U.S. Plan on 3rd World Debt Wins Tepid Support of Allies

Treasury Secretary Nicholas F. Brady’s controversial new proposal for dealing with the Third World debt problem won lukewarm endorsement from America’s major economic allies Sunday, raising some doubts about how quickly and completely it can be put into effect.

After a meeting of 8 1/2 hours, finance ministers of the Group of Seven--the United States, West Germany, Japan, Britain, France, Italy and Canada--issued a formal communique that endorsed the Brady plan in principle but conspicuously rejected some of its key provisions.

In the same document, the seven also served notice that they will oppose any effort in the foreign exchange markets to push the dollar’s value up further. If anything, they want to see the dollar decline slightly to the middle of previously agreed-upon trading ranges for the world’s major currencies.

The finance ministers also warned for the first time that inflation pressures are building in the United States and several other countries and that improvements in global trade imbalances are beginning to lag. But they offered no policies to help deal with these problems.

The thrust of Sunday’s action was to provide an international go-ahead for a modest but important shift in the global debt strategy, aimed at reducing the actual burden of Third World debtors rather than just relying on more bank lending to help them pay interest bills.

Under the previous policy, outlined in 1985 by then-Treasury Secretary James A. Baker III, the industrial countries had called on banks to step up their lending to Third World countries in return for steps by debtor country governments to overhaul their economies.

Brady’s proposal, unveiled March 10, would seek to reduce the size and cost of that debt by encouraging banks to discount a portion of their loans and to exchange them for new long-term bonds that debtor countries would provide with guarantees by the World Bank.

U.S. officials insisted after the meeting that they are satisfied with the Group of Seven’s action on the Brady debt plan. Brady told reporters later that “this was an endorsement of the (U.S.) proposal.”

Nevertheless, reflecting reservations by European countries, the group took a decidedly cautious tone on the specifics of the U.S. proposal. The finance ministers specifically rejected a call for the World Bank to underwrite interest-rate cuts for Third World debt.

They also indicated they wanted to rely far more heavily on continued new lending by commercial banks than the Treasury plan appeared to envision, both to help debtor countries pay their bills and to keep financing interest payments on current loans.

Easier Restrictions Backed

And they gave similarly cautious backing to a call for relaxing bank regulations, tax laws and accounting principles in the industrialized countries to make it easier for commercial banks to write down their Third World loans without hurting their profits too severely.

Sunday’s communique conspicuously omitted another key element of the new Brady plan--any confirmation by Japan that it would provide some of the cash needed to underwrite the new steps by banks and debtor countries to discount some of the current debt. In the past, Japanese officials had indicated a willingness to help out financially.

At the same time, however, both U.S. and Japanese officials suggested after Sunday’s meeting that Japan might announce a cash contribution to the effort later this week. Japan’s finance minister, Tatsuo Murayama, did not attend Sunday’s meeting because of a political scandal at home. He was represented by a deputy.

Despite the endorsement in principle, Sunday’s communique came as something of a disappointment for the United States. The Baker plan to solve the Third World debt problem had stalled after commercial banks had declined to increase lending, and the Treasury Department had touted the Brady proposal as a major initiative of the Bush Administration.

The session of the Group of Seven came on the eve of a semiannual meeting of the ministerial-level Interim Committee, the policy-setting body of the 151-country International Monetary Fund, and the Development Committee, which governs the World Bank.

Lukewarm Latin Reaction

The Interim Committee, consisting of 22 finance ministers representing the IMF’s entire membership, is scheduled to take up the debt problem at a meeting this morning. Reaction by Latin American governments has been generally positive, but also lukewarm.

Critics of the Brady plan have complained that the debt-reduction features alone will not provide enough relief to enable debtor countries to meet their annual bills for debt service and to sustain economic growth. They say more lending by commercial banks is needed as well.

With many Latin American democracies now threatened by leftist or populist challengers, some analysts fear that the Brady plan will only ignite more political unrest--and unravel any progress by debtor countries to overhaul their economies--if it proves to be a disappointment.

To help promote interest in the plan, the United States is expected to begin working soon to apply the new proposal to Mexico and Venezuela. During a meeting with Venezuelan President Carlos Andres Perez on Saturday, President Bush ordered work to start this week.

The ministers’ firm statement on the dollar Sunday was designed to help blunt the U.S. currency’s recent rise, which some analysts fear could soon send the trade deficit here ballooning again. A high dollar makes imports more attractive here and American exports less competitive abroad.

Although the formal language in the communique gave the same message, Brady took the unusual step of telling reporters in plain language that the ministers did not want the dollar to rise any further. The seven industrial nations have been intervening in the exchange markets to stem the dollar’s rise.