M ay God help us,” said Brazilian President Jose Sarney as he ended his speech announcing the unilateral suspension of debt payments to commercial banks. The announcement on Feb. 20 sent shock waves through U.S. financial markets, again raising fears of an international financial crisis.
One should remind Sarney and other major players in the debt crisis that “men at some time are masters of their fates; the fault, dear Brutus, is not in our stars, but in ourselves.” Since Mexico unilaterally suspended debt payments in August, 1982, the international debt crisis has been successfully managed through a case-by-case negotiation process among debtor countries, commercial banks, creditor nations, the International Monetary Fund and the World Bank.
Although critics view rescheduling agreements simply as a way of postponing one’s day of reckoning, they actually provide bankers more time to strengthen their balance sheets to protect themselves against the possibility of default or long-term debt moratorium. Because of interdependent interests, each successive crisis has been successfully managed through a give-and-take, albeit tough, bargaining process. This was true for Mexico in 1982 and 1986, Brazil in 1983 and Argentina in 1984; in all probability, it will again be true for Brazil in 1987.
Reasons abound for being optimistic about Brazil in 1987. First, the strength and size of the Brazilian economy encourage confidence. As Federal Reserve Board Chairman Paul A. Volcker recently observed: “They have demonstrated in recent years that theirs is an economy of considerable strength and resiliency and that there is no apparent reason why they can’t grow and generate the kind of trade surpluses necessary to service their debt.”
Indeed, Brazil was able to generate a $9-billion surplus in its trade account last year. But debt service costs are simply too high for Brazil and other debtor nations to handle, even under a reasonable trade performance, which Brazil certainly has.
Second, Brazil’s aggressive and unilateral suspension of debt payments is a negotiating tactic that has been used before. Mexico did it in 1982, as did Argentina in 1984. Mexico, moreover, during its latest round of intense debt negotiations last year, used the possibility of suspending payments as a bargaining chip to strike its best deal.
Brazil simply is following suit. As Enrique Iglesias, Uruguay’s foreign minister and coordinator of the Cartagena Group of Latin American debtor countries, has said: “The Brazilian move is a negotiation tactic, not an attempt to rupture the system. Brazil does not want collective action because that would generate a political reaction by the creditors, which would weaken Brazil’s position.”
Ecuador Suspended Payments
A third reason for optimism is that other debtor countries and creditors have previously negotiated workable reschedulings.
Ecuador, which recently suspended interest payments after its disastrous earthquake, is a special case that will have little effect on other debtor countries. More typical are Venezuela and Chile, which recently signed rescheduling agreements with terms approaching the low interest rates of last year’s Mexican deal.
In addition, Argentina is close to concluding a new credit arrangement with commercial bankers. These concluded and pending deals were made possible by the stimulus of the Brazilian moratorium, strong behind-the-scenes persuasion by U.S. government and IMF officials, bridge loans from industrialized countries and Citicorp’s new flexibility. Significantly, the negotiators have found ways, such as with Mexico in 1984, to circumvent the formal IMF programs that debtors have bitterly opposed.
Fourth, major banks have significantly increased both their loan-loss reserves and primary capital bases. This means that they can afford to be more flexible in debt-rescheduling agreements, as they were in the cases of Chile and Venezuela.
John R. Reed, the chairman of Citicorp, who has publicly opposed Mexican-type deals for Brazil and other debtor countries, is the commercial banking counterpart to Brazil’s finance minister, Dilson Funaro, the architect of Brazil’s debt moratorium approach.
Both men are staking out their strongest possible bargaining positions. In the end, their mutual interest in a deal should be strong enough to overcome any obstacles.
Brazil needs new loans and continuing trade credits to grow, while Citicorp needs to maximize its income stream from Latin America for two reasons: Income from Latin America constitutes about a quarter of the bank’s annual earnings, and having no deal with Brazil would be much more costly than a Mexican-style agreement.
The Mexican debt pact of 1986 was a significant precedent in several respects, but most importantly, it signaled a move toward real long-term rescheduling of debt.
Brazil, which six months ago was considered a model case in the management of the debt crisis and on the verge of gaining access to new loans, should certainly receive similar treatment. The biggest danger in the debt crisis is the possibility of mismanagement and miscalculation. Just as World War I lasted many years even though no one wanted it, the debt crisis could be mismanaged into financial warfare by the chief negotiators, perhaps as a result of what Volcker recently termed “battle fatigue.”
Clearly, bankers and government officials have expended enormous amounts of time and energy in successfully managing the debt crisis over the last 4 1/2 years; they should not be blinded by exhaustion to the tremendous progress that has been made. Not only are banks in much better shape, but as Volcker observed last month, there has been “more progress in Latin America toward fundamental economic reform than in any time in the last 50 years.”
Volcker called for “a renewed effort here based on the understanding that everybody is going to hang or succeed together, creditors and debtors alike.” As in past crises since 1982, the major players in the Brazilian situation probably will heed Volcker’s call.