Peru's nationalization of banks shakes business confidence. While some fear end of private property, Garc'ia sees small business gains

By some worried analysts' estimates, Latin America's most radical debtor country will topple into economic chaos within six months. Others give it more than a year. Working like a propeller on the crisis is a controversial law nationalizing what remains of the private financial system.

President Alan Garc'ia P'erez signed the law Sunday - passing 10 private commercial banks, 17 insurance companies, and six finance companies into the hands of the state. Congress passed the nationalization law at the end of September after the President proposed it July 28.

The law, which was hotly debated in the streets as well as in the Congress for two months, has polarized Peru. In the eyes of President Garc'ia as well as many in Peru's large electoral left wing, it is an important step along the road to democratic socialist revolution.

Although its economic justifications are thin, the center-left President firmly believes in the political importance of the measure. In a country whose majority is shockingly poor, the grip of the most powerful economic groups, clustered around major private banks, must be broken, Mr. Garc'ia said. The state will bestow credit more democratically, he added, with a greater portion going to medium and small businesses.

For those who oppose the measure, who are largely middle class and rich, it spells the end of the right to private property and the beginning of an era of centrally planned economy that will inevitably bring shortages, more bureaucracy and corruption, and a severe and prolonged economic crisis.

The expropriated owners of a number of banks and insurance companies are expected to dramatically resist the implementation of the law. Francisco Pardo Mesones, the president of the Association of Banks, for example, has been sleeping in his office at the Banco Mercantil, of which he is president, since Sept. 28. ``My bank is not for sale and I will not leave it voluntarily. They will have to carry me out,'' he says.

Government officials say they will seek to avoid scandalous scenes of dragging bankers out into the streets in their pajamas. But so far no smooth transition to state control appears to be worked out.

The nationalization has demolished the confidence of the business community, which had been vigorously courted by Garc'ia up until July. Ricardo Vega Llona, president of the largest private-sector organization, the National Confederation of Private Business Institutions, said flatly, ``The government has lost its credibility.'' A recent survey showed that 72 percent of businessmen disapproved of the government's economic policy and that 75 percent had little or no confidence in the government's intentions.

With such a negative outlook, the business community is much less likely to invest, and this is expected to be the most damaging effect of the nationalization. If investment does not occur, the consumer-led boom engineered by the government during the last two years will fall flat.

The government has stimulated consumption by steadily raising wages, creating jobs programs for the unemployed, controlling prices, and either freezing or keeping a tight rein on the exchange rate. Last year, the program brought Peru 8.5 percent annual growth, the highest growth rate in Latin America, and lowered inflation from a rate of near 250 percent to 63 percent.

The model was initially largely based on using up Peru's ample industrial idle capacity. The country had been in a slump since 1983. According to presidential economic adviser Daniel Carbonetto, an investment phase would begin once the idle capacity was absorbed and businessmen were awash in profits from the consumer boom.

In the first several months of this year, dubbed the year of investment by the government, the hoped-for investment did not get off the mark. Garc'ia has accused businessmen of secreting their profits abroad instead of investing them at home.

Although tempers are still running high, the President is beginning to try to make amends with the business community. He has proposed ``an investment state of emergency'' under which he is offering incentives and facilities for investors to act fast. But enticing investors will not be an easy task, and not only because of the nationalization.

Peru's net foreign currency reserves have dropped to $479 million, barely enough for three months' imports. The dollar shortfall will mean some inputs become scarce and industrial bottlenecks develop, economists say. Some consumers, anticipating shortages, are already stocking up on such basic products as soap, toilet paper, and cooking oil.

Inflation has also picked up, and is now at 100 percent. The trade deficit is predicted to be $156 million in goods alone, with an additional $381 million deficit in nonfinancial services, according to the National Planning Institute. Unlike most other Latin American countries, help cannot be expected from abroad. Peru has been almost completely cut off from international financing since Garc'ia unilaterally limited debt payments to 10 percent of export income two years ago. Now, the nationalization has scared away at least $100 million in vital trade credit lines, Mr. Pardo Mesones said.

Despite these negative signs and the added threat of Maoist Shining Path guerrillas, Garc'ia and his economists are optimistic that many entrepreneurs will invest. They will do so, the government says, because the only alternative is to leave Peru and lose all.