Forgive Us Our Debts

By Barbara Rudolph

The central bankers and finance ministers who gathered in Berlin last week for the annual meeting of the International Monetary Fund and the World Bank encountered more than the usual round of interminable speeches and parties. While the world's top moneymen jawed away inside the International Congress Center, outside in the streets legions of leftist demonstrators chanted, "IMF, meeting of murderers!" At one point, policemen carrying Plexiglas shields and billy clubs broke up a boisterous crowd of 2,000. Another day, 75,000 marchers paraded peacefully. While the protests did not disrupt the conference, the bankers knew what they symbolized: a growing anger around the world with the way banks and governments have handled the thorny dilemma of Third World debt.

Even before Berlin, the bankers had been getting the message. Lenders are recognizing that the $1.2 trillion debt load carried by the developing nations has stifled growth. No longer can the problem be papered over by stretching out payments, granting new loans and hoping for the best. Many bankers at least grudgingly support some form of debt relief -- an actual reduction in the amount of money owed. Still, the debate over how to provide that relief | has only begun. U.S. Treasury Secretary Nicholas Brady suggested continuing the policies of his predecessor James Baker, who called for reforms of debtor economies as well as new loans from creditors. But many of Brady's critics urged a clean break with past policies.

A growing number of experts now believe that some debt of the developing countries should be simply forgiven. Until recently that was a radical proposal to voice in the company of Western creditors. Economic consultant David Smick, president of Smick Medley International, recalls a 1986 conference in which a banker suggested that a Third World debtor should be treated like a financially troubled company whose outstanding obligations should be partly forgiven. "Two years ago, that was a renegade view," says Smick. "Now half the bankers share it."

Just five days before the start of the Berlin conference, more than 400 commercial banks showed that they were capable of orchestrating a significant reduction in Latin American debt. They agreed on a plan that could slash Brazil's $110 billion debt load by $18 billion within five years. Some of the loans will be exchanged for equity stakes in Brazilian businesses. The banks will suffer losses, although technically Brazil did not default on any of its loans. As the bankers view the transactions, the loans have been reduced but not forgiven.

The so-called Baker plan of 1985 aimed to provide a long-term solution to the debt crisis. The initiative called for $29 billion in new loans from commercial banks and lending agencies like the World Bank. There was one important condition: the debtor nations had to modernize their economies and institute financial reforms. Baker hoped that economic growth would provide the debtors with sufficient capital to repay their loans, bringing the level of total debt down to a more reasonable level.

In three years the debt has only grown, increasing from $950 billion to $1.2 trillion. Brazil, Mexico and Argentina owed $283 billion at the end of 1987, some $30 billion more than they had when the plan was announced. In the meantime, economic growth has stagnated for most debtor countries. Concludes New Jersey Senator Bill Bradley: "The Baker plan is dead. Let us do the decent thing: bury it and start anew."

The borrowers suffer from what is called debt fatigue. When capital flows between borrower and creditor are measured, the harsh fact is that much more money is moving from debtor to banker than the other way around. In the past two years, 15 of the most indebted borrowers made a net transfer of $58 billion to their creditors. And it is not just commercial banks that have been collecting the cash. In fiscal 1988 the IMF took in $5 billion more in interest and principal payments on outstanding loans than it disbursed in new loans.

Foreign debt is placing dangerous pressures on fragile democracies. Especially troublesome to many businessmen is the strong showing made by the leftist opposition parties in Mexico's presidential election last July. "Our foreign debt has to be faced firmly," says Vicente Bortoni Gonzalez de Cosio, president of the Confederation of Industrial Chambers of Mexico, the country's largest group of private industrialists. "If not, it will force the country into leftist policies."

But how should Third World debt be reduced? At the World Bank-IMF meeting, the Japanese presented a general plan. Borrowers would exchange some loans for long-term bonds, unofficially dubbed "junk debt." Interest on those notes would be guaranteed by special funds set up by the IMF, although the money would come from the debtor countries. Remaining commercial bank debt would be rescheduled. Brady, in what was seen as an attack on the plan, suggested that the Japanese proposal would transfer private debt to the public sector -- that is, to taxpayers -- since the notes would be insured by an IMF-administered fund.

James Robinson, chairman of American Express, argues for the creation of a new international organization, the Institute of International Debt and Development, or I2D2 for short. (American Express knows something about marketing, after all.) I2D2 would buy Third World loans from commercial banks at a discount in exchange for bonds backed by industrial countries. The United Nations Conference on Trade and Development offers a far more radical proposal: an outright 30% reduction of private bank loans owed by 15 major debtor countries.

Not surprisingly, some bankers oppose any debt forgiveness. Walter Seipp, chairman of West Germany's Commerzbank, lambastes Latin Americans who live beyond their means on borrowed dollars. Says Seipp: "I haven't worked 16 hours a day in a bank just to pay for their life-styles. The term forgiveness does not exist in my vocabulary."

Instead of forgiving loans, bankers are swapping debt for equity stakes in local companies. Citicorp last month swapped $66 million of Chile's debt for a $56 million stake in a forestry project. Some loans are being taken over by organizations concerned about the welfare of developing nations. Conservation International, for example, bought $650,000 worth of Bolivian debt from Citicorp at the discounted price of $100,000. Instead of demanding payments on the loan, the nonprofit organization has created a wildlife sanctuary in the Amazon Basin that the Bolivian government has agreed to protect.

These imaginative and important steps, however, will reduce total Third World debt by only a tiny fraction. Bankers may find that if they move too cautiously in easing the debt burden, more sweeping solutions to the problem may be forced upon them.

With reporting by James O. Jackson/Berlin and Frederick Ungeheuer/New York