TIME: Almanac 1993/TIME Almanac 1993.iso/time/010989/01098900.035

Text File | 1992-09-23 | 8.7 KB | 168 lines

                                                                                WORLD, Page 32

LATIN AMERICA

Sounding the Alarm


Drowning in debt, threatened democracies look to Washington for
help


    As the New Year dawned, Mexico was bracing itself for a
painful reality. Jan. 1 marked the start of the Pact for
Economic Stabilization and Growth, the latest package of wage
and price controls intended to help keep Mexico's inflation rate
below 20%. But it will probably pinch workers, whose real
earnings have fallen steadily since 1982, and add further stress
to an economy already staggering under more than $100 billion
in foreign debt.

    The implications could be explosive. Three days after
President Carlos Salinas de Gortari announced the
belt-tightening measures last month, hundreds of government
workers demanding pay increases stormed the legislature shouting
antigovernment slogans. Thousands more demonstrated in the
streets of the city. At his inauguration Salinas, who won a
clouded election by the narrowest margin in the 59-year history
of the ruling Institutional Revolutionary Party, again called
for a reduction in Mexico's debt payments. "The interests of
Mexicans," said he, "come before those of the creditors." Yet
Salinas' ability to curb his country's debt burden is severely
handicapped by the threatening political consequences of
domestic austerity.

    Salinas' is but one voice in what has become a rising
chorus of debtor discontent. Crippled by stagnant growth and a
combined foreign debt of more than $400 billion, Latin American
governments are finding it increasingly unacceptable to shoulder
interest payments for loans that only push them deeper into the
red. Yet the banks that made the loans, many of them privately
held U.S. institutions, have come up with few acceptable
solutions.

    For the U.S. Government, the ticking of the debt bomb is no
less disturbing. In the 1980s new democracies laboriously
replaced dictatorships in more than half a dozen Latin American
countries. In Argentina the third military uprising in 20 months
was dispelled; shortly afterward, soldiers won a 20% pay hike.
By sweeping municipal elections in Brazil's major cities last
November, the left posed a credible political threat to the
government of President Jose Sarney. With nearly a dozen Latin
American debtor nations scheduled to hold presidential elections
in the next two years, some populist candidates lure voters with
promises of radical solutions to break the debt squeeze. Unless
the region's scarce capital can be shifted away from
foreign-debt payment back into economic growth, the frail bloom
of democracy could wither.

    In humanitarian terms, the picture is equally grim. In its
annual report, the United Nations Children's Fund blames the
debt crisis for lowering the quality of life for almost 900
million people over the past decade. If the current trend
continues, UNICEF warns, the debt problem will cause the deaths
of 18 million children a year by the end of the century.

    Latin American leaders are sounding the alarm on the
debilitating effects of huge foreign debt in their individual
political campaigns. Venezuela's newly elected President Carlos
Andres Perez won a resounding victory with promises to ease
debt repayments that have subjected the once wealthy nation to
"conditions of poverty." In Mexico, Salinas' chief opponent,
who made the debt issue a central theme of his campaign,
garnered more than 30% of the vote. Argentina's outgoing
President Raul Alfonsin warns that the huge drain on capital
reserves not only smothers Latin American economic growth but
also breeds the social unrest that precipitates political
revolt. "Unfulfilled expectations engender despair," he said,
"which is the appropriate climate for authoritarian adventures."

    Alfonsin speaks from hard experience. Last month's military
mutiny is only one manifestation of the country's worsening
political problems. Restive citizens, plagued with a downward
spiral in the standard of living and an inflation rate of
nearly 400%, are finding the populist promises of the resurgent
Peronist party increasingly alluring. The government of Mexico
is under continual pressure from leftist opposition parties that
have used anger over the debt issue to whip up nationalist
feelings. "In economic stagnation," says Salinas, "democracy can
wither and politics turn into social conflict."

    It may already be too late to prevent that outcome in Peru,
where an inflation rate of some 1,700%, a shrinking economy,
food shortages and stepped-up attacks by the Maoist-oriented
guerrilla group Sendero Luminoso (Shining Path) have brought the
country to the brink of disaster. After taking office in 1985,
President Alan Garcia Perez advanced boldly against his
country's crippling debt. He unilaterally pledged to limit
payments on Peru's foreign debt to 10% of export earnings. But
his strategy only plunged his country deeper into trouble.
Foreign banks were wary of extending desperately needed new
credit. Says one diplomat: "If you are a relatively small debtor
like Peru, you cannot play hardball with the international
system."

    That is not expected to stop the finance ministers of
Mexico, Brazil, Venezuela, Argentina, Uruguay, Peru and Colombia
from sending a joint proposal on debt reduction to the Group of
Seven major Western industrial powers. At a meeting last month
in Brazil, the Latins decided to approach their creditors united
but without confrontation. Yet all agreed they must convince the
creditors that a reduction in debt payments is an "indispensable
condition" for economic recovery.

    There is a growing awareness among Western leaders of the
need for workable solutions. French President Francois
Mitterrand has suggested allowing an organization like the
International Monetary Fund to buy depreciated Latin debt and
accept interest payments in line with the loans' discounted
value. Author John Kenneth Galbraith and Harvard economist
Jeffrey Sachs call for the Latin Americans to declare
moratoriums on their current interest payments and pay only as
much as they can afford. For some nations the plan would be
tantamount to debt forgiveness, which would force banks to write
off the loan-loss reserves they have set aside against the
possibility of defaults. But countries that have tried to
declare moratoriums, like Peru and Brazil, have learned they
merely forfeit all chance of fresh credit. Yet another plan,
advocated by James Robinson III of American Express, urges
creation of an international debt-management authority. The body
would buy all outstanding downgraded bank loans. The difference
between the loans' current discounts and their face values would
be absorbed by the contributors to the authority, comprised
mainly of wealthy countries. Once the loans are settled, the
debtor countries would be eligible for new investments from
other sources.

    Far more palatable to commercial bankers is a mixed formula
of voluntary and negotiated debt reduction between the banks
and debtor nations. Last September Brazil signed a package
worth $82.1 billion that includes an $8.3 billion net reduction
in debt in 1988 and 1989, and $5.2 billion in new money.
Venezuelan economic officials are considering a novel way to
raise $1 billion that would make future oil sales a guarantee
against new credits.

    Perhaps the most unusual proposal to date comes from a
Peruvian economist, who has suggested swapping debt for the
creation of an antidrug fund. Under the scheme, debts held by
overseas commercial banks would be handed over to the central
bank of the debtor. The commercial banks would be able to write
off the debt as a loss and donation for tax purposes, while the
debtor country would put a percentage of the debt into a local
currency deposit. The interest would be directed into an
antidrug fund for financing crop substitution and other
development projects in areas where cocaine is produced.

    In the end, Latin American governments are increasingly
looking to the U.S., and particularly the incoming
Administration of George Bush, for both leadership and financial
help. The President-elect has said he wants to take a "whole new
look" at the problem, but aides say his proposals will probably
be more evolutionary than revolutionary.

    While such assurances sound all too familiar, many Latin
leaders are hopeful that this time words may translate into
action. Bush has acknowledged the "enormous problems" debt poses
to "our own hemisphere." But it remains to be seen whether the
U.S. will finally have a leader who understands that a solution
to the Latin debt crisis is in America's own interests.