A Little Unexpected Optimism

By John Greenwald

Bankers see progress on defusing the Third World's debt bomb

Central bankers and finance ministers, who are not exactly a frivolous group even at the best of times, have been particularly solemn over the past two years as they struggled with the Third World's staggering debt problems. But the financiers arriving in Washington for this week's joint annual meeting of the World Bank and the International Monetary Fund were in an upbeat mood. Gone was the near panic that swept the same meeting in 1982 after Mexico declared that it could not make its loan payments on schedule. Now the bankers and ministers share a growing optimism about the health of the world economy.

Said C. Fred Bergsten, director of Washington's Institute for International Economics: "This year's meeting will be a love feast."

While the debt bomb has still to be defused, its tick is much softer than before. "The international financial system has the capacity to handle the Latin American debt crisis," said Economist Arnaldo Musich, an unofficial adviser to Argentine President Raul Alfonsin. Robert Solomon, a guest scholar at the Brookings Institution, agreed: "The countries can grow out of it. The world can grow out of it."

One key reason for the sunnier mood is the exuberant U.S. economic recovery, which has stimulated growth around the globe. Indeed, the American surge has been so strong that some economists fear it might eventually force the Federal Reserve to push up interest rates to keep growth under control. The clearest sign of U.S. economic might has been the continuing strength of the American dollar abroad. Last week it hit alltime highs against the British pound and the French franc and climbed to an 11 1/2-year peak against the West German mark. The British pound was worth more than $2.30 in 1980 and about $1.50 a year ago, but now fetches barely $1.25. Late the week the West German Bundesbank bought several hundred million dollars' worth of marks in an effort to shore up the value of its currency.

Some experts suspect that the runaway dollar may be partly a political phenomenon. Foreigners watch ing this year's presidential campaign for clues about the future investment climate in the U.S. like what they see in the public opinion polls. Says Stephen Marris, a former economist for the Organization for Economic Cooperation and Development: "In the last two or three weeks, the growing feeling is that it's going to be a landslide for Reagan. That basically means more people want to put money into America."

Whatever is causing the dollar's climb, both the U.S. rebound and the strong currency have been a tonic to many countries. Reason: the thriving economy whets the American appetite for imports, while the strong dollar slashes the price of foreign exports to the U.S. This has been particularly important to the indebted developing countries. Brazilian exports to the U.S. have climbed 44% over the past two years, to an estimated $6.9 billion for 1984, while Mexico's are up 15%, to $18 billion. Boasts Treasury Secretary Donald Regan: "What is good for the U.S. has to be good for the rest of the world. We are the engine of recovery. We have enabled the other nations of the world to recover faster."

Mexico, whose plea of poverty set off the emergency, is now showing how the problem might be solved. The government of President Miguel de la Madrid Hurtado has cut its domestic spending and taken other painful IMF-demanded steps to put Mexico's economy in order. The country's creditors rewarded it last month with financial breaks that could serve as a model for agreements with other borrowers. The accord allows Mexico to repay about half of its $95 billion in foreign loans at an average interest rate of 14 3/8%, down from 14 5/8%, by 1998, eight years beyond the original deadline. That will save the country $400 million per year in interest payments.

The international debt crisis, however, is still not over. Argentine Economy Minister Bernardo Grinspun, whose country is now the most troubled of all Latin American borrowers, was in Washington last week for another meeting with IMF Managing Director Jacques de Larosiere. The two discussed a long-delayed austerity program aimed at attacking Argentina's hyperinflation rate, which is now 1,200% a year. Without an accord by Sept. 30, the country will be unable to get loans that will permit it to make overdue interest payments on its $44.4 billion of debt.

Latin American borrowers continue to be haunted by the possibility of a further rise in U.S. interest rates. A jump in the prime rate earlier this year from 11% to 13% raised their debt payments by $5 billion and led them to consider forming a cartel to demand easier terms. Latin debtors today are running the same type of risk as homeowners with adjustable-rate mortgages. Though they may have originally borrowed at an affordable 7%, householders could be forced to default on their loans if borrowing costs suddenly rose. Said Lawrence Brainard, the chief international economist for New York's " Bankers Trust: "If rates rise by another 2% to 3%, as some of my colleagues predict, we will be back Square 1." Last week, however, Morgan Guaranty and other banks dropped their prime rate of interest from 13% to 12 3/4%.

Mexico and other Latin nations are also concerned about the cash drain required to pay off the foreign debt. In the past year, Latin American countries have transferred $30 billion more in interest payments to their creditors than they have received in fresh lending. That represents 3% of their total gross national product. Mexico alone has had an $11 billion annual outflow and expects to continue losing $7 billion a year even after it becomes eligible for increased credit in about two years.

Declared Mexican Finance Secretary Jesus Silva Herzog two weeks ago at a meeting of the eleven largest Latin debtors in Mar del Plata, Argentina: "The real problem of the foreign debt is far from resolved. You do not solve a problem in one or two rounds when the match may take 15 rounds or more."

--By John Greenwald.

Reported by Gisela Bolte/Washington and Frederick Ungeheuer/New York

With reporting by Gisela Bolte/Washington, Frederick Ungeheuer/New York