Signs of Hope in Coping With 3rd World Debt

Like a long-dead Transylvanian that refuses to lie down, the Third World debt problem is haunting us again. The worry of the moment is that Mexico, hurt by the decline in oil prices, may be forced to suspend interest payments on its $100 billion in debts to foreign commercial banks and governments.

Meanwhile, members of the Reagan Administration and Congress seem to regard Mexico as disorganized or crooked or both, and there is tension as Mexican Finance Minister Jesus Silva Herzog leads a delegation into negotiations with the International Monetary Fund in Washington this week.

But don’t let the sound and fury--and the pre-negotiation posturing--frighten you. This is a time of hope and progress on Third World debt. Even Mexico is not as badly off as it is painted, and it can do much to help itself once it achieves new understandings with the IMF and its commercial creditors.

To understand what’s really happening, we must first stop thinking of developing countries as wastrel children, intent on living a rake’s progress at the expense of the grown-up responsible countries such as ourselves. Such attitudes reflect cultural prejudice and historical ignorance.

Economic World Shifted

Mexico, for example, did not pull a sombrero over its eyes and go to sleep once it had struck oil. It had a National Industrial Development Plan that called for using the oil money to catapult itself into the modern industrial world. It made a conscious decision in 1979 to import food--paying with oil money--in order to push the building of industry. But then the economic world shifted around it. In 1980, the U.S. Federal Reserve changed its policy and allowed interest rates to rise, which hurt the Mexican borrower, at the same time that a gathering U.S. recession hurt the Mexican exporter. It was a double whammy.

And it recalled, in an uncanny way, our own history. In the early 1840s, two states (Florida and Mississippi) of the young United States repudiated their loans from English investors, and six other states (Pennsylvania, Maryland, Michigan, Indiana, Illinois and Missouri) suspended or fell behind on interest payments. The states had floated bonds to finance canal building, believing that the revenue from the canals would be great enough not only to pay off the bonds but every other state expenditure as well. One state repealed its local taxes on the day that it sold the bonds. The dream came to an end when the Bank of England raised the interest rate in 1839.

Brazil, Argentina on the Move

So what happened after the defaults? The Americans were reviled in England as deadbeats but slowly repaired their credit standing by restoring interest payments, and, by the late 1840s, English investors came back enthusiastically for the bonds of newly forming U.S. railroads.

Parallels with the present are obvious, but past is past. The real story today is that the big South American debtors, Brazil and Argentina, have issued revalued currencies and slapped on price and wage freezes to get their inflation-wracked economies under control. They are at the point where a beginning is being made in converting their loans to new investment.

The way this works is that a U.S. company with a subsidiary in Brazil, say, will buy a Brazilian loan at a discount from the U.S. bank holding it. It then gives the loan to its Brazilian company, which can use the debt payments that it collects from the Brazilian borrower to expand its facilities.

The benefit for Brazil is that the loan is now repaid in cruzados, the Brazilian currency, and that investment in the country is expanded. The benefit to the U.S. bank is that it gets the loan off its books, although at the cost of writing it down and taking the loss against current income.

On Brazilian loans these days, the discount is said to be around 20%; on Mexican loans, the discount is 40% to 50%. Because the big banks are not eager to declare big loan losses, the conversion business remains small--involving less than $2 billion of the more than $350 billion of bank and governmental Third World loans.

The business will pick up as things improve in Latin America, says one banker. To be sure, it is hardest to foresee the economy improving in Mexico, where oil revenue is in decline and the peso’s value is plummeting against the dollar.

But even here, economist William Cline of the Washington-based Institute for International Economics points out that Mexico can expand its non-oil exports by $2 billion if it gets understanding terms and fresh capital from the IMF and its creditor banks.

Rather than sermons on austerity, says Cline, what Mexico needs now is the means to expand export industries, creating jobs and income for the Mexican people.

Will Mexico really find understanding in Washington this week? Just ask yourself if U.S. Treasury Secretary James A. Baker III favors measures to renew growth in Latin America and you can answer your own question.