TIME: Almanac 1993/TIME Almanac 1993.iso/time/032089/03208900.016

Text File | 1992-09-23 | 5.3 KB | 102 lines

                                                                                BUSINESS, Page 54

Enter the Brady Plan


Washington unveils a new program to ease Third World debt


    As a longtime and close adviser to President George Bush,
Secretary of State James Baker is one of the most powerful men
in Washington. But his tenure as Ronald Reagan's Treasury
Secretary has left a sorry legacy: the failure of the so-called
Baker plan, the 1985 policy designed to ease the debt burden of
Third World nations. The 15 largest borrowers, most of them in
Latin America, have seen their debt climb to more than $500
billion, from $350 billion in 1981. The debt load has left local
economies a shambles and fragile democracies threatened. After
300 people died in Venezuela two weeks ago during riots over
austerity measures imposed to pay off foreign debt, the Bush
Administration decided that the time had come to act.

    In unveiling a sweeping new approach to the crisis last
week, Treasury Secretary Nicholas Brady all but repudiated
Baker's program, which promised new loans for debtor countries
once they instituted economic reforms. Instead, he called for
measures that would help reduce Third World debt. "Our
objective," said Brady, "is to rekindle the hope of the people
and leaders of debtor nations that their sacrifices will lead
to greater prosperity in the present and the prospect of a
future unclouded by the burden of debt."

    The Administration has tried to minimize the change, but
the break with past policy is dramatic. The Baker plan
adamantly rejected the notion that debt reduction should be
achieved by commercial banks writing off a significant portion
of their loans. But the Administration is now encouraging U.S.
commercial banks to reduce some of their Third World loans by
allowing debtor countries to make smaller payments on their
principal and interest obligations. Brady left many of the
plan's details vague, and the initial response from bankers,
Congress and Latin American finance ministers was guarded. The
Mexican government called the plan a "first positive step" but
cautioned that many details still need to be worked out. New
Jersey Senator Bill Bradley, an outspoken critic of the old debt
program, called it a "significant change in direction'' and
declared that the "Baker plan is dead."

    Not everyone was so enthusiastic. Venezuelan President
Carlos Andres Perez called the new proposals "encouraging" but
only "very timid steps." Paul Volcker, former chairman of the
Federal Reserve Board, warned against looking for a "magic
elixir" to solve the crisis. In a speech before a conference on
Third World debt in Washington, Volcker explained, "If not well
managed, a process of debt reduction clearly could be hazardous
to the health of debtors and creditors alike."

    No one, however, was calling for a revival of the Baker
plan. Baker hoped to spark economic expansion and allow debtors
to grow their way out of their problems. What happened was just
the opposite. Most banks simply refused to issue new loans,
fearing they would be throwing good money after bad. As a
result, debtor countries found themselves using more and more
of their scarce currency reserves to pay their debts. Last year
Latin American nations paid $26 billion in interest to their
creditors but received only $6 billion worth of new bank loans.
The results were stagnant growth and a rate of inflation that
has soared to 400% in Argentina and 1,000% in Brazil.

    The Brady proposal hopes to reverse that tide by giving
lenders an incentive to ease the pressure on debt-ridden
countries. A banker, for example, might be willing to accept
lower interest payment on an existing loan -- 6% a year, say,
as opposed to 10% -- if assured that all interest payments would
be made on time. In recent years, many strapped Latin debtors
have repeatedly made late interest payments. This has an
immediate and painful effect on the creditor bank, since it
lowers its quarterly earnings. Under the new plan, the
International Monetary Fund and the World Bank would insure that
interest payments are made on time.

    In the past, some economists have argued that new money
must be provided to make any meaningful dent in the debt load.
Secretary Brady has not proposed earmarking any new U.S. funds
to help solve the debt crisis. But Japanese Finance Minister
Tatsuo Murayama last week pledged financial support for the
Administration plan, though no numbers have yet been released.

    The U.S. is under increasing pressure to find a solution to
the debt crisis. Last year Mexican President Carlos Salinas de
Gortari won election by the narrowest margin in his party's
59-year history over left-of-center candidate Cuauhtemoc
Cardenas. In Brazil left-wing parties have mounted a serious
challenge to President Jose Sarney. And a nationalist party in
Argentina could win the presidential elections set for mid-May.

    Politics will be very much on the minds of central bankers
and finance ministers when they convene in April in Washington
at the semiannual meeting of the IMF and World Bank. At a series
of closed-door meetings, the world's leading moneymen will
tackle the details of the U.S. proposal in earnest. They will
probably have little trouble agreeing that debt relief is a
worthy goal. After that, nothing will come easy.