Pressure to Revamp Third World Debt Strategy Mounting

The Reagan Administration is facing growing pressure from Congress and business to provide sweeping debt relief to Latin American debtor countries--a push that is likely to create a serious flap over the Third World debt issue later this year.

Democrats on the House Banking, Finance and Urban Affairs Committee are renewing their effort to create a new international agency that would buy up Third World loans from commercial banks and refinance them--at a discount--to debtor countries.

American Express Chairman James D. Robinson III has unveiled a similar proposal for discounting Latin American debts, ostensibly to be financed by the governments of the United States, Japan and Western Europe, at an initial cost of about $2.5 billion. A new study by the 20th Century Fund is expected to endorse some of these ideas.

But Reagan Administration strategists and officials of the major international financial institutions such as the International Monetary Fund insist that the debt strategy of the past 5 1/2 years--in which banks provide new loans to debtor countries on a case-by-case basis--is working and needs only minor adjustments to remain viable for the next several years.

Strategy Criticized

Manuel H. Johnson, vice chairman of the Federal Reserve Board, told Congress last week that he saw “no viable alternative to the case-by-case approach.” Officials argue that sweeping debt-relief proposals would not work because each country’s problems are different.

However, those pressing for broader debt-relief efforts insist that the current debt strategy is not working. Third World governments are having to channel so much of their resources to servicing their debt, these analysts argue, that they cannot get their economies moving again.

“The pretense that all is well with the debt management is imposing serious costs to the debtor nations, the creditor banks and ultimately the U.S. taxpayer,” contended Jeffrey Sachs, a Harvard University economist.

“The private markets cannot solve the problem on their own,” Sachs argued. The suggestion that governments should stay out of the problem “makes no more sense than . . . that we should eliminate the bankruptcy code . . . and let the markets handle corporate financial distress.”

The revived interest in debt forgiveness comes in the wake of the failure of Morgan Guaranty Trust’s highly touted Mexican debt-relief plan earlier this month to attract many takers among commercial banks.

Under the Morgan proposal, Mexico had offered banks an opportunity to swap Mexican government loans at a discount for new, high-yield bonds that would be backed by U.S. Treasury securities. But the plan lured only enough takers among the banks to reduce Mexico’s debt by $1.1 billion--far below the $10 billion that some had envisioned.

The Right Response

Paradoxically, however, the new pressure for bold debt-relief measures is intensifying as the major Latin American debtors again are embracing the existing case-by-case approach and are taking new steps to restructure their own economies.

Brazil, which announced a moratorium on debt payments a year ago, has resumed interest payments to banks and is negotiating a new economic restructuring plan under the aegis of the International Monetary Fund--a step the country had rejected for two years as politically too onerous.

Mexico, still plagued by hyper-inflation but awash in $14 billion in cash reserves, is doing relatively well for now. And Argentina is negotiating a new financing arrangement with commercial banks.

What is more, many debt analysts regard the lukewarm response to the Morgan Guaranty plan as evidence that the current debt strategy is working. Had banks regarded Mexico’s debt as worthless, they would have jumped at the chance the Morgan plan offered them to unload their portfolios, these analysts say.

“The Morgan plan may have fallen short of the Mexicans’ hopes, but it was about the right size (response) given the kind of bonds the Mexicans were offering,” said William Cline, a debt analyst at the Institute for International Economics, a Washington research group.

Clash Threatens

Angel Gurria, Mexico’s director of public credit, told an audience here Thursday that Mexico will continue its efforts to reduce its $106 billion in debt, despite the poor response to the Morgan plan. “We’re probably going to try a number of variations on this scheme,” he said.

The new push for broad debt relief threatens to provoke a clash between the Administration and its critics. Treasury Secretary James A. Baker III already has begun fighting back, dismissing broad-scale debt relief as a “mirage” and criticizing American Express Chairman Robinson’s plan harshly.

Shortly after Robinson unveiled his proposal, the Treasury issued a statement attacking it as “a bank bailout” that would be “counterproductive.” A senior Treasury official angrily branded the proposal “clearly a commercial venture on the part of American Express.”

Plan May Not Survive

Both Baker and the Federal Reserve Board want to make the current strategy more flexible by providing a “menu” of new financial instruments that banks can use to reduce their exposure and to convert more of their debt to equity, eventually reducing the Latin countries’ debt burdens. Progress on that front has been increasing but is slow by any measure.

House Banking Committee Democrats Bruce A. Morrison of Connecticut and John J. LaFalce of New York, major congressional proponents of broad debt-relief legislation, have tacked their proposal to the omnibus trade bill now under consideration by a House-Senate conference committee.

But the provisions have already been diluted substantially and may not survive in the compromise legislation, and Baker has warned that the Administration will not accept the debt proposals.

Insistence on Change

“The politics of the moment and certainly the next few months are that big debt-relief initiatives have no support,” said Alan J. Stoga, a debt specialist for Kissinger Associates, a New York consulting firm. “The situation has calmed down; the fires have been damped.”

But Morrison and LaFalce also plan to insist on enactment of their proposal in exchange for congressional support for a bill to increase the World Bank’s lending authority so that it can take a more active role in resolving the debt problem.

That strategy has a better chance because the Administration is firmly committed to gaining more funding for the World Bank. Congress is unenthusiastic about appropriating money in a tight-budget year to benefit foreign governments.

“If we give the World Bank more capital without having a sensible debt strategy in place, we’re being very irresponsible,” Morrison asserted. “This is not some kind of political gambit; this is something that is connected together.”