TIME: Almanac 1990/1990 Time Magazine Compact Almanac, The (1991)(Time).iso/time/032089/03208900.016

Text File | 1990-09-17 | 5KB | 95 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.