Tax bill risks turning off US banks on Latin lands
A provision in the tax-overhaul bill could crimp future bank loans to large Latin American debtors like Mexico, and it might jeopardize the Reagan administration's strategy to rescue these troubled nations. The provision would tax larger banks' ``loan loss'' reserves, a nest egg that lenders maintain to back up any shaky domestic or international loans. Banks typically hold a 1 percent to 2 percent reserve to cover possible losses from bad loans.
The reserves have been tax free -- a loophole that the Reagan administration wants to plug. Under Congress's tax-overhaul plan, banks with assets of $500 million or more would see a 10 percent tax on their reserves in 1987, with the levy climbing to 50 percent by 1990. The move would garner an estimated $4 billion to $7 billion in government revenues during the next four years.
``A lot of people are going to rethink their [lending] strategy,'' says Carlos Escudero, with Union Trust Bank in Baltimore. ``There may be industries that we've loaned to before that we may not in the future,'' because maintaining large loan reserves may be too expensive.
Bankers could rule out some risky ventures in the United States and overseas as they try to minimize their loan exposure, thus reducing their need for large loan-loss reserves, lenders say.
``You start playing it safer and safer; you start hedging yourself'' to avoid getting stuck with bad loans, says Mr. Escudero, who oversees the bank's loans to Latin America and other developing regions.
Playing it ``safe,'' however, is not a phrase Latin America wants to hear. The region is carrying about half a trillion dollars in debt, with a considerable portion owed to US banks. Many countries say they will need a fresh infusion of money to stave off an economic catastrophe.
Mexico -- which has nearly $100 billion in loans -- is negotiating $12 billion in new loans from commercial banks and multinational lending agencies as part of an accord struck between Mexican officials and the International Monetary Fund.
That loan package is part of the Reagan administration's strategy of providing new money in exchange for domestic economic reforms. The program, dubbed the Baker plan after Treasury Secretary James A. Baker III, is still in its infancy, and this tax provision could harm its continuation, observers say.
In light of the tax plan, banks ``will rethink the whole Baker initiative, and some will say `no way' '' to participating, Escudero contends.
The American Bankers Association says each lending institution will have to consider if it will stick with the Baker plan. ``The rules of the game have been changed,'' says Nina Gross, associate tax counsel with the association. ``There may be some second thinking; there should be an impact and some fallout.''
Ms. Gross says banks are ``quite disturbed'' by the possible tax, and they are ``running the numbers'' to see if it would be profitable to continue their current lending practices.
Observers say regional banks would most likely be the first to drop out of the international lending arena if the tax provision remained. ``They will have to evaluate their commitment to their international division and decide if it is worth it,'' one banker says.
Administration officials have declined to comment on the tax provision, saying it is still a congressional matter.
An aide to Sen. Bill Bradley (D) of New Jersey, who has been a driving force behind the tax-overhaul bill, says the secretary of the Treasury and the Federal Reserve chairman have ``indicated to the [Senate Finance] committee that the changes would not jeopardize the banks.'' Nor will they affect lending to indebted nations, he says.
Mr. Bradley's office would not comment on the possible effects on the Baker plan, which the New Jersey senator opposes. ``Senator Bradley will look for ways to implement recommendations he has made'' to relieve Latin America's huge debt problems, the aide adds.