Will third world's big debtors default? Both sides in debate gain new arguments
The prospects of the developing nations fully repaying their debts are dismal, former White House economist Norman A. Bailey contends. Not so, says David C. Mulford, assistant secretary of the United States Treasury for international affairs. The debtor countries have made ``major strides'' in reducing their external imbalances.
Ever since the debtor crisis began in 1982, when Mexico announced it could not service its debts, optimists and pessimists have debated the chances of default on some portion of the $900 billion in debts.
That dispute has been revived by the drop in oil prices and by Nigeria's move last month to set a ceiling on the amount it will pay on its international debt this year.
Mr. Bailey, who was senior director of international economic affairs in President Reagan's National Security Council, sees the Nigerian move as part of a trend, a sign that the debt crisis is not just a temporary shortage of foreign exchange, but ``a structural and systematic disequilibrium'' within debtor nations.
He maintains that the debtor nations will need more help than the $29 billion extra over the next three years included in a plan of Treasury Secretary James A. Baker III.
The debtor nations need ``debt-service relief,'' he maintains, not just additional funds that add to their total debts. He suggests various techniques for reducing the interest rate on the massive debts to 6 percent, from around 10 percent nowadays.
The Treasury's Mr. Mulford maintains that his boss's plan is sufficient. He told Congress Jan. 23 that the decline in interest rates since the start of 1985 has saved debtor countries $7 billion. And, although lower oil prices have worsened the picture for some developing countries, this change will help other debtor nations.
``On balance,'' he said, ``the overall situation has improved since last summer.''
He concedes, however, that Mexico and Nigeria, both highly dependent on oil exports, will face increased financing requirements in the near future.
Most commercial bankers figure the present system of dealing with the debts on an individual-country basis will suffice. They would like to see more financial help from ``official'' creditors -- from governments and international institutions such as the World Bank and the International Monetary Fund (IMF). But talk of interest rate reductions on the debt makes them anxious.
William R. Rhodes, chairman of the debt restructuring committee of Citibank, the world's largest bank, talks cheerfully of progress in dealing with the debts, a ``generally excellent performance on trade worldwide,'' and ``a future with less reliance on debt and more geared to stable, sustainable growth.''
Mr. Rhodes expects the banks to conclude more multi-year programs for stretching out debt payments, similar to the 14-year rescheduling deal signed with Mexico last year. He sees the political side ``coming more into play again.'' In other words, the question is whether the less developed countries have the will to continue the internal economic adjustments necessary to enable them to service their debts. He feels they do have this political strength.
So far none of today's crop of debtor nations have refused to pay anything on their debts, except temporarily during negotiations. But four nations have talked of limits on their debt payments.
Bolivia in 1984 spoke of limiting its payments to 25 percent of its export revenues. Last year Peru's new President, Alan Garc'ia, said he would limit payments to 10 percent. And Poland has put a ceiling of $2 billion a year on its debt servicing payments.
``It's obvious where the situation is going,'' commented economist Bailey at a conference on debt issues last month which was sponsored by the United Nations Economic Commission on Latin America and the Caribbean (ECLAC).
Commercial bankers at the same conference disagreed, however, maintaining that there is no trend toward even partial default.
One pointed out that in the case of Nigeria, 30 percent of foreign-exchange earnings should be adequate to service that nation's $17 billion in international debts.
Moreover, Nigerian Finance Minister Kalu Kalu later told reporters the 30 percent figure is a target, not a strict limit.
In Peru, President Garc'ia's campaign promise to limit debt payments has proved extremely popular, it was noted. To some degree it has given him the political strength to impose stringent austerity on the nation, despite a decline in Peru's per capita output of goods and services of 14.6 percent since 1980. If economic growth revives, Peru could be in a better position to service its debts, it is argued.
Bankers warn that interest rate limits would discourage their institutions from making any further loans to the developing countries, as pressed for by the Baker plan.
``I wouldn't be totally pessimistic about working out a solution along the same lines as in the last three years,'' said an official connected with a bank.
ECLAC estimates Latin America's total external debt at $368 billion at the end of 1985. That was up only 2 percent from a year earlier, and down somewhat in real terms when the impact of inflation is considered. Commercial banks put only $4.75 billion in new loans to the region on their books last year.
Referring to slow growth in most of Latin America, ECLAC economists complain that ``The burden of the adjustment has been borne by the debtor countries, without the creditor countries making an adequate contribution.'' They see neither a significant reversal in the recessionary trend nor any noticeable progress in contending with indebtedness.
The current-account deficit of Latin America as a whole (payments abroad minus earnings abroad) declined from $41 billion in 1982 to $1 billion in 1984. ECLAC estimates it rose again last year to $4.4 billion.
But the economic situation varies considerably from country to country. Here is the picture in the three nations with the largest debts:
Mexico: The IMF last month gave a $315 million loan to Mexico to help it cover some of the nation's emergency outlays in the wake of the severe earthquakes last September. Lower oil prices and other factors have left observers more pessimistic about Mexico's prospects, although its economy did grow 3.5 percent last year.
Mexican Finance Minister Jes'us Silva Herzog says the drop in oil prices could cost Mexico $3 billion in lost export income. Oil income provides Mexico with 70 percent of its export earnings.
Mexico's surplus of exports over imports dropped from about $12.8 billion in 1984 to around $8 billion in 1985. That surplus was not quite sufficient to service its $97.7 billion of debts. Imports increased 20 percent and exports decreased 10 percent.
Inflation has accelerated since a major devaluation of the peso in July. It reached almost 60 percent for the 12 months before November. Capital flight was also substantial last year.
Mexico had expected to need $4.8 billion in new financing this year, of which $2.75 billion would come from commercial bankers. Assistant Treasury Secretary Mulford now figures that $6 billion to $6.5 billion may be required ``relatively quickly.''
Argentina: President Ra'ul Alfons'in's ``battle plan'' of June 14 has done much to restore economic stability to the nation. That plan includes a new currency, the Austral, frozen wages and prices, and a difficult reduction in the government's budget deficit. The nation's gross national product plunged an estimated 4.5 percent last year.
Argentina's trade surplus, needed to service external debts of $50 billion, ran about $4.6 billion last year, up from around $3.9 billion in 1984. Argentina has made some interest payments on its debts, pleasing foreign commercial banks. Inflation, which exceeded 1,000 percent for the year through June, dropped to a little more than 2 percent in the September-November period. Brazil: Last month Brazil and its creditor banks scrapped plans for a major restructuring of about half its $102 billion in debt. The new democratic government of Jos'e Sarney has refused to seek an IMF loan and austerity plan.
But Brazilian officials saw IMF managing director Jacques de Larosi`ere early last month, hoping to get some form of endorsement of a government program for cutting the budget deficit and improving the efficiency of state enterprises. Since this would not give the IMF the right to review Brazil's policy and economic performance, it may be difficult for Mr. de Larosi`ere to grant the program his blessing -- an endorsement useful when one is talking to commercial bankers.
One problem is that inflation has accelerated to around a 220 percent annual rate. On a brighter note, Brazil's economy last year grew a handsome 7 percent, higher coffee prices will boost export revenues, and lower oil prices will trim import costs.
Brazil and a group of its creditor banks reached tentative agreement later in January to reschedule over seven years some $6 billion in principal payments due in 1985 and to maintain some $16 billion in trade credits.