Heavy Debt Payments Stifle Growth, Making Repayment More Difficult : Latin American Nations Want Out of Catch 22 Situation

The seaside city of Salvador, once the colonial capital of Brazil, is so rich in ancient churches and tradition that it is classified by the United Nations as “a heritage of humanity.” But poverty and urban decay are eroding the quality of life and pastel beauty of the 17th Century city.

“When I visit the people in the shantytowns, they talk to me about the children who have died of dysentery for lack of clean water,” Mario Kertesz, 42, the mayor of Salvador, said not long ago in an interview. “All I can say is, ‘Don’t lose hope’--because I don’t have a solution.”

The rich cultural inheritance of Salvador is not matched by any financial legacy. The city of 1.4 million people is run on a municipal budget of $25 million, nearly all of which goes to pay the city’s day-to-day bills.

For money to spend on any longer-term projects such as sewers and water works, Salvador had to turn to foreign banks. In that, it was not alone. A number of other cities in Brazil, similarly lacking a tax base, also borrow from abroad. Now these cities have to pay a total of $160 million a year to service their foreign debt--and many do not have the money.

Holds Back Growth

That is the situation through most of the Third World. Like a blood clot, the $830-billion debt of the developing countries is blocking circulation of fresh financial blood. And this is holding back the economic growth that is needed to enable the debtors to repay what they owe.

Leaders of the borrowing nations say that this is their dilemma: Without growth they cannot repay existing loans; without new loans they cannot pay for growth. Lenders see the problem but are reluctant to commit new money when the borrowers are already struggling to pay what they owe.

Four years into the current Third World debt crisis, there is still no international solution to this vicious circle. And in the debtor countries, there is mounting political discontent as citizens demand from foreign banks and governments sacrifices to match those suffered in the debtor nations.

Mayor Kertesz, for instance, leads a movement of 20 big city mayors who are putting pressure on Brazil’s federal government to postpone foreign debt payments and use the money to cover local urban needs.

“If a democracy doesn’t face the problems of the cities, it will be political suicide,” Kertesz said.

And 3,500 miles across the South American continent, Kertesz’ social judgment is echoed by Msgr. German Schmidt, an auxiliary bishop of Lima, Peru. Schmidt is responsible for Villa de Salvador, a sprawling shantytown on the outskirts of the capital city, and other surrounding “new towns” where 300,000 people live in poverty.

Economic Violence

“It is not possible to pay off the foreign debt as quickly as the banks would like without endangering the lives of our people,” Schmidt told a reporter. “This is a form of economic violence.”

The mayor and the bishop represent widely held political sentiments in Latin America. Many here attribute a host of economic and social ills to the burden of debt repayment.

Major Latin American debtors say they are being drained of financial resources. They are being forced to pay off on debts at a faster rate than their export earnings can sustain. What they need, they say, is more time and new money.

The private international banks who are owed all those billions of dollars have been forced to give them time, but they strenuously resist any increase in lending.

“If the banks have to assume the risk, there will never be new money voluntarily again,” said Roy Scott, the Latin American regional chief for Bank of Nova Scotia.

This, as many international economic observers see it, has created an impasse that is dangerously unstable.

In Peru, which owes $14 billion, the populist president, Alan Garcia, decided to put growth before debt repayment. He unilaterally ordered that Peru’s debt payments in any year not exceed 10% of its export earnings. As a result, Peru has been shunned by the world banking community and was declared ineligible for new loans by the International Monetary Fund.

Serve People First

So far, there has been no major debtor nation has followed Peru’s example. But British economic analysts Lord Lever and Christopher Huhne warned in their recent book, “Debt and Danger,” that “If pushed to make a choice between servicing the banks’ debts and serving their people, few if any of Latin America’s leaders are likely to fail to serve their people.”

If that happens, many international banks could be endangered. A default, for instance, by Brazil, Mexico and Argentina, with a collective debt of $250 billion, could bring about the insolvency of nine major American banks involved in Latin America: Citibank, Manufacturers Hanover, Bank of America, Chase Manhattan, Morgan Guaranty, Bankers Trust, Chemical, Continental Illinois and First National of Chicago.

Indeed, fear of such a situation is the only thing that overcomes the banks’ reluctance to lend more money. When it looked as if Mexico might default on interest payments after oil prices collapsed early this year, an international rescue operation was launched involving 19 central banks, including the U.S. Federal Reserve, along with the International Monetary Fund, the World Bank and 800 reluctant private creditor banks.

It was almost a repeat performance of the salvage operation of 1982, when Mexico touched off the current debt crisis by notifying its creditors that it could not pay even though the price of oil, Mexico’s main export, was then at $32 a barrel. Oil prices are now between$14 and $15 a barrel.

Capital Outflow

But such new money flowing in is the exception. At a time when Latin American countries desperately need capital to finance economic and social growth, they have paid creditors $107 billion more in the past four years than has flowed into the region.

Aldo Ferrer, president of the Argentine Bank of the Province of Buenos Aires, said: “It is impossible for Latin America, which is a developing region that needs capital, to continue these transfers and achieve economic growth. More has to come in than goes out on a current basis.”

Latin American countries need a favorable trade balance to keep up on payments on the region’s $370-billion debt. The region has increased its annual trade surplus to $35 billion in 1985 from $9.1 billion in 1982. But all of that surplus went toward paying debt, not financing economic growth.

To achieve even this export growth, governments have had to make savage cutbacks in imports and increase sales to the United States and other industrial countries. Those countries have responded with an upsurge of protectionism, particularly aimed at reducing imports of such goods as textiles, shoes, steel and agricultural products.

“It is a ridiculous situation,” Mario Brodersohn, Argentina’s minister of finance and chief debt negotiator, said in an interview. “We have to transfer 40% of our domestic savings to pay debt, and the basis of our exports is being undermined.

Blames Creditor Nations

“If agricultural prices had been the same this year as in 1984, we would be earning another $2 billion that could be used to service the debt. But prices are down because of deliberate actions by creditor countries.

Brodersohn complained that “The European Community keeps out our agriculture exports and dumps its beef and dairy surplus at subsidized prices. The United States is giving three-year credit to the Soviet Union to displace our wheat exports. We are deprived of the means to pay the creditors and have to borrow.”

But negotiations over such borrowing have not been fruitful.

After their last round of debt negotiations, Argentina and Mexico were significantly deeper in debt, although payments were stretched over longer terms and bank commissions and “spreads”--the difference between what the banks were paying for their money and what they were charging the debtor nations, were lower.

Now, Mexico is back for another $9 billion in “new money” from the private banks to offset losses in oil income. Argentina is also seeking new loans of about $2 billion to offset losses in export income from wheat and beef.

Twenty Latin American debtors formed a regional coordination unit called the Cartagena Group in 1984. They proposed to the major creditor governments that a negotiating system be set up to deal with debt, trade, development finance and other forms of managing the crisis.

In a letter to the last meeting of the U.S., British, French, West German and Japanese heads of government--the industrialized “Group of Five”--the Cartagena Group indicated that it would agree to talk on the basis of the so-called Baker Plan.

Baker Proposal

This plan was proposed by Treasury Secretary James A. Baker III last year at the IMF-World Bank annual meeting in Seoul, South Korea. So far, it has not been tested, but it puts forth the idea that in exchange for “market-oriented” domestic reforms, a participant will receive money for development from a $29-billion fund put up by banks, international agencies and the governments of industrialized nations.

The Latin Americans have said that the three-year plan provides too little money and does not deal with trade conflicts.

The Cartagena Group proposal for a direct political discussion with the industrialized countries on the debt has not been accepted by the Group of Five, which continues to insist that the IMF and the World Bank take the lead in negotiations. The commercial banks, as well, refuse to talk to debtors who have not made their peace with the IMF.

But this generates an impasse, because most major debtors reject IMF austerity and trade policies as anti-growth and politically explosive.

“If the debt issue remains just a discussion with the banks, it does not lead to a solution,” said Brodersohn, the Argentine finance minister. “There is growing debt fatigue, and the political cost of no growth creates serious tensions in the debtor countries. This is not simply a commercial matter.”