Resolving third-world debt: a matter of time or taking action?
Many bankers are probably more concerned about the safety of their developing-country debts than they like to admit in public. That is shown in a ''confidential'' study prepared by the Royal Bank of Canada, one of the largest banks in the world.
''It is highly probable,'' the 50-page memo states, ''that an important part of the debt servicing burdens of developing countries involved in reschedulings do not represent short term liquidity problems that time alone will quickly resolve.
''Present reschedulings (of debts) are not really solving these problems but rather are giving some breathing space by putting them off into 1985 and beyond. There is need to take advantage of this breathing space by developing initiatives now for managing the debt servicing problems that will reemerge in 1985.''
That view sharply contrasts with the confidence expressed by George J. Clark, executive vice-president of New York's Citibank. In that bank's monthly taped commentary, Sound of the Economy, he says that ''. . . we do not yet see anything in that debt situation which is not manageable. We think that each country can work out its affairs so that the debt can be serviced.''
There's something of a similar split between relative optimists and pessimists in the economic research area.
Rudiger Dornbusch, an economist with the Massachusetts Institute of Technology, terms the present strategy for dealing with the debt problem one of ''muddling through.'' Each country is dealt with by the creditors on a case-by-case basis. The International Monetary Fund provides a loan, conditional on a program of restraint designed to improve the nation's international payments position. Once that is done, the commercial bankers sweeten the pie with more new money, plus a resched-uling of the old debts to ease the servicing burden.
''Muddling through,'' Professor Dornbusch says, ''is poor policy, because it does not, in the near term, return the debtor economies to reasonably functioning market economies, poorer but with employment and hope. Muddling through has, for all intents and purposes, created siege economies.''
To solve the problem for the longer run, he says, industrial countries must remove import barriers to goods from the developing countries. And commercial banks have to write down some of their debts in exchange for less severe stabilization programs in the developing countries aimed at stimulating their exports.
William R. Cline, a senior fellow at the Institute for International Economics in Washington, is more optimistic. Talks could break down, he says, if austerity programs bring on political problems, but ''it would be a mistake to change policy direction toward radical new departures at this time, when the early phase of global debt management has shown major progress.''
He is confident that as the United States reduces its budget deficit, interest rates will fall, easing the debt problem. The dollar also should weaken. As the recovery spreads, industrial nations will pull in more imports from the third-world nations and boost commodity prices.
The Royal Bank study, siding with Dornbusch, says that ''simple rescheduling alone will not provide permanent financial relief. Such relief must involve the transformation of debt instruments into equity type instruments (a corporate stock is an equity), and/or permanent reduction in debt-servicing through easier terms and/or write-offs by creditors.
''Such relief will have to come from initiatives by the banks, multilateral organizations, and industrial governments.''
That study was completed early this year, before the recent rise in interest rates worsened the problem.
As the Royal Bank economists see it, the debt crisis developed when the so-called ''debt-service ratio'' - the ratio of payments on interest and principal on a nation's debts compared with the value of its exports - deteriorated to an ''unmanageable'' 45 percent in 1982 and '83. The ''maximum sustainable level,'' the bank figures, is probably about 20 percent. Reschedulings accomplished so far, for such nations as Mexico and Brazil, have reduced the debt-service ratio to an average 22 percent in 1983 and this year.
But the bank calculates that the ratio, even after reschedulings, could climb to 38 percent next year and remain in the 35- to 44-percent area through 1988. And that, the bank says, assumes a ''relatively optimistic scenario'' of falling interest rates, resumed export growth, and modest real growth in the industrial countries of about 2.7 percent on average.
Mr. Cline, it might be noted, has made similar calculations with somewhat more cheerful assumptions and come to a happier conclusion.
The Royal Bank study worries that the situation could be even ''much worse'' if recovery falters or the developing countries fail to follow stabilizing domestic policies. If, the bank continues, the international banks have to increase their exposure in major debtor countries throughout the 1980s simply for capitalizing interest on past debt, this ''raises serious questions of sound banking.''
The study concludes gloomily: ''The way things are going, there could be a massive debt servicing problem in 1985.'' Even Citibank's Mr. Clark believes it will be 20 months before major Latin American debtor nations will be able to borrow freely again.