A Prickly Dilemma for the Banks

By Charles P. Alexander

Financiers meet to hunt for a way out of their Latin debt troubles

The three-day International Monetary Conference held last week in Philadelphia had all the trappings of a gala affair. In the evenings, private bankers and government finance officials from 22 countries sipped champagne at the Philadelphia Museum of Art and sampled Viennese pastries in the gorgeous Longwood Gardens of the Pierre S. du Pont estate. But during the daytime closed-door meetings at the Bellevue Stratford Hotel, the business was serious and the mood sober. Bankers were groping once again for solutions to the Latin American debt dilemma, which was threatening to take another turn for the worse.

As the week began, Ecuador proclaimed that it was suspending payments on part of its $6.7 billion debt. Though Ecuador's loans are small in relation to the $350 billion owed by Latin America as a whole, the announcement was disturbing because the country seemed to be playing a me-too game. Less than a week earlier, Bolivia had said it would suspend interest payments on some of its $3.4 billion debt. Some bankers feared that this defiance could keep spreading to other countries.

At the Philadelphia conference, Jacques de Larosiere, managing director of the International Monetary Fund, and Paul Volcker, Chairman of the U.S. Federal Reserve Board, urged bankers to stretch out repayment schedules for Mexican loans and reduce that country's interest rates, which now run as high as 13.5%. Mexico deserves such a break, said De Larosiere, because it has made substantial progress toward solving its economic problems. Since 1982 the country has cut a 100% inflation rate almost in half and doubled its annual trade surplus to $13.6 billion.

The advice from De Larosiere and Volcker produced an immediate response from the bankers. Mexico's major creditors, led by New York's Citibank, announced that they were willing to renegotiate the interest rates and the timetable for payments. The banks remained reluctant, however, to grant similar concessions to other large Latin debtors because they have made less headway with their economic difficulties. Brazil's annual inflation rate is 210%, and Argentina's is an astounding 500%.

Finance and foreign ministers from several Latin countries, including Mexico, Argentina and Brazil, are planning to get together next week in Cartagena, Colombia, to discuss their debt problems. But Citibank Chairman Walter Wriston dismissed fears that the Latin nations would join forces to withhold payments. Said he: "They would be cutting off their source of funds. They would be cutting their own throats by setting up a cartel."

The latest worries about Latin debt came as the U.S. banking system was still recovering from the shock of the near collapse in May of Continental Illinois Bank. The bank revealed last week the stringent terms that it had been forced to accept to receive an emergency $1.5 billion loan from the Federal Deposit Insurance Corp. The FDIC insisted that it have the power to fire Continental directors, that the bank suspend its 50-c--per-share quarterly dividend payment and that the bank's officials refrain from giving themselves large severance bonuses, known as golden parachutes, in the event another financial institution takes over Continental.

One reason for continuing concern about Continental is that the bank has $2 billion, or nearly 5% of its assets, on loan to Mexico, Brazil, Argentina and Venezuela. If all those countries demanded lower interest rates, the earnings at Continental and other major U.S. banks would suffer. For that reason, bankers will be waiting anxiously for news from Cartagena next week.

--By Charles P. Alexander.

Reported by Bernard Baumohl/Philadelphia and Frederick Ungeheuer/New York

With reporting by Bernard Baumohl, Frederick Ungeheuer