Latin Debtors Gloomier Than Most Lenders : Meeting Will Take Up Interest-Rate Burden

The foreign and finance ministers of 11 heavily indebted Latin American governments will meet in the Dominican Republic on Thursday with a view of the international debt situation that is gloomier than that held by foreign lenders.

In their meeting in Santo Domingo, their third since they gathered last May in Cartagena, Colombia, the Latin American debtors, who together owe more than $360 billion, are expected to invite the West’s major industrial nations for a “political” meeting of government officials rather than just private bankers.

The central idea, which is gaining support among the debtors, is that only coordinated action with the governments of the United States, West Germany, Japan, Britain and France can relieve the three key debtor problems, which are:

- International interest rates that remain much higher than the rate of inflation, making debt-service payments particularly costly.

- Trade protectionism in industrial countries that make it difficult for debtor nations to export such goods as steel, textiles, shoes, agricultural and mining products. This limits export earnings at a time when prices for the debtors’ other main source of income, commodities, are low.

- Reduced access to long-term foreign loans for development, as private international banks withdraw from making new project loans in Latin America. The World Bank, the Inter-American Development Bank and other government-financed lenders have not stepped in to fill the gap.

Austerity Programs Sought

Until now, the Big Five industrial countries, led by the United States, have insisted that the debt problem can be managed by the borrowers and the private banks if the debtors, aided by the International Monetary Fund, adjust their economies through austerity programs.

This means lowering public spending, cutting back imports and lowering domestic consumption while exporting more to earn the dollars to pay off a total of $37 billion a year in interest and other remittance payments.

As signs that debtor nations can expect better days ahead, lenders point to recent reductions in international interest rates, measured by a decline in the London interbank rate to 9% a year, and strong demand for Latin American imports in the expanding U.S. economy.

But Latin American growth last year, measured by the U.N. Economic Commission for Latin America, was 2.6%, and this barely kept pace with the region’s population growth. And it did not make up for a 4% total decline for years 1982 and 1983.

Citing four years of stagnation, rising unemployment and rising inflation, Enrique Iglesias, secretary general of the U.N. commission, has spoken of the 1980s as “the lost decade of development” in Latin America.

The 11 countries to be represented in Santo Domingo have different economic situations and debt problems.

Oil Prices Dropping

Mexico, Venezuela and Ecuador, for example, are oil exporters, concerned with declining prices that reduce their foreign income. Brazil, Chile, Uruguay and the Dominican Republic are oil importers; their debt is eased by lower oil prices, but they suffer from low prices for such commodities as coffee, copper and sugar.

However, all are in agreement that debt-service payments are so high now, in relation to export earnings and capital inflows, that economic recovery in Latin America is not possible without lowering interest rates and attracting new capital from abroad. Interest payments take more than 40% of the debtors’ annual export earnings.

“The international bankers say the worst is over because we have made heavy sacrifices to keep up interest payments,” said Carlos Massad, a former president of Chile’s central bank.

“But for us, the worst lies ahead in unemployment, reduced living standards and, ultimately, social and political violence if debt terms are not eased and economic recovery does not return.”

President-elect Tancredo Neves of Brazil, who will take office March 15, has said that Brazil will continue to service its debt of more than $100 billion but not at the price of continuing recession in his country.

“We owe money, and money is paid with money, not with the unemployment, misery and despair of our people,” he said.

The social tensions caused by Latin American belt-tightening to pay high debt charges were apparent in the Dominican Republic last week as riots broke out after the government raised gasoline prices, and thereby bus fares, by 50%.

Latin American economic growth problems cannot be solved by private bankers alone, say the debtors; they depend on decisions by governments and their own central banks, trade officials and legislatures.

No Defaults Yet

For the international banks, which hold more than 70% of the Latin American debt, the immediate problem is to obtain some return on their heavy exposure in Latin America.

The crisis that erupted in 1982, when Mexico notified creditors that it could not meet interest payments, was the threat of default.

With the exception of Bolivia, where inflation has spiraled to more than 1,500% a year and the economy is in disarray, there have been no defaults, although Peru is regarded by some bankers as being on the brink. The largest Latin American debtors--Brazil, Mexico, Argentina and Venezuela--have reached agreements with creditor banks on refinancing about $125 billion in debts that fall due in the period from 1983 to 1991.

These refinancing plans, deferring principal payments for up to eight years, have averted potential defaults. They permit the banks to collect annual interest payments at the floating rates of the international market, plus a margin of profit.

Under the recent agreements, the “spreads” are lower than they were when they peaked in 1982 and 1983 at 2% to 3% over the U.S. prime rate.

This means lower profits for the banks. The reduction is supposed to reflect lower risks.

Attract Foreign Investors

Some banks, already exposed to the legal limit, do not want to lend new money in Latin America.

Secretary of State George P. Shultz has proposed that Latin American countries encourage capital investment by taking steps to attract foreign investors.

This is a sensitive subject for Latin American economic nationalists, but it could be one of the subjects discussed in a debtor-creditor government conference.

The key debtor proposal will undoubtedly be to find a way of easing the interest-rate burden.

Carlos Langoni, a former president of Brazil’s central bank, has proposed that the IMF provide money to finance interest payments above a level of 3% a year after inflation.

This was the “historic” level of interest rates in the 1970s, when the Latin American debtors began to accumulate significant debts. When interest rates shot up after 1980, they could not reduce their already heavy debt because of much higher interest costs.