Citicorp's loan plan will play part in Venice economic talks
Although the chairman of Citicorp will not be attending the annual economic summit in Venice in June, his presence will be felt. The bank's decision to dramatically increase its loan-loss reserves by $3 billion will be the highlight of discussion on third-world debt.
A government official familiar with international debt confirms the effect of Citicorp's action, saying: ``I assume it elevates [the issue]. It adds a startling new ingredient in the debt question.''
Many analysts of the debt situation believe Citicorp's decision will mean debtor countries will face tougher negotiations to get new loans.
Citicorp chairman John Reed last week explained that the move would place the bank in a stronger bargaining position. For example, Mr. Reed said Citicorp expects to take $1 billion of its newly created $3 billion reserve when it swaps loans on its books for equity.
In swapping debt for equity a bank becomes a shareholder in a country and its return is tied to the country's performance. Thus the bank does not depend on interest payments but can press for more substantial economic reforms within a debtor country.
Economist George Rocourt of Mercantile Safe Deposit & Trust Company in Baltimore says the Citicorp move means that Treasury Secretary James A. Baker's debt plan is still alive, although some observers believe otherwise. The Baker plan depends on growth in the debtor countries, as well as debt-equity swaps, such as Citicorp is doing. ``Part of the Baker plan counts on the privatization of business in the debtor countries. The Citicorp decision will move in that direction faster,'' Mr. Rocourt says.
At the same time, many supporters of a new plan to help the debtor nations believe the Citicorp decision will help their cause. James Robinson III, chairman of American Express Co., says the concept of a new Marshall Plan for the debtor countries will be raised at the summit. In the original Marshall Plan, the US committed 2 percent of its gross national product to the reconstruction of Europe at the end of World War II. The US now spends about one-tenth of this level on overseas development.
Says Mr. Robinson, ``It is coincident with the 40th anniversary of the Marshall Plan, and is too obvious to ignore.'' The decision by Citicorp, Robinson says, ``draws into focus the need for the transfer of more resources to the LDCs (less developed countries).''
Last week in Tarrytown, N.Y., a gathering of business, government, scientific, and media experts suggested such a plan should be enacted to help in yen recycling, or the movement of Japan's large trade surplus, and to help the third world. Conference participants also said there should be ``an immediate realistic assessment'' of the third-world debt burden instead of an ad hoc approach.
Dr. Norio Yamamoto, head of the Mitsubishi Research Institute in Tokyo and a participant in the conference, is pessimistic on prospects that world leaders will take such steps. ``This kind of drastic choice may be filtered out,'' he says. However, some conference participants believe Japanese Prime Minister Yasuhiro Nakasone will suggest new aid for the debtor nations. For political reasons Mr. Nakasone is reluctant to be the only summit participant to suggest new aid. Last week Nakasone revealed details of a $20 billion plan to recycle some of Japan's large trade surplus.
Citicorp wanted to wait until almost all of the debt negotiations were over this year before announcing its decision to build loan-loss reserves. Only Brazil's debt remains to be negotiated. Three months ago Brazil unilaterally stopped making interest payments.
Reed assured the bank's executives that it would conservatively take two years for the bank to recoup the lost earnings because of the increased reserves. This is because the bank earns about $500 million per quarter before taxes. With the large loss, it will pay minimum taxes.