Showdown Over Latin Debt

By Stephen Koepp

When seven top U.S. bankers received telephone calls from Treasury Secretary , James Baker last week, they dropped what they were doing and rushed to Washington. Huddling in his Treasury Building office with the moneymen and Federal Reserve Chairman Paul Volcker, Baker gave a 95-minute preview of a new Reagan Administration plan for defusing the Third World debt bomb. Meanwhile, in New York City, a group of bankers representing 600 international lenders agreed to grant Mexico an emergency six-month extension on nearly $1 billion of IOUs. While those events unfolded, the sharp impact of another new Washington strategy was being felt around the world. Spurred by a U.S. commitment to reduce the foreign exchange value of the dollar, the greenback tumbled last week to its lowest level in several years against other major currencies.

Those rapid-fire developments were part of the background for this week's joint annual meeting of the World Bank and the International Monetary Fund in the South Korean capital of Seoul. The Reagan Administration's take-charge efforts are certain to dominate the four-day-long gathering of the two global financial institutions. Delegates from 149 countries will give the U.S. an early reading on how successful its strategies may be.

At the top of the agenda is Washington's aggressive new approach to the debt problem. Until last week, the Administration was seemingly content to go along with the IMF's stop-gap strategy of extending short-term loans and imposing painful belt-tightening programs on Third World nations. Sensing that those countries are being crushed by their debt burdens, the U.S. now believes that their only hope lies in faster economic growth. To achieve that goal, Washington thinks the IMF should enlist the help of the World Bank, a cash-rich agency that has largely remained aloof from the debt thicket. The Administration wants the bank to lend money more broadly and follow up the loans with long-term economic guidance for the debtors.

The outline of the White House position drew cautious praise last week from U.S. bankers, who have $230 billion at risk in Latin America alone. Said Lawrence Brainard, senior vice president of Manhattan's Bankers Trust: "What we expect from Baker is a totally new approach. The U.S. must assume leadership to avoid being overtaken by the crisis." Added Princeton University Economist Peter Kenen: "Baker has learned very quickly what the international realities are. He is going about this in a sensible way." Even so, some bankers feared that the debtors might be allowed too much freedom, which could encourage them to resume their free-spending habits. Just months ago, the three-year-old debt crisis seemed at last to be improving. Mexico, which owes $96 billion, and Venezuela, a $35 billion debtor, had persuaded bankers to stretch out many of their loans. Adhering to their agreements with the IMF, the Latin countries were struggling to reduce inflationary government spending and curb expensive imports. Even Argentina ($50 billion), which last year took a defiant stance toward its creditors, successfully froze wages and prices last summer and issued a new unit of currency, the austral, which is equal to 100 old pesos. As a result, Argentine consumer prices rose only 2% last month, compared with a 30% rise in June.

Yet the debtor nations have come to realize that their people are paying a high price for fiscal prudence. Government budget cuts have led to increased unemployment and poverty, which in turn has sparked anger and unrest. Last August more than 100,000 labor union members paraded through downtown Buenos Aires to protest the government's compliance with IMF austerity measures. Read one giant banner: PEACE, BREAD, WORK AND TO HELL WITH THE IMF.

For millions of Latin American families, the cutbacks have eroded an already humble standard of living. Since July, when two of Luis Contreras' daughters lost their meat-packing jobs near Buenos Aires, the family of seven has barely scraped by. Says Contreras, who earns $190 a month as a traffic-department worker: "We're eating, but that's about it. Thank God none of us needs medical care."

The problems of debtor countries have been compounded by sluggish growth rates that cripple their ability to repay loans. The troubled nations must boost export sales to raise more money, but that has grown increasingly difficult. One hindrance has been the rise of protectionist sentiment in the industrial world. Another is the falling price of many Third World exports, ranging from coffee to copper and tin. Mexico, which depends on oil for most of its export income, has suffered a 13.5% drop in petroleum sales this year.

Hopes for freer trade got a boost last week when 90 countries meeting in Geneva agreed to draw up an agenda for a new round of global trade talks. The plan calls for the discussions to start next year under the auspices of the General Agreement on Tariffs and Trade. The negotiations, which could last several years, will be aimed at reducing the barriers that nations have erected against exports.

During the past month, Latin American leaders have gone on a lectern- pounding campaign for concessions from their lenders. Brazilian President Jose Sarney, among others, took the appeal to the U.N. General Assembly. Declared Sarney: "Brazil will not pay its foreign debt with recession, not with unemployment, nor with hunger." Peru's President Alan Garcia Perez, whose country owes $14 billion, has threatened to pull out of the IMF unless the agency gives his country more breathing room. Mexico's President Miguel de la Madrid Hurtado took a similar, if less militant, stand. Even before the deadly earthquake hit last month, his country was beginning to have difficulty limiting its spending enough to meet IMF guidelines. The disaster caused as much as $4 billion in damage and amplified Mexico's need for more aid.

The U.S. has good reasons of its own for wanting to ease the debt load. The potential for a massive default still hangs over the nation's banking system. In addition, the Third World's severe belt tightening has dried up a possible market for U.S.-manufactured goods. The United Auto Workers Union estimates that cutbacks by debtor nations cost 1.1 million U.S. jobs between 1980 and 1983.

The debt morass has persisted partly because the debtors have virtually no money left over for productive investments after they make their loan payments. "We're like a man whose farm is under two meters of water," said one Argentine official. The debtors thus require a source of funds that will enable them to develop their economies. Since the IMF deals mostly with short- term lending, the U.S. wants the World Bank to step into the breach.

That agency, started together with the IMF in 1945, traditionally has financed such projects as roads and dams. Last year the bank lent $2.5 billion less than its capacity. The Administration thinks the bank should use the extra money to spur growth in ailing nations. Among the neediest are 42 sub-Saharan African countries that owe some $125 billion. Many are forced to repay borrowings with money that is sorely needed for such basics as food, health and education.

Even while it exhorts the World Bank to make more loans, the U.S. continues to oppose boosting the agency's funding. This resistance has nettled the bank and its president, A.W. Clausen, the former Bank of America chairman. In recent months, rumors have circulated that the Administration may name Fed Chairman Volcker to succeed Clausen when the latter's term expires next June. Volcker, though, has shown no apparent interest in the job.

Some nations have already cast a wary eye on the U.S. policy shift. Said one European official: "It's dramatic in World Bank terms, but it's just spitting in the ocean in terms of the needs of Brazil and other major debtors." Concurred Rudiger Dornbusch, an M.I.T. economist: "When the developing countries hear Baker in Seoul, they will say that's not enough."

Recognizing the need for more financing, Washington has asked private bankers to give Third World borrowers new loans, instead of simply rolling over old ones. But that is akin to asking a crowd to run back into a burning movie theater. The institutions would rather lend money for mortgages or corporate takeovers, especially since Government regulators have ordered them to set aside hefty reserves against losses on many of the foreign loans they have already made. U.S. bank lending to developing countries declined 3% in fiscal 1985, to $116.4 billion.

Despite its limitations, the Administration's new approach could help stem a rising level of resentment among beleaguered borrowers, who urgently need a signal that rich countries are listening to their plea. As Peru's Garcia put it: "We cannot go on talking and writing letters that the wealthy of the earth refuse to read."

This week's meeting could also mark a new era in the turbulent debt crisis --one in which Western governments and moneymen worry less about month-to- month payments and more about the debtors' long-term health. Says Rodolpho Bertola, an executive of a major Brazilian manufacturer: "We would never refuse to pay. Absolutely no way. All we are asking for is breathing space." That is a request that the wealthy countries may find difficult to refuse.

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With reporting by Gisela Bolte/Seoul and Frederick Ungeheuer/ New York, with other bureaus