Trying to Defuse a Debt Bomb

By John Greenwald

Latin America's borrowers, $320 billion in the hole, look for help

"These debts cannot be paid under existing conditions."

With those words, Victor Gimenez Landinez, Venezuela's Ambassador to the Organization of American States, summed up the plight of the 26 Latin American and Caribbean nations that met last week in Caracas, Venezuela. Just one year ago, Western bankers and public officials were scrambling frantically to avert a worldwide financial crisis as several Latin American countries tottered on the brink of default. The moneymen have since lent more than $45 billion to Brazil, Mexico and other Latin American nations to help them pay interest on about $275 billion in loans.

But the so-called debt bomb has continued to sputter, and last week the 26 Latin borrowers joined forces for the first time to demand that banks relax their repayment terms. "We have broken the taboo of not even mentioning the words 'concerted action,' " said Carlos Alzamora, permanent secretary of the Latin American Economic System, a regional group.

Most of the cash-strapped Latin nations are steadily sinking ever more deeply into debt. Countries in the region owed foreign lenders some $300 billion at the end of last year. Since then, new loans and missed payments have added another $20 billion to the total. Venezuela alone has piled up nearly $500 million in overdue interest in the past six months. No fewer than twelve Latin countries have individually sought debt reschedulings or other concessions since August 1982.

The south-of-the-border borrowers cannot repay their loans because, like impoverished citizens, they are not earning enough. The region's exports dropped 10% last year, to $95 billion, as world recession and falling commodity prices eroded income from sales abroad. During the 1970s, by contrast, the value of Latin American exports had grown an average of 19% a year. So sharply have exports fallen that the region now owes foreign lenders more than three times the amount it earns annually from exports.

Although some observers thought that the Caracas delegates might try to form a "debtors cartel" that would renounce foreign financial obligations, the representatives stopped short of that move. "The idea of a debtor cartel was definitely put aside at this conference," said Mailson Nobrega, secretary-general of Brazil's Finance Ministry, as the meeting came to a close at week's end.

The delegates avoided even hinting that they might repudiate their debts, realizing that any refusal to repay past borrowings would mean the certain cutoff of future loans. In Washington, William Cline, senior fellow at the Institute for International Economics, said, "No major debtor wants to jeopardize its long-run credit reputation further by joining anything that has the appearance of a cartel for debt moratorium or repudiation purposes."

Nonetheless, the delegates to the conference, which was hosted by Venezuelan President Luis Herrera Campins, had plenty of complaints about their bankers. Their major concern was about the fees and extra interest that American banks are charging them on new and rescheduled loans. Representatives noted that ailing U.S. firms like International Harvester received much more favorable terms than they. Said Venezuelan Finance Minister Arturo Sosa: "It is only sensible to ask whether the conditions being offered to our countries are comparable to those secured by troubled enterprises in industrial nations." A working paper presented to the session estimated that Latin borrowers must pay on average a stiff three percentage points above the U.S. prime rate for new money. That brings their current borrowing expenses to about 14%. International Harvester, on the other hand, is now paying just under 12%.

Some U.S. experts agree that American banks are overcharging Latin customers and thereby making the world debt crisis worse. Says Robert Solomon, a Brookings Institution guest scholar and an expert on international finance: "I realize the banks thought they were under greater risk, but they should also have known that they are just making it tougher for their debtors to put themselves back on their feet."

Most U.S. bankers avoided the week-long session. Only Bank of America and Chase Manhattan sent observers. "It's a no-win situation," noted a Caracas-based U.S. moneyman, who said he had feared that banks and Americans in general would come in for "some gringo-bashing that we could do without."

The bankers, however, were still watching the Latin American conference closely. They have invested $96 billion in the region, and many of those debts are turning sour. Problem foreign loans have more than doubled for Chase Manhattan and Citicorp during the past year. Chase said it considered $976 million of overseas lending to be "nonperforming" as of last June 30, compared with $427 million on the same date a year ago. Borrowers have at least temporarily stopped payments on such loans. Citicorp reported hat its nonperforming foreign loans had climbed to $1.7 billion on June 30, up 143%. Citicorp said the increase was largely due to problems with loans to firms in Latin America.

Five nations account for 90% of Latin America's more than $300 billion of international debt. The Brobdingnagian borrowers:

BRAZIL. Latin America's biggest debtor is also its most troubled (see box). Brazil owes some $90 billion and is in its third year of a deep recession. The country is promising to undertake tough austerity measures so that it can begin paying off its debt, but those steps are intensifying already serious social unrest. Last week food riots broke out in Rio de Janeiro. Says one U.S. Treasury official: "Brazil is the key to the entire Latin American debt problem."

MEXICO. The country that nearly ignited the debt bomb in August 1982, when it came close to defaulting on $85 billion in foreign borrowings, has been straightening out its finances. Last month it repaid a $1.85 billion loan just two weeks after successfully rescheduling $11.4 billion of public debt. Nevertheless, Mexico's gross national product is expected to drop by 3% to 5% this year, and inflation is raging at an annual rate of about 90%.

ARGENTINA. The costly Falkland war has helped to weaken Argentina's ability to service its $40 billion of foreign debt. The country will have to borrow $1.5 billion this year just to help pay off some $4.5 billion in interest. Banks that extended the country $6.6 billion in short-term credits before last year's war now fear that Buenos Aires will seek to stretch out those loans.

VENEZUELA. When oil income flowed in during the 1970s, Venezuela went on a buying binge. But the drop in energy prices forced the country last March to impose such austerity measures as tight curbs on imports. Last week Venezuela announced that it was postponing until 1984 negotiations to stretch out payments on $18.4 billion in overseas loans. That amount, which comes due this year and next, represents more than half of the country's foreign debt.

CHILE. Economic stagnation has triggered the political unrest that has been sweeping Chile in recent weeks. The country is only slowly recovering from the collapse of world copper prices that drove unemployment to 34.6% last year. The government is trying to reschedule $2.5 billion of its nearly $19 billion in foreign loans.

The Caracas conference endorsed a platform calling for measures that included lower interest rates. Heads of state of the Latin nations will meet later this year in Quito, Ecuador, to consider possible political moves to implement the demands. That gathering, though, is likely to maintain last week's bankerly calm and be free of wild rhetoric.

Among those pleased by the predominantly moderate tone of the proceedings was Beryl Sprinkel, Under Secretary of the Treasury for monetary affairs, who represented the U.S. at the session. "It is in our interest that the debtor countries adjust and grow," said he. "But we have not committed ourselves to expending vast increases in resources on their behalf, because we do not have them." Nevertheless, by pressing their interests without raising threats, the delegates may have helped to keep the debt bomb from going off.

--By John Greenwald.

Reported by Gisela Bolte/Washington and Frederick Ungeheuer/Caracas

With reporting by Gisela Bolte, Frederick Ungeheuer This file is automatically generated by a robot program, so viewer discretion is required.