World bankers search for new ways to defuse world debt crisis
Bretton Woods, N.H.
Alarmed by a flare-up of interest rates in the United States, the financial community is groping for new solutions to the debt crisis faced by developing countries.
Until recent weeks, commercial bankers were reluctant to talk publicly about making concessions on their billions in loans to the developing countries. They were afraid they might weaken their bargaining position in negotiations over restructuring bank loans to such nations as Brazil, Mexico, or Argentina.
That attitude has changed. Now the bankers talk much more openly of alternative techniques for easing the debt--service burdens of the developing countries. Some such ideas could be inconvenient or costly to their banks.
Also, they have been hearing verbal appeals from Federal Reserve officials - their regulators - to give the troubled debtor nations a break.
The Fed has moved to boost domestic interest rates to slow what it considers to be too-rapid economic expansion. But those higher rates endanger the progress made within the past nearly two years in dealing with the debt issue.
Earlier this month, Anthony Solomon, head of the Federal Reserve Bank of New York, suggested that the banks consider ''some kind of cap'' on interest on loans to developing countries.
Each 1 percent boost in the average interest rate on loans to the non-OPEC developing nations adds $3.5 billion or more to their annual interest bill, he noted.
In the past few weeks, the prime rate - the interest rate commercial banks charge their more creditworthy customers - has risen 1.5 percent to 12.5 percent. The interest charged on most loans to the major Latin American debtors floats up or down above the prime rate or another key rate in London known as Libor.
This rise in interest rates, says Pedro-Pablo Kuczynski, co-chairman of First Boston International, ''poses an urgent and immediate problem.''
Mr. Kuczynski was speaking here at a conference organized by the Federal Reserve Bank of Boston on the international monetary system. Forty years earlier , representatives of some 44 nations met here in the same room in the same red-roofed hotel, The Mount Washington, to establish a new international monetary system for the world.
Speakers here have termed that 1944 meeting, known as the Bretton Woods Conference, the ''most successful'' of economic conferences. Among other things, it established the World Bank and the International Monetary Fund (IMF), two key organizations in the economic system of the world.
The external debt problem of the developing nations, particularly the larger Latin American nations, has been dominating the attention of world financial leaders, just as the quadrupling of oil prices by OPEC did a decade ago. Both challenges have been considered threatening to the international financial system.
It was the world recession, zooming interest rates, falling commodity prices, a strong dollar, increased protectionism, and economic mismanagement that weakened the capacity of the debtor nations to service their debts. The crisis began in August 1982, when Mexico declared a limited moratorium on repaying its debts. It was also hurt by weak oil prices.
Since then, the commercial bankers, central bankers, and officials of the IMF and other international institutions have had to deal with a steady succession of debt crises, with one nation after another having to negotiate a rescheduling of its debts to ease its payments burden.
To a large degree, bankers were counting on an improvement in world economic conditions to enable the developing countries service their debts. There were calculations that world economic recovery (well under way), rising commodity prices (up, but not as much as expected), declining interest rates, a weaker dollar (actually stronger than expected), and austerity in the debtor countries would do the trick over the next several years. But rising interest rates have cast some fresh doubts on this vision of events.
As a result, bankers and others have been considering such ideas as these:
* Cap the interest rate on loans to debtor countries at, say, 10 percent. If market rates go above that, the interest would be tacked onto the end of the loan period.
* Change the currency composition of the loans. Most are now denominated in dollars. But interest rates in such nations as West Germany or Japan are considerably lower than those on dollar loans. This would ease the repayment problem of debtor nations.
From the standpoint of banks in other industrial countries, loans denominated in their own currencies may offer some additional safety. Their central banks may more likely come to the rescue in the event of a major default.
* Stretch out the rescheduling.
At the moment, debts coming due within the next year are rescheduled on a case-by-case basis to ease the debt burden. The IMF and commercial bankers have wanted to keep the debtor nations on a short leash to be sure that ''adjustment programs'' are carried out properly to improve the chances for repayment.
These programs have involved sizable declines in the standard of living in Latin American nations in an effort to reduce imports and make more output available for export. Such IMF-related austerity measures provoked food riots in the Dominican Republic last month, as well as recent protests and riots in Brazil, Bolivia, and Peru.
The bankers and officials, however, are becoming exhausted as the negotiations go on and on and repeat themselves year after year. Moreover, the developing countries argue they want easier terms that will provide them with more time to adjust their domestic economies.
* Alter the accounting rules for US banks so they do not have to take losses on delinquent loans so quickly.
This has become an important issue because of the failure of Argentina to keep its interest payments current while working out an adjustment program with the IMF in return for a loan. If interest payments lag 90 days, banks must take losses on their financial statements. This was avoided for first-quarter bank earnings statements by a deadline package of loans worked out at the end of March. Another deadline approaches June 30 with the IMF talks still under way.
However, Congress passed the International Lending Supervisory Act of 1983 with the idea of restraining the banks from making what many congressmen considered imprudent loans to countries. So the regulators may be reluctant to ease the accounting provisions.
* Reduce the margin between what banks pay for their money and what they charge the debtor nations. If loan rates were reduced to the cost of money for banks, Latin American nations and the Philippines would save some $8 billion over the next 12 months, according to Mr. Kuczynski.
For now, any special bank concessions will be worked out during rescheduling talks on a case-by-case basis.