Third-world debt specialists are worried
The continuing third-world debt crisis has spawned some unusual styles of financial consultancy. Washington consultant Norman Bailey thinks his big bank clients are out to lunch when it comes to third-world debt, and he tells them so.
``I tell them what I think they should do, and why,'' Mr. Bailey says, ``and they just ignore it.''
It's probably an exaggeration. Bailey is a former chief economist on the National Security Council in the first Reagan administration, so it's unlikely his clients completely ignore what he says. What he means is that his clients are making a big mistake: They think the Latin American debt crisis is on the road to recovery, when, he says, it is getting dangerously worse.
``They're whistling past the graveyard,'' says Bailey. ``I tell them that. The time for diplomacy is over.''
Across town, in the offices of Smick-Medley and Associates, the time for diplomacy is only beginning. Former senior congressional staffers Richard Medley, a Democrat, and David Smick, a Republican, describe their consultancy operation as a process of helping Wall Street, Washington, and foreign governments understand each other.
Their firm acts for banks and investment dealers, but Messrs. Smick and Medley say the news and contacts they bring to Washington from Wall Street help their government sources as well.
``We help craft policy,'' says Medley.
``We write speeches for congressmen and senators,'' says Smick.
In international financial affairs, says Medley, ``There's room for policy entrepreneurship.''
Both Bailey and Smick-Medley agree that the united front of lenders, supported by Federal Reserve chairman Paul A. Volcker and Treasury Secretary James A. Baker, is in an advanced state of disarray.
``There's no question the creditors' cartel is collapsing,'' Bailey said in an interview in early December. ``For example, only 58 percent of Mexico's creditor banks contributed to the recent $6 billion loan package - 285 banks out of 490, to be exact - in spite of the heavy pressure from Volcker to go along.''
And he points out that more and more banks are coming out in favor of strategies that include organized debt relief for the most troubled debtors.
The assessment in the Smick-Medley shop is the same.
``The united lenders' front doesn't exist anymore,'' Medley says, adding that coming negotiations with Brazil, Philippines, Argentina, and Peru will further weaken whatever solidarity still exists among the creditors.
Another point of agreement: Many banks are ill-prepared for the day of reckoning. When the time comes to write down third-world loans to their true value, says Medley, ``many US banks will be left holding a large part of the bag,'' because of their refusal to take gradual write-downs now.
On the positive side, Smick and Medley are excited by the possibilities for a wide range of innovative financial arrangements such as debt-equity swaps and barter of export-goods for debt.
But for Bailey, the current interest in financial novelties smacks of faddishness. The current craze for debt-equity swaps ``is a substitute for thinking about the real problem,'' he says. And as for barter, he said in a recent speech, ``This is somewhat the equivalent of a large modern factory creating a department of stone tools.''
One reason for his skepticism could be that Bailey himself was in on the biggest financial innovation of them all: the third-world lending craze of the 1970s. With a firm called Bailey, Tondu, Warwick & Co., he packaged third-world loans and sold them to banks.
In 1981, Bailey joined the Reagan White House as international economist on the National Security Council.
``The first memorandum I wrote was on an impending financial crisis; then, a month later, in April 1981, Poland went bankrupt. They said: `Oh, that's because they're Poles, and the Poles are communists.' There was no understanding of the seriousness of the situation, despite the fact that in 1982 reports were coming in constantly of countries with payments problems.''
Having quit to work on the 1984 Reagan campaign, Bailey was invited by former Central Intelligence Agency director William Colby to join him in a Washington consultancy firm. After two years, the partnership is being amicably dissolved. Bailey says some clients were worried about any CIA association, however remote. He will carry on as a consultant.
Medley, the Democrat, and Smick, the Republican, are so well-matched that they are often confused for each other. ``Just remember, I'm the Democrat, so I have the beard,'' said Medley, trying to assist an absent-minded reporter.
A series of international economics seminars in Washington, Zurich, and New York, supposedly ``hosted'' by presidential aspirants Rep. Jack Kemp (R) of New York and Sen. William Bradley (D) of New Jersey, was actually organized by Smick and Medley.
The latest seminar, billed as a ``Congressional Summit on Debt and Trade'' and held at the Waldorf-Astoria Hotel in New York, was a big success.
``There meetings not only advance the public debate through the on-stage events, but they provide the opportunity for all kinds of behind-the-scenes meetings,'' says Medley.
Treasury Secretary Baker and Senator Bradley gave their set speeches on the so-called Baker Plan and the Bradley plan respectively. The Brazilian and Argentinian governments were represented on the ministerial level, but the Mexicans dropped out.
``What apparently happened was that the banks told the Mexicans their loan-package was not going well in terms of the rest of the banks signing up, so the Mexicans stayed home for fear of further antagonizing the banks,'' says Medley.
Among the other speakers at the conference was consultant Bailey. ``There is no time anymore,'' he said, ``for meetings, conferences, complex or even simple schemes that require meetings or negotiations.''
Bailey said the United States should provide immediate, official debt-relief to the poorest of the overindebted countries, and encourage banks to do likewise.
To the congressional officials present, he said: ``I urge you to hold hearings, to hector, to badger, to make absolute pests of yourselves.
``If you succeed, future generations will be in your eternal debt. If you fail, at least you will know that you did what you could, and the blame for the consequences will rest squarely and unambiguously where it belongs - on the shoulders of the Secretary of the Treasury and the chairman of the Federal Reserve Board.''
Medley agrees that the important thing to watch for is a sign from Baker or Volcker that they would encourage the banks to tackle the problem of debt-relief.
Has he seen any indications of such signs?
``Not yet,'' says Medley. ``But the pressures are growing.''