Bush’s Third-World Debt Plan Faces Hurdles

Despite a series of recent endorsements, the Bush Administration is facing an uphill fight in its efforts to launch its new plan to solve the Third World’s debt problem.

Leaders of the International Monetary Fund and the World Bank threw their support behind the plan Tuesday, two days after finance ministers of the seven major industrial nations signed on. But their support was lukewarm.

“They’ve got some serious problems ahead,” Alan J. Stoga, a debt analyst at Kissinger Associates, said of the Administration’s effort.

Japan, which some officials had hoped would contribute $10 billion to the effort, announced that it would allocate only $4.5 billion. West Germany, which harbors major doubts about some provisions of the U.S. plan, has declined to ante up any new money.

Skeptical European finance ministers limited the amount that the IMF and World Bank can divert for Third World debt relief. And the United States is under serious budget constraints of its own.

Pressure Big Banks

The Bush Administration will also need to pressure the big U.S. banks to step up--or at least maintain--their current levels of lending to Latin American debtor nations. But U.S. bankers have served notice that they are not eager to increase their lending to Latin American countries and do not want to write down the value of their existing loans without attractive sweeteners from governments.

Moreover, the Administration faces opposition within the Federal Reserve Board to easing bank regulations and accounting rules to make it easier for commercial banks to discount their Third World loans. The Fed has already rejected suggestions that it penalize banks that do not go along with the Administration plan.

The debt plan, written by Treasury Secretary Nicholas F. Brady, is still in outline form, and the Administration must work out enough details by July to win endorsement from the heads of government at the annual seven-nation economic summit conference in Paris.

To make its plan credible, the United States must also move quickly to apply it to some specific “test” cases. Mexico, Venezuela and the Philippines are the primary candidates.

The Brady plan marks a major turning point in management of the Third World debt problem.

In previous years, the United States sought to spur more bank lending to help Third World debtors pay their bills, an approach that helped debtor nations stave off default but also inevitably resulted in increasing their debt burdens. The Brady plan seeks to reduce their debts.

Essentially, the proposal would provide new ways to encourage banks to discount a portion of their Third World loans and to exchange them for new long-term bonds that debtor countries would provide with guarantees by the World Bank. The Administration had also hoped for more from Japan and a significant contribution from West Germany to supplement the World Bank funds.

Despite the formal endorsement by the World Bank and the IMF earlier this week, the plan has received something of a lukewarm reception from individual creditor and debtor countries.

The Group of Seven major industrial nations--the United States, Japan, West Germany, Britain, France, Italy and Canada--approved the proposal in principle but expressed reservations about several key specifics.

Political Unrest

Both British Chancellor of the Exchequer Nigel Lawson and West German Finance Minister Gerhard Stoltenberg were publicly critical of the plan.

Reaction from the Latin debtor countries was mixed. Although Brazilian Finance Minister Mailson Nobrega called the Brady proposal “a major conceptual breakthrough,” he warned that “the question remains: Where will the necessary resources come from?”

And some Latin American officials have privately expressed chagrin that the Brady plan would offer debt reduction to do-nothing governments as well as those that have made sacrifices to restructure their economies. Brady offers debtor countries no incentives, these critics say, to adopt necessary but unpopular austerity measures such as tighter budget and monetary policies.

What worries critics most is that, for all of Brady’s efforts, the proposal may not provide enough relief to help Latin American countries back on their feet. Instead, they fear, it could tighten the economic squeeze in the region and exacerbate the political unrest already developing there.

“These ideas raise new hopes. They should be translated into immediate action,” Brazil’s Nobrega told the IMF delegates earlier this week.

Brady told reporters Wednesday that the Administration was not troubled by the criticism. “Now’s the time to light a candle rather than curse the darkness,” he said.

Brady said Wednesday that Treasury officials have already “been talking to a number of countries” about qualifying for the new debt-reduction plan and were hoping to move quickly to negotiate agreements with specific countries and to iron out the program’s details.

Mexico has already submitted its own proposal, combining Brady’s debt-reduction scheme with a request for a major new lending package from commercial banks. And Venezuela is drafting a plan of its own.

But as Brady concedes, time is of the essence. Several major Latin American governments are facing elections this year in which leftists or populists have early leads, and a series of victories there could lead to reversals of economic restructuring programs.

“It is crucial,” Nobrega said this week, “that such new hopes do not give place to new frustrations.”

MOST INDEBTED NATIONS The 17 countries classified as highly indebted by the International Monetary Fund owed more than a half-trillion dollars at the end of 1988. Five of them account for two-thirds of the total debt.

Top 5 debtors: Brazil: $120.1

Mexcio: $107.4

Argentina: $59.6

Venezuela: $35.0

Nigeria: $30.5

$32,6 billion

Other Latin American debtor nations: $83.0 billion

Other debtor nations: $93.0 billion

Total: $528.6 billion

Other Latin American debtors: Chile, Colombia, Peru, Ecuador, Bolivia, Uruguay, Costa Rica. Other debtor nations: Philippines, Yugoslavia, Morocco, Ivory Coast, Jamaica.

Source: International Monetary Fund via Associated Press