Latin America Feels the Squeeze

Rising U.S. interest rates generate jitters not just from Maine to California; they also rattle nerves in Latin America from Mexico to Argentina. Every time rates jump, so do the interest costs on the region's $335 billion foreign debt, of which about 27% is owed to U.S. banks. For each percentage point rise in the U.S. prime and other international lending rates, the annual interest on Brazil's $96 billion debt increases by about $750 million, and the payments on Argentina's $43 billion obligation go up by some $300 million. Latin America's economies are already severely depressed, and they will not be able to tolerate major additions to their financial burden.

Since the debt crisis erupted in 1982, the Latin American countries have persuaded banks to reschedule principal payments and have relied on the Intern tional Monetary Fund for emergency loans. In return, the IMF has insisted that they adopt austerity programs to cut excessive government spending. Partly as a result of such measures, Brazil's economic output fell by 3.3% last year, and yet inflation still rages at an annual rate of 230%. Mexico, which has an $85 billion foreign debt, suffered a decline of almost 4% in production last year, and expects no growth in 1984.

Political tension is growing. In Mexico, a coalition of opposition parties, including both conservative and socialist groups, is demanding that the country refuse to pay higher interest rates on foreign loans. In Peru, efforts to cope with a $13 billion debt through cutbacks in government spending helped provoke last week's 24-hour general strike by labor unions.

Unlike some of its neighbors, Argentina has rebelled against further reducing growth just to pay off foreign debt. The new civilian government of President Raul Alfonsin canceled an agreement that the old military regime had negotiated with the IMF and is asking the agency for loans on easier terms. Argentina has made no payments on its debt since October and is $2.7 billion in arrears.

Unless the country catches up on its interest payments by the end of March, which is extremely unlikely, U.S. banks will have to classify Argentine loans as "nonperforming" and write off the missing interest against earnings. That would be a significant blow to the profits of several New York banks, including Chase Manhattan, Morgan Guaranty and Manufacturers Hanover, which together have $3 billion on loan to Argentina. Lawrence Cohn, a banking analyst with the Dean Witter investment firm, estimates that Manufacturers Hanover's profits will fall 15% in the first quarter compared with the same period in 1983, and 5 that Chase Manhattan's earnings will dip 13%.

The banks are confident that Argentina will come to terms with the IMF and resume interest payments within a few months. For that to happen, how ever, the Argentines must convince the IMF that they can curb their 400% inflation rate. A major cause of the price explosion is the government's budget deficit, which amounts to 14% of the country's domestic production. By comparison, the federal deficit in the U.S. is about 5% of national output.

For nearly two years, the Latin American nations have narrowly avoided default through a series of debt reschedulings and IMF bailouts. But if U.S. interest rates shoot up, the patch work will shred and the international banking system could once again be in grave danger.