No `instant solution' to debt problem
Brazil will not default on its $108 billion debt. If the country did, every Brazilian export would be seized and imports cut off. ``The [legal] papers are already drawn,'' says Walter Wriston, who retired as chairman of Citicorp in 1984, in an assessment of the loans made to Latin American debtors.
On Feb. 20, Brazil declared a moratorium on interest payments on its debt. Last week, Citicorp said it may make an accounting change on its Brazilian debt, which could hurt its earnings. Next week, Brazil will present its own plan to its creditors.
Mr. Wriston, who was responsible for many of the bank's $4.6 billion Brazilian loans (as of 1986), believes there is no instant solution to the Latin debt problem. He says bankers will continue to work toward a resolution to allow them to sleep at night. ``It's not a situation where you have a big loan out to a guy with oil at $50 a barrel, and you wake up and it's now $12,'' he explains.
Rather, Brazil's skilled work force still exists, the factories are still running, and the country is competitive in many different products.
Wriston points out that Brazil must face up to a bad political decision to freeze wages and prices a year ago.
``They are paying the check for a very unwise policy that lasted about a year,'' he says.
Following are comments from an interview with Wriston, who is now chairman of the President's Economic Policy Advisory Board:
How did the latest debt crisis develop?
The latest alarm comes out of Brazil, which had an 8 percent real growth last year with big reserves of $11 billion to $12 billion. But the growth was created artificially. They put a freeze on wages and prices and got themselves elected, which is not unknown in this country. When the party was over, they had created all this demand and now they are back to square one.
That's the bad news, and they started this campaign that they could not do anything about it. Well, the facts are that only the borrower can regulate his own life - lenders can't.
We read about Brazil defaulting on its debt. Is that a possibility?
All these countries know if they attempted to default, credit would be cut off for all of their imports, all their ships would be liable and aircraft would be seized when they landed and every bag of coffee and every other thing.
So that is not an option except in a political speech.
You really think banks would seize Brazilian assets?
I know it would happen, the papers are drawn. And the borrowers all know that. If someone defaults on a loan, any kind of a loan, the lenders will get a judgment against you.
What do you think of some of the plans like [New Jersey Democratic] Senator [Bill] Bradley's to forgive the debt?
All Bradley says is that the banks should write it off and make a gift to the third world. A congressman giving away other peoples' money is his main function in life.
The only problem is he has not collected this money in a lawful tax. It's a wonderful solution if you don't ask who pays the check.
What do you see as the solution?
The only way you can get out of it is to grow out of it. This will be a continuing problem for quite a while, but it's not going to blow up the world. The dimension of the problem is much smaller than it was five years ago. But today it's the pretty girl at the party [who gets all the attention].
How much time should we give the Brazilians to get their economy back on track?
Well, ``God is a Brazilian'' as they will tell you as you get off the plane in Rio. And tomorrow belongs to Brazil. Tomorrow is defined as tomorrow.
They have all the ingredients of success, they have to put it together in a policy that works. There is no mystery what works but there is a mystery on how you sell it politically just the same as there is in this country.
When will Brazil start paying interest on its loans?
They could start ... now.
Why did they stop? Was it just a political statement?
Yes, from what I can tell they are not getting support. I have no doubt loans to Brazil are going to get signed. It's not a situation where you have a loan out to a guy with oil at $50 a barrel and you wake up and it's now $12.
All the people are still there; all the factories are there. And they are all competitive in many different products. They are paying the check for a very unwise policy that lasted about a year.
Should the banks make new loans to Latin America countries?
If they run a fiscal and monetary policy that attracts back their own flight capital, sure. If they say, `we have nothing but state-run enterprises and 100 percent inflation,' the answer is no. So once again it's the conduct of the borrower.