Too Far Gone to Fix? : Rescue of S&Ls; Begins, but Latin Debt May Defy Solution
Now that President Bush has weighed in with a gutsy plan to rescue the nation’s savings-and-loans, he will have to turn to the next bailout--debt-swamped Latin America.
Difficult as the S&L; fiasco is, extending an effective lifeline south of the Rio Grande will be even tougher. In fact, even with the best of intentions it probably cannot be done.
Never mind that the finance ministers and central bankers of the key industrial nations just met in Washington and declared their intention to do something big for Latin America. Never mind that Bush has promised a “whole new look” at America’s policies. And never mind that Mexico, Brazil and Argentina are all screaming for relief. The point is that some problems are just too difficult to solve.
Washington is no novice when it comes to multibillion-dollar bailouts. It has reached deep into its pockets to save Lockheed, Chrysler, Continental Bank of Illinois and, most recently, the $60-billion farm-credit system. Bush’s medicine for the thrifts won’t be popular, but one way or another Congress will probably swallow it.
Latin America is another matter.
It’s not that a rescue isn’t warranted. It’s not that debt-restructuring proposals do not abound.
But the debt crunch in Latin America is different in that it is the first truly global bailout involving the public and private sectors on several continents. Therein lies its intractability.
In the case of S&Ls;, for example, Bush stepped in when the Treasury, the Federal Home Loan Board and the Federal Deposit Insurance Corp. started fighting with one another. But there is no such mediator on the international scene. Right now, for example, there is a major dispute between Washington and Paris over whether money should be raised to guarantee new Latin bonds. On another front, banks from America, West Germany and Japan are scrapping because their respective taxing authorities are treating their losses differently, thereby creating competitive disadvantages for some in the global market. Even the International Monetary Fund and the World Bank are at one another’s throat over who should be leading the bailout effort. All this is on top of the inevitable battles between lenders and debtors.
We know how to shape up an American bank, or close it down if necessary. But no one has yet figured out how to make belt-tightening work in fledgling democratic economies that are under great financial stress.
In the new plan for the thrifts, moreover, there is the Justice Department to go after the guys who ran off with the store. But what can be done about illegal capital flight from Latin America, now estimated at almost half of the $250 billion in debt owed to commercial banks, which is now earning interest in Geneva or financing condos in Aspen?
In the past, Washington mobilized itself to provide international financial help whenever communism reared its head. The Marshall Plan was not an act of selflessness--America was afraid that the Soviets would overrun Greece, Turkey and the rest of Western Europe. Now, thanks to Soviet President Mikhail S. Gorbachev’s new smile, Washington and other Western capitals don’t seem all that worried about Latin America’s potential drift to the far left.
The United States was able to mobilize the world’s central bank resources, too, when the economy was directly threatened--as it was in the wake of the October, 1987, crash of the stock market. From the standpoint of the banking system, however, the Latin debt crisis is over.
In fact, more than two-thirds of all Third World debt is held by nine big money-center banks that can take care of themselves--Citibank, Bankof America, Bankers Trust, Chemical Bank and so forth. And all of them have built up bigger and bigger cushions against bad loans and reoriented their future money-making activities elsewhere.
President Bush, British Prime Minister Margaret Thatcher, Japanese Prime Minister Noboru Takeshita et al . will have to do something--and soon. As a foreign-policy issue, the debt will dwarf Nicaragua, El Salvador and Panama together. There will have to be some financial help, some regulatory relief for banks to encourage new lending, some beefing up of the World Bank and the IMF. But, compared to the black hole out there, these will be small potatoes.
In the end it won’t be governments but markets that reduce the debt to livable levels. Today you can buy Mexican debt at more than a 50% discount, Peruvian debt for less than 10 cents on a dollar. Sooner or later all the debt owed to banks will be valued this way, and the debt service of Latin governments will be vastly reduced. A deregulated, competitive global marketplace must eventually reflect the truth.
Meanwhile, there is almost no one who doesn’t want to help Latin America. But the reality may be that there is no one who can.
