Shaky Mountain of Debt

To pay soaring energy costs, many Third World countries have been forced to borrow voraciously from big banks, notably in the U.S. Now, that rising mountain of debt is casting an ominous shadow across the international banking scene. A growing number of monetary experts, bank regulators and economists are concerned about the ability of some less developed countries (LDCS) to pay off. They worry that a series of defaults could severely jolt the banking systems of the U.S. and other major lending countries--and perhaps imperil the Western economies.

This concern is voiced especially sharply by Yale Professor Robert Triffin, a member of TIME'S Board of Economists who was a chief architect of the West's postwar monetary system. According to his calculations, foreign loans made by the world's private banks surged from $100 billion in 1969 to $548 billion last year. Swiss banks accounted for $56 billion of the loans outstanding last year, French banks $42 billion and German banks $22 billion. But U.S. banks and their overseas branches were by far the most aggressive lenders. Their loan commitments at the end of last year totaled $207 billion, almost eight times the $27 billion of 1969.

OPEC Surpluses. The quickening flow of loans to those LDCS that do not produce oil is particularly bothersome. A study by Morgan Guaranty Trust Co. shows that net new international borrowing by these countries leaped by $109 billion from only 1974 through 1976. In all, the non-oil LDCS now owe about $180 billion. Such a huge expansion of overseas lending, mostly by private American financial institutions, heightens the possibility of a series of defaults that could cause panic to spread through international banking. So far, banks have managed to avoid this danger by renewing the loans or stretching out payments for some of the poorest countries. Yet the threat remains.

The surge in lending has been spurred by the vast balance of payments surpluses piled up by members of the OPEC oil cartel. In particular, Saudi Arabia, Kuwait and the United Arab Emirates have been unable to spend their new-found wealth fast enough, and they have deposited enormous sums in such major U.S. banks as Citibank, Chase Manhattan, Morgan Guaranty and Bank of America. Triffin reports that "at the end of last year, general monetary liabilities of the U.S.--including foreign deposits in U.S. banks and their overseas branches, as well as Treasury obligations purchased by foreigners --amounted to $280 billion, almost five times as large as they were in 1969."

Political Pressures. To keep this flood of cash moving and to make a profit, U.S. banks have been lending these funds to LDCs. But, Triffin believes, in taking on this responsibility the banks are making themselves too vulnerable to pressures from their oil-rich depositors. In any disagreement with U.S. policy, a bloc of OPEC nations could quickly withdraw its deposits, possibly leading to a dangerous disruption in the foreign exchange market.

Bankers are confident, however, that if they get in real trouble the Government will either rescue the debtor country through some international funding operation or bail out the banks directly. Yet even a successful rescue operation could send dangerous reverberations through the system.

At the very least, more of the burden of lending to LDCs should be shifted to the World Bank and the International Monetary Fund. That, of course, would require additional funding by rich nations for these lending institutions. One major benefit of a strengthened IMF and World Bank: they could lay down loan conditions that would require borrowing countries to cut unnecessary spending and take other steps to reduce inflation.

In addition, Triffin believes, U.S. monetary authorities--including the Federal Reserve Board and the Comptroller of the Currency--should use their influence to persuade major U.S. banks to rein in the particularly openhanded lending policies of their foreign branches, especially in places like the Cayman Islands and the Bahamas. At present these branches are subject to few of the checks that the Government places on banks located in the U.S.

Triffin's views are echoed by other critics. Congressman Henry Reuss, the influential Wisconsin Democrat who heads the House Committee on Banking and Finance, argues that the IMF should take over more of the burden of lending to LDCS from private U.S. banks. FRB Chairman Arthur Burns called on American banks to take a hard look at their overseas lending policies. Burns spoke of borrowings "that are uncomfortably large in relation to the debt-servicing capabilities of many countries."

Most bankers, however, insist that the worries are exaggerated. Says Harry Taylor, executive vice president of Manufacturers Hanover Trust: "Each lending bank regularly reviews conditions in a particular borrowing country and makes a decision about what the country's lending limit should be." Moreover, bankers point out, most of their loans are concentrated among richer and more productive LDCS where the risk of default presumably is lowest --such countries as Brazil, Mexico and South Korea. By contrast, countries like Pakistan, Peru and Ghana get little commercial-bank credit. Finally, bankers argue, a substantial cut in foreign loans now could lead to social and political disruption in some LDCs and bring on the very defaults that critics fear.

Such arguments do not persuade those critics. If the attitudes of Burns, Reuss and Triffin are any indication, the pressure to put more restraints on the banks' foreign lending policies can only grow in the months ahead.

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