with the IMF, was given a hero's welcome...
...inflation, capital flight, imports and the domestic deficit are up...
...Some will continue to go it alone for a while, without an IMF program, as Brazil is now doing...
...5. Increasingly, calls will be heard from unlikely quarters--centrist and even some conservative politicians and academics-for concessions from the banks...
...He also refuses to frame the issue in East/West terms, as Castro does, saying the debt is strictly a North/South matter...
...government may wake up to the very real threat of the collapse of the world economic system...
...Since the infamous weekend in August 1982-when the government announced its inability to meet foreign obligations-Mexico has been considered the barometer of regional debt performance...
...the Dominican Republic, Brazil, Bolivia, and Peru have all experienced IMF-related violence...
...Castro says Havana's Debt Conference: "a four-day rally...
...The 36year-old social democrat chose the occasion of his inaugural last July to openly challenge Peru's creditors...
...In 1980, Nicaragua became the only country in recent history to achieve a rescheduling of interest payments...
...Too little, too late," is how one critic described the plan...
...bankAlan Garcia ers are now required to set aside 25% of their Peruvian loans against a possible default...
...But the "creativity" of the agreements indicates the desperate situation in which the system finds itself, and the need for ever-more radical solutions...
...Castro is quick to point out that wiping the slate clean will not solve the Third World's development problems, and proposes that the step serve as a bridge for finally creating a New International Economic Order (NIEO...
...The new president, Victor Paz Estenssoro, quickly announced a severe austerity plan, and showed his intolerance of public dissent by declaring a state of siege to end a 16-day general strike...
...The Cartagena group repesenting 11 regional debtors appealed to the Bonn summit last May...
...Until now, the Administration has considered the problem something to be worked out on a case-by-case basis between debtors and their creditors...
...It creates some possibilities and opens new doors...
...The victory of Alan Garcia's APRA party signals a shift to the center-Left in Peruvian politics that is unprecedented in the postwar era...
...Within the creditors' scheme of things, South Africa is clearly an unusual case, but there is an increasing tendency to make everything "special" in an attempt to accommodate unorthodox solutions and rationalize leniency...
...Brazil will not pay its foreign debt with recession, nor with unemployment, nor with hunger," Sarney told the UN General Assembly in September, "for a debt paid for with poverty is an account paid for with democracy...
...position: an admission that the problem can only be solved through economic growth, and that fresh loans are needed to spur this growth...
...The governments of other Latin American countries know they are in debt to the Cubans," says MacEwan...
...Bolivian labor remains in the forefront of those pushing to ensure that the costs of austerity are divided among all social 6groups...
...Garcia's pronouncement and his calls for a summit of regional heads of state has so far fallen on deaf ears...
...Not willing to let Castro steal the limelight or the initiative, Alan Garcia has repeatedly emphasized Cuban hypocrisy in urging others to repudiate their obligations...
...In an act that illustrates the cautious course Alan Garcia is charting, the new president met with representatives of Peru's creditors three weeks before his inaugural, warning them of his pending announcement on debt payments...
...The money involved in Peru's case is not at the level of a Mexico or a Brazil...
...The IMF has reopened talks on a new letter of intent, and granted an emergency $300 million...
...In early October, Mexico's advisory committee-representing some 600 banks--granted a six-month deferral on $950 million due in the next two months...
...The Mexican earthquake may well provide that opportunity...
...Bankers may well find this part of Garcia's challenge more threatening than a cap on interest payments...
...Not envisioned as a high-level working conference, the initiative succeeded in providing an open forum for discussion, and in creating a media event, thereby increasing momentum around the issue...
...If it's the same thing with a different name, it will just be treating the patient's fever, not the illness...
...Based on what is known at this point, it seems unlikely the Administration's proposal is enough to change the banks' stance...
...Reschedulings are usually reserved for payments on principal only...
...With the new civilian government of Jos6 Sarney still testing the waters, the Brazilians have refused to implement further austerity measures...
...Debtors and creditors are grasping for ever more "creative" solutions...
...Even the Reagan Administration, which has acted as if there were no debt problem, has been spurred to action by the desperation expressed in various messages coming from Latin America's largest debtors...
...It deREPORT ON THE AMERICAS pends a lot on how the program is to be implemented," said a spokesman for a South American debtor...
...It could be triggered at any moment, depending on domestic political developments in debtor countries such as Brazil or Mexico...
...Peru had failed to meet a 15 July deadline on U.S...
...The country's debt service ratio-the ratio of interest plus principal payments to a nation's export earningsis among the highest in the region, and foreign currency reserves are among the lowest...
...In June, Peru was spared a "value-impaired" ruling by U.S...
...Increased multilateral lending, it is hoped, will serve as an inducement to commerical banks to re-open lending windows...
...Even before the earthquake, Mexican officials were beginning to sound less like compliant debtors and more like their more confrontational neighbors...
...The combined interest payments of Mexico and Brazil alone during 1985 should amount to about $25 billion...
...Non-payment or non-cooperation by these large debtors is widely believed to be capable of seriously rocking the system to the point of collapse...
...When the Mexican economy is doing well, and the government in compliance with its IMF agreement and interest payments, op- timism reigns in international financial circles...
...To take a few examples: * Colombia was the first Latin American country to receive new money without an IMF support program since the debt crisis "began" in 1982...
...domestic issues...
...Talks with the IMF were suspended in July when the two sides were unable to find common ground...
...In some ways these case-by-case solutions reinforce the creditors' "divide and conquer" approach, ignoring the debtors' plea for one regional solution...
...And we can expect Third World debt to surface in discussions of U.S...
...While the IMF provides balance of payment support, the World Bank has focused on development projects, money for a dam or cement plant...
...Speaking in June to a luncheon gathering of New York corporate officials and bankers, Sally Shelton, the Carter diplomat turned banker, complained of "a wave of anti-bank sentiment" sweeping the country...
...Now, because of the earthquake it's possible to do some rearranging," says economist Arthur MacEwan...
...Getting new money out of the commercial banks may require a fair amount of arm-twisting, or what is known as "forced lending...
...Suddenly their calls for leniency seem moderate...
...Costa Rica has been repeatedly granted waivers...
...The new government quickly brought its payments up to date, only to fall behind again in September...
...Garcia also called for "dialogue with our creditors without using the International Monetary Fund (IMF) as an intermediary...
...With the Cartagena group scheduled to gather again before year end, it is clear that the debt will remain squarely on Latin America's agenda for some time to come...
...1 he de la Madrid government recently told creditors it needed an estimated $4.5 to $4.8 billion in new money during 1986, up from its $2-3 billion prequake estimate...
...Treasury Secretary James A. Baker unveiled his "Program for Sustained Growth" at the joint meeting of the World Bank and IMF in Seoul, South Korea, in early October...
...Emphasis is on trade expansion and reducing the state sector...
...It does seem abundantly clear to almost everybody-most of all Latin American consumers-that the region's heavily indebted nations are not going to come up with the cash to repay their loans...
...Transfering Reaganomics to the developing world is hardly the answer, yet some find solace in the fact that the Administration has admitted publically that there is a debt crisis and that it should play some role in its resolution...
...With exports expected to net $3.1 billion, payments should amount to about $300 million under this new plan-a far cry from the $5.5 billion which falls due this year...
...This is the first time some government has tried to change the rules," a government minister told The New York Times...
...Mexico has lowered the price of oil-which provides 70% of export earnings-twice in the last year in an effort to bid out other producers...
...Smaller regional banks-which form the majority of U.S...
...The rapid deterioration in Mexico's situation is said to have finally opened the Reagan Administration's eyes to the severity of the crisis...
...lenders--are exerting themselves more in relations with the larger, money-center banks such as Chase Manhattan and Citicorp...
...Speaking recently in New York City, Sol outlined two possible scenarios...
...Alternatively, Sol said, if more debtors choose the "less noisy" form of non-payment, a la Bolivia, the U.S...
...2. It is increasingly clear that old solutions are not adequate for the magnitude and complexity of today's problems...
...agriculture, a sector with an enormous debt problem of its own, not unlike the Third World's dilemma...
...Countries will skate in and out of the debt crisis cycle...
...A moratorium by a major debtor could cause a run on a few key European banks and on money-center banks in the United States...
...Similarly, a spokesman for the American Bankers' Association called Baker's initiative "constructive and thoughtful . . . but no details are available...
...Earthquake clean-up is expected to cost $3-4 billion, a sizeable sum for an already overextended federal budget...
...Less than a year ago Mexico was considered the pride of the international financial community, an example of a cooperative debtor who was willing to squeeze interest payments out of the economy, regardless of cost...
...Cuba has a good repayment record on its $3.4 billion Western debt, and has reportedly counseled the Sandinistas twice to stay on the banks' good side...
...In many countries the debt has become a major domestic political actor, in some cases toppling governments and causing political realignments...
...While hardly trueBolivia declared an ad hoc default in July 1984, and had been in arrears on its private debt since the previous spring-it is the first time a nation has openly announced its defiance within the international arena, and with such fanfare...
...The Reagan Administration was not doing its share to solve the problem, said Shelton, calling for more sensitivity to "the plight of the debtors as well as the plight of the banks...
...The IDB, Latin America's major development bank, says previous solutions to the debt crisis are inadequate...
...Several welcomed what they consider key departures from the U.S...
...The country's much-lauded trade surplus has dropped 46% in the first seven months of 1985 over the same period in 1984...
...The Administration just doesn't understand the threat that the debt poses to Peruvian democracy," a congressional source told NACLA...
...While many of those who attended could be identified as left of center, there were numerous notable exceptions, indicating how the issue cuts across political lines...
...Mexico began to fall short of IMF targets last fall, holding up release of the remaining $908 million on its $3.4 billion fund program...
...It required a major lobbying effort by Brazil's financial team to get the banks to roll-over the debt which fell due at the end of August...
...The Administration's approach is three-pronged...
...3. We can expect more political and social unrest as "remedies" to the debt burden are imposed from without-by the IMF-or from within, by governments seeking to stay on good terms with international financiers...
...4. More quiet repudiation: "It's not a good example to debtor nations," said a spokesman for a British bank of South Africa's announcement that it was suspending foreign payments, "but the circumstances are clearly unusual...
...Also at odds with the Brooke-Alexander...
...Salvadorean economist Jorge Sol-an original staff member of the IMF at its inception in 1947 and now a fellow at the Institute for Policy Studiespaints a gloomier picture...
...Journalists, youth, women and trade unionists all journeyed to Havana to consider the re- gion's $360 billion debt...
...Acting In Concert The other major voice coming out of Latin America is that of Fidel Castro, who in numerous interviews with the foreign press and at a series of international conferences held in Havana has put forth his own scheme of things...
...The amendment calls for suspension of REPORT ON THE AMERICAS I 4new U.S...
...Confidence to Gloom Well before September's earthquakes gave the most recent jar to Mexico's economy, creditors had begun to speak of Latin America's second largest debtor in worried tones...
...There's a terrific insensitivity to banks' efforts to help Latin America out of this," said the Bankers Trust vice president...
...the World Bank stepped up disbursal of a $300 million commitment...
...The Cubans have proved the most tireless proponents of the NIEO, endorsed by the United Nations Gen- eral Assembly in 1977 and largely ig- nored by the developed world ever since...
...officials are now consulting with bankers, trying to sell their "new" approach...
...The Third World is to receive $29 billion in new money over the next three years: $20 from commercial banks and $9 from multilateral lenders such as the World Bank anIIu L In ter-AJmerican Development Bank...
...It was really a four-day rally, rather than a conference," said economics professor Arthur MacEwan, of the University of Massachusetts in Boston, who attended the gathering...
...APRA, the country's largest and best organized political force since the 1920s, had until now been effectively blocked from power by the military in alliance with ruling right-leaning parties...
...We've already seen linkage on various trade issues, most recently on tariffs on shoe and textile imports...
...regional debtors need no new money and should apply funds earmarked for debt service to domestic development...
...But the Reagan Administration managed to close ranks with likeminded European allies, keeping the debtors' issues off the agenda...
...The stakes are high for the largest institutions...
...Honeymoon is Over Painfully aware of the unpopularity of IMF-mandated austerity programs, no government eagerly seeks out the IMF...
...We're awaiting additional information...
...The Cubans have had a large measure of success in amplifying the concerns of regional debtors, convening five in- ternational conferences between May and August...
...In fact, Peru has made no payments on its debt to private banks since July 1984 and, although the figures tend to vary, is about $425 million in arrears...
...But last year's confidence has given way to gloom...
...IMF letters of intent, said Garcia, "are in reality letters of colonial submission to the prevailing injustice...
...Most countries, sadly, come back to the IMF at some point...
...September's ouster of Panamanian President Ardito Barletta, a former World Bank official, is in part attributed to political ineptitude in handling the debt problem...
...government...
...As it becomes apparent that the Latin economies have been squeezed to their limit, we can expect increasing intensity in the debate at elite financial and political levels about whether government or the private sector should bear the costs of a bail-out...
...But the need for fundamental overhaul of the world economic system is lost on few in the developing world...
...NOVEMBER/DECEMBER 1985 Castro's admonition to his neigh- bors on debt repayment seems a case of "do as I say, not as I do...
...Under intense pressure from organized labor, the former center-Left government -of Hernin Siles Zuazo went without an IMF accord for several years...
...Too Little, Too Late" Observers point out that for the first time, the United States has taken an "activist" stance, pledging to bring together all three parties, encouraging each to do its part...
...He hoped, Garcia is reported to have said, that they would not consider his "a confrontational approach...
...Calls for a debt moratorium are coming from a broad political spectrum as domestic entrepreneurs also feel the squeeze...
...But with oil prices still dropping, Mexico looks like a shaky investment...
...All eyes are on Peru to see if a medium-sized debtor can get away with it...
...Brazil's experience is not unusual...
...Signing Up Argentina Economic predictions made in the annual reports of the IMF and the Inter-American Development Bank (IDB) give no cause for optimism...
...Smaller regional banks, however, are more apt to cut their losses now, rejecting further Third World lending...
...Another likely issue is U.S...
...Widespread bank failures in the United States would follow, demanding a major federal bail-out...
...Interviews with financial officers at several Latin American embassies indicate that "until the blanks are filled in," debtors are taking a wait-and-see attitude...
...By October, the honeymoon was over...
...The pay- ment was part of an agreement hammered out in the fall of 1984...
...Citing Nicaraguan Vice President Sergio Ramirez as the conference's highest-ranking participant, conservative observers pronounced the event a failure, somewhat missing the point...
...The Castro solution is simple: repayment is a political and economic impossibility...
...In a speech colored with rhetorical excess, Garcia directed his most biting commentary toward such multilateral lenders as the IMF, charging that "they were accomplices in the squandering and unproductive use" of borrowed funds...
...Addressing the UN General Assembly on September 23, Garcia threatened to pull out of the IMF if it did not respond to his "demand [for] decisions on the reform of the monetary system and the distribution of world liquidity in a fair manner...
...Further, it appears that "deals"-bail-outs, reschedulings, refinancings, restructurings-are getting increasingly difficult to put together...
Vol. 19 • November 1985 • No. 6
