US banks distance themselves from debtor nations. THIRD-WORLD LOANS
In May, Citibank took a half step away from Latin America when it set aside $3 billion in reserves against bad loans; a stampede of other banks followed suit. This week, the Bank of Boston took a full step away from Latin America when it wrote off $200 million, or 20 percent of its third-world debt. This time no one expects a stampede, but if even a few banks follow suit, United States officials will be under pressure to rethink their strategy on third-world debt.
``Every one of these things is a nail in the coffin of the Baker plan,'' says John Walsh, an aide to the Senate Banking Committee. The plan outlined several years ago by Treasury Secretary James Baker III encourages commercial banks to continue lending to debtor nations in exchange for those countries restructuring their economies.
Walter Wriston, retired chairman of Citicorp, called the timing of bank's move ``puzzling.'' ``I'm not sure what has transpired,'' he says, noting that with the exception of Peru and Brazil, other Latin debtors are making interest payments.
Rather than one specific event, the Bank of Boston move reflects the frustration banks have felt over the slow pace of restructuring within debtor countries, analysts say. It comes two weeks after the heads of eight Latin countries met in Acapulco, Mexico. It was the first Latin summit held without US involvement.
The summiteers specifically noted that they would not gang up and form a debtors' cartel, notes Luis Luis, director of the Latin American department at the Institute of International Finance. ``But the very organization of the meeting made banks aware that there is far more coordination than ever existed before,'' he says. That, he says, may be ``cause for concern'' for US banks.
Other banks, however, are expected to operate business-as-usual for some time at least. They will be watching to see whether Latin countries decide to curtail interest payments to US banks, as the Latin officials suggested in Acapulco, to keep their economies growing. In light of this, New York bankers are understood to be considering holding back any new money if Latin economies underperform.
Moreover, unlike the Bank of Boston, many banks cannot afford such write-offs. On Tuesday, Standard & Poors put Bank of Boston on its ``credit watch'' list while it reevaluates the bank's finances. The rating agency could downgrade the bank's credit rating - an action banks want to avoid if possible.
In addition, as one banker explained, the move limits the bank's options in how it can use any future money it gets from debtor countries.
More drama may be coming from the Bank of Boston itself, however. A spokesman for the bank said yesterday that the $200 million represents pieces of loans to all countries, not entire loans to specific countries. Once the bank goes through the loans with a fine-tooth comb, it may decide to write off chunks of the remaining $800 million it holds, according to sources outside the bank.
``Generally the trouble gets worse before it gets better,'' says Robert Lorenz, former chief debt negotiator at Security Pacific.
If other banks decide to pull back, they could indirectly hurt the World Bank, which also lends money to the debtor countries, says congressional aide Mark Constantine. Next year, Congress will consider a $60 billion international package to increase the World Bank's capital, but that increase will be in jeopardy if Congress perceives that commercial banks are just standing aside and letting multilateral banks funnel in new money for developing nations.