TIME: Almanac 1993/TIME Almanac 1993.iso/time/caps/83/83capbus.2

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                                                                                September 19, l983

ECONOMY & BUSINESS

Trying to Defuse a Debt Bomb


Latin America's borrowers, $320 billion in the hole, look for
help


"These debts cannot be paid under existing conditions."

With those words, Victor Gimenez Landinea, Venezuela's
Ambassador to the Organization of American States, summed up the
plight of the 26 Latin American and Caribbean nations that met
last week in Caracas, Venezuela. Just one year ago, western
bankers and public officials were scrambling frantically to
avert a worldwide financial crisis as several Latin American
countries tottered on the brink of default. The moneymen have
since lent more than $45 billion to Brazil, Mexico and other
Latin American nations to help them pay interest on about $275
billion in loans.

But the so-called debt bomb has continued to sputter, and last
week the 26 Latin borrowers joined forces for the first time to
demand that banks relax their repayment terms. "We have broken
the taboo of not even mentioning the words `concerted action,'"
said Carlos Alsamora, permanent secretary of the Latin American
Economic System, a regional group.

Most of the cash-strapped Latin nations are steadily sinking
ever more deeply into debt. Countries in the region owed
foreign lenders $300 billion at the end of last year. Since
then, new loans  and missed payments have added another $20
billion to the total. Venezuela alone has piled up nearly $500
million in over due interest in the past six months. No fewer
than twelve Latin countries have individually sought debt
reschedulings of other concessions since August 1982.

The south-of-the-border borrowers cannot repay their loans
because, like their impoverished citizens, they are not earning
enough. The region's exports dropped 10% last year, to $95
billion, as world recession and falling commodity prices eroded
income from sales abroad. During the 1970s, by contrast, the
value of Latin American exports had grown an average of 19% a
year. So sharply have exports fallen that the region now owes
foreign lenders more than three times the amount it earns
annually from exports.

Although some observers thought that the Caracas delegates
might try to form a "debtors cartel" that would renounce foreign
financial obligations, the representatives stopped short of that
move. "The idea of a debtor cartel was definitely put aside at
this conference," said Mailson Nobrega, secretary-general of
Brazil's Finance Ministry, as the meeting came to a close at
week's end.

The delegates avoided even hinting that they might repudiate
their debts, realizing that any refusal to repay past borrowings
would mean the certain cutoff of future loans. In Washington,
William Cline, senior fellow at the Institute for International
Economics, said "No major debtor wants to jeopardize its
long-run credit reputation further by joining anything that has
the appearance of a cartel for debt moratorium or repudiation
purposes.

Nonetheless, the delegates to the conference, which was hosted
by Venezuelan President Luis Herrera Campins, had plenty of
complaints about their bankers. Their major concern was about
the fees and extra interest that American banks are charging
them on new and rescheduled loans. Representatives noted that
ailing U.S. firms like International Harvester received much
more favorable terms than they. Said Venezuelan Finance Minister
Arturo Sosa: "It is only sensible to ask whether the conditions
being offered to our countries are comparable to those secured
by troubled enterprises in industrial nations."  A working paper
presented to the session estimated that Latin borrowers must pay
on an average a stiff three percentage points above U.S. prime
rate for new money. That brings their current borrowing
expenses to about 14%. International Harvester, on the other
hand, is now paying under 12%.

Some U.S. experts agree that American banks are overcharging
Latin customers and thereby making the world debt crisis worse.
Says Robert Solomon, a Brookings Institution guest scholar and
an expert on international finance:  "I realize the banks
thought they were under greater risk but they should also have
known that they are just making it rougher for their debtors to
put themselves back on their feet."

Most U.S. bankers avoided the week-long session. Only Bank of
America and Chase Manhattan sent observers. "It's a no-win
situation," noted a Caracas-based U.S. moneyman, who said he had
feared that banks and Americans in general would come in for
"some gringo-bashing that we could do without."

The bankers, however, were still watching the Latin American
conference closely. They have invested $96 billion in the
region, and many of those debts are turning sour. Problem
foreign loans have more than doubled for Chase Manhattan and
Citicorp during the past year. Chase said it considered $976
million of overseas lending to be "nonperforming" as of Last
June 30, compared with $427 million on the same date a year ago.
Borrowers have at least temporarily stopped payments on such
loans. Citicorp reported that its nonperforming foreign loans
had climbed to $1.7 billion on June 30, up 143%. Citicorp said
the increase was largely due to problems with loans to firms in
Latin America.

Five nations account for 90% of Latin America's more than $300
billion of international debt. The Brobdingagian borrowers:

Brazil. Latin America's biggest debtor is also its most
troubled. Brazil owes some $90 billion and is in its third year
of a deep recession. The country is promising to undertake
tough austerity measures so that it can begin paying off its
debt, but those steps are intensifying already serious social
unrest. Last week food riots broke out in Rio de Janeiro. Says
one U.S. Treasury official "Brazil is the key to the entire
Latin American debt problem."

Mexico. The country that nearly ignited the debt bomb in August
1982, when it came close to defaulting on $85 billion in foreign
borrowing, has been straightening out its finances. Last month
it repaid a $185 billion loan just two weeks after successfully
rescheduling $11.4 billion of public debt. Nevertheless,
Mexico's gross national product is expected to drop by 3% to 5%
this year and inflation is raging at an annual rate of about
90%.

Argentina. The costly Falkland war has helped to weaken
Argentina's ability to service its $40 billion of foreign debt.
The country will have to borrow $1.5 billion this year just to
help pay off some $4.5 billion in interest. Banks that extended
the country $6.6 billion in short-term credits before last
year's war now fear that Buenos Aires will seek to stretch out
those loans.

Venezuela. When oil income flowed in during the 1970s,
Venezuela went on a buying binge. But the drop in energy prices
forced the country last March to impose such austerity measures
as tight cuts on imports. Last week Venezuela announced that it
was postponing until 1984 negotiations to stretch out payments
on $18.4 billion in overseas loans. That amount, which comes
due this year and next, represents more than half of the
country's foreign debt.

Chile. Economic stagnation has triggered the political unrest
that has been sweeping Chile in recent weeks. The country is
only slowly recovering from the collapse of world copper prices
that drove unemployment to 34.6% last year. The government is
trying to reschedule $2.5 billion of its nearly $19 billion in
foreign loans.

The Caracas conference endorsed a platform calling for measures
that included lower interest rates. Heads of state of the Latin
nations will meet later this year in Quito, Ecuador, to consider
possible political moves to implement the demands. That
gathering, though, is likely to maintain last week's bankerly
calm and be free of wild rhetoric.

Among those pleased by the predominantly moderate tone of the
proceedings was Beryl Sprinkel, Under Secretary of the Treasury
for monetary affairs, who represented the U.S. at the session,
"It is in our interest that the debtor countries adjust and
grow," said he. "But we have not committed ourselves to
expending vast increases in resources on their behalf, because
we do not have them." Nevertheless, by pressing their interests
without raising threats, the delegates may have helped to keep
the debt bomb from going off.

--By John Greenwald. Reported by Gisela Bolte/Washington and
Frederick Ungehauer/Caracas