Fresh Fears About Mounting Debts

By Charles P. Alexander

When the Latin American debt crisis first struck in August 1982, it seemed like a virulent fever that might quickly overwhelm the world financial system. Instead, it turned out to be more like a chronic ailment that flares up or recedes by turn but is always maddeningly present. When representatives of both creditor and debtor nations came together in Washington last week for meetings of the policymaking committees of the International Monetary Fund and the World Bank, the persistent debt dilemma was at the top of the agenda. Fears are rising once again about the financial condition of Brazil and Argentina, as well as that of a host of smaller debtors located mainly in Latin America and Africa. After three days of closed-door talks, the world's moneymen were no closer to a cure for the debt woes. Said Onno Ruding, Finance Minister of the Netherlands: "Do not expect miracles."

In Brazil, economic policymaking has been almost paralyzed by the grave illness of Tancredo Neves, the first civilian to be elected as the country's President after 21 years of military rule. Meanwhile, the IMF has suspended $1.5 billion in loans that the country had expected to receive from the fund. Following the IMF's stern lead, banks in the U.S. and Western Europe halted talks with Brazil about rescheduling payments on its $102 billion debt. One of the main reasons for the IMF's action was that Brazil's annual inflation rate has been running higher than 230%, far above the 120% target level set by the government in its loan agreement with the fund.

The IMF has also shut off credit to Argentina, which owes $48 billion in loans. Although the country promised the IMF last September that it would slash inflation from a 687% annual rate to 300%, prices are now rising at an 851% pace. The government is trying to slow the whirlwind by limiting wage hikes to 90% of the previous month's cost of living increases, but that policy has led to a series of strikes, which threaten to stall economic growth. Admits President Raul Alfonsin: "The government is multiplying its efforts to get the country back on its feet, but we are going to go through some tough times."

While Brazil and Argentina struggle, the two other largest debtors, Mexico and Venezuela, are continuing to make strides toward easing their credit crunches. Venezuela, which has a 16.9% inflation rate that is modest by Latin American standards, has reached a tentative accord with its banks to stretch out payments on $20.8 billion of its $35 billion debt over 12 1/2 years. Bankers have agreed to give Mexico until 1999 to finish making payments on $28.6 billion of its $96 billion debt. Mexico gained the confidence of the bankers by reducing its inflation rate from 100% in 1982 to 59% last year.

The publicity surrounding the large debtors has overshadowed the plight of many other less developed countries that are in far worse shape. Says William Rhodes, a senior vice president at New York's Citibank, which has $18.4 billion on loan to Latin America: "Progress in some countries is sometimes balanced by setbacks in others." Bolivia, which has an annual inflation rate of 3000%, stopped making payments on its $3.5 billion debt last May. The Sandinista government in Nicaragua is using at least 40% of its budget to fight its civil war and thus has no way to meet payments on its loans of $4.7 billion. Peru, which was rocked earlier this year by a violent three-week strike staged by 400,000 government workers, is $300 million behind in paying interest on its $13.5 billion debt.

The banks have not declared these countries to be in default because the lenders hope that payments will eventually resume. "A default becomes a real mess," says one New York banker. Since the debts of Bolivia, Nicaragua and Peru are relatively small and spread out among many lenders, the banks' losses on these loans have been easily offset by healthy profits in other lines of business. Bank earnings will suffer, however, if either Brazil or Argentina falls more than a few months behind in its payments.

U.S. banks have only $6 billion on loan to debt-ridden Africa, the most depressed part of the developing world. But the 42 countries of sub-Saharan Africa owe a total of $80 billion, mostly to foreign governments and organizations like the World Bank. Because of the low prices that African nations are receiving for such key exports as coffee, tea and oil, they cannot import enough food for their drought-stricken populations, much less make payments on foreign debt.

Africans are becoming increasingly impatient with the austerity measures that the IMF demands in exchange for its loans. Tanzanian President Julius Nyerere calls the IMF a "substitute for colonialism," charging that it and other international institutions have become "tools of the rich nations to control the economies of poor nations." The fund has been particularly unpopular in Sudan, where a military coup toppled the government three weeks ago. Before his overthrow, President Gaafar Nimeiri had been unable to fashion an economic program that satisfied the IMF. As a result, aid from creditor nations was cut off, and a lack of foreign currency led to shortages of bread and petroleum. When prices of these precious commodities jumped, crowds took to the streets shouting, "We will not be ruled by the IMF!"

At last week's IMF-World Bank meeting, the debtor nations pressed anew their demands for increased official aid and commercial loans. The U.S. and other industrial countries resisted, arguing that only a long period of strong growth in the world economy can resolve the debt crisis. The IMF's staff optimistically projected that the major industrial countries could average 3% growth annually, after adjustment for inflation, from 1985 to 1990, up from 2% in the first four years of the decade. That growth rate, said the IMF, could help developing countries boost exports by 5% to 6% each year and thus ease their loan burdens. In the meantime, though, the debtor nations have to continue hoping that the lifeblood of credit from the IMF and banks will keep flowing. --By Charles P. Alexander. Reported by Gisela Bolte/Washington and Frederick Ungeheuer/New York with other bureaus

With reporting by Reported by Gisela Bolte/Washington, Frederick Ungeheuer/New York with other bureaus