Treasury Chief Offers Plan to Ease Third World Debt

The Treasury Department, seeking to dampen growing political unrest in Latin America, unveiled the outlines Friday of a plan for helping Third World countries reduce their massive foreign debts, provided they undertake needed economic reforms at home.

Disclosure of the plan, sketched only broadly and slated to be fleshed out in coming months, was rushed for maximum political impact in Latin America. Venezuela experienced widespread rioting over economic issues just last week, and Brazil and Argentina are facing leftist threats.

However, some analysts speculated Friday that governments in the region may be disappointed in the proposal. The plan would not increase the total amount of money available to Latin America, and it would benefit only those countries that agree to reforms.

As outlined by Treasury Secretary Nicholas F. Brady, the overall thrust of the new plan would be to offer debt-reduction as an incentive to coax debtor countries into taking steps to encourage more investment and saving at home and stem the drain of capital to investments overseas.

Brady, who sketched the plan in a speech before a conference on Third World debt, said that the Administration wants “to rekindle the hope . . . of debtor nations that their sacrifices will lead to greater prosperity in the present and the prospect of a future unclouded by the burden of debt.”

It was not immediately clear how closely the Bush Administration ultimately will stick to the new scheme. The proposal still faces strong opposition within the government. White House spokesman Marlin Fitzwater noted pointedly that President Bush has not yet approved it.

Nevertheless, Brady’s speech about the proposal seemed to represent a major shift in the U.S. strategy for dealing with the Third World debt problem.

Until now, Washington has sought mainly to help debtor countries obtain more loans from commercial banks so that they could meet current interest payments. But the banks have proved reluctant to provide much new money, and many Latin American economies have stagnated.

Under the new approach, the Administration would seek to reduce the actual size of the debt by coaxing banks--with collateral money and loan guarantees from the World Bank and the International Monetary Fund--to negotiate deals with debtors to reduce some loans.

Larger Japanese Role

The United States also reversed its earlier opposition to allowing Japan to play a larger role in easing the plight of debtor countries. With U.S. backing, Tokyo announced Friday that it will make “parallel” loans to deserving debtors to bolster IMF-World Bank loans.

It was not clear how much the Third World’s debt burden could be reduced under the new plan. The Treasury refused repeatedly to provide any estimates. By rule of thumb, each $1 in actual debt reduction trims the interest that a country must pay by only about 10 cents.

Critics also questioned whether debtor countries would be able to resolve their current financial problems, let alone spur economic growth, merely by reducing their current debt burdens, without also borrowing more money from banks. Treasury officials speculated that lending by banks will be more “modest” in the future.

In drafting its proposal, the Treasury specifically rejected calls by some members of Congress for massive debt forgiveness, possibly through creation of an international agency that would buy up questionable Third World loans and resell them at a discount to the debtor countries.

Still, the move by the Treasury to abandon the old approach, which has prevailed since the introduction of the plan put forward by then-Secretary of the Treasury James A. Baker III in late 1985, was welcomed by both private analysts and members of Congress.

Sen. Bill Bradley (D-N.J.), one of Congress’ most vehement critics of the previous debt strategy, said that he was “pleased at the shift of focus” apparent in the new plan. But he expressed skepticism that it would result in significant debt-reduction.

And A.W. (Tom) Clausen, former World Bank president who now heads Bank of America, said that adoption of the plan might encourage banks to charge somewhat lower interest rates on loans to some Latin American debtors.

“It didn’t reach expectations,” Clausen said of the Brady proposal, “but it does provide a new direction and emphasis.”

If Bush goes along with Brady’s ideas, Treasury officials said, the Treasury secretary will outline them more fully in April at a meeting of finance ministers of the seven largest industrial countries and seek formal approval at the annual seven-nation economic summit in July.

In the meantime, the Treasury hopes to apply some of the plan’s principles in providing financial help for Mexico, which is just beginning negotiations with its creditors for a series of new loans and possible write-downs of some of its debt.

A few minutes before Brady outlined his plan, current World Bank President Barber Conable called for providing major help to the new Mexican government. “Mexico has done all the right things,” Conable said. “I think (it) should be the place to start.”

$1.3 Trillion in Debts

Third World countries owe about $1.3 trillion in foreign debt, approximately $300 billion of it to U.S. banks. Besides the United States, European and Japanese banks also are heavy lenders to Latin America.

Under the Brady proposal, once a debtor country has undertaken the needed reforms, it could begin negotiations with commercial banks on ways to reduce parts of its overall debt burden--either by swapping portions of its debt for equity or through other financial schemes.

The IMF and World Bank would help speed this process in two ways. First, they would set aside part of their current lending as collateral in cases where countries offered to give banks new government bonds in exchange for being able to buy up old debt at a discount.

Second, they would tap some of their currently unused resources to serve as collateral in instances where banks agreed to reduce the interest payments that a debtor country owed. As a result, officials say, banks should be more willing to discount loans.

The plan posed the possibility that the new system might widen the gap between debtor countries that agree to go along with domestic reforms and those, such as Peru, that do not.

Both the writing down or reduction of commercial bank loans and the new money provided by Japan would be restricted to countries that agreed to overhaul their domestic economic policies.

Brady said in his remarks Friday that ultimate adoption of the plan “could help lay the basis for” U.S. support for a proposal to increase the lending pool of the IMF, possibly by the end of the year.

The Bush Administration so far has opposed any increase in the IMF’s lending resources, contending that existing funds are adequate to handle the current global debt problem. The 151-country IMF serves as administrator for most Third World austerity programs.

Treasury officials insisted Friday that the proposals Brady outlined had been approved fully within the Administration and are likely to win the backing of the President. But other policy makers, particularly at the Federal Reserve, remain opposed to the move.

Officials said the Fed had expressed fear that the plan would prove inadequate and might encourage debtor countries to ease up on their reform efforts.

Separately, the Treasury announced formally that it is offering Venezuela a temporary “bridging” loan of $450 million to tide that country over until it receives its first disbursement on a pending loan from the IMF. Plans for the move were announced earlier.