Critics Doubt Brady Proposal Will Work : U.S. Plan for Third World Debt Struggles for Acceptance

The Bush Administration’s controversial new Third World debt strategy is facing a critical test in the next several weeks--whether it can be made to work or will have to be supplanted to keep Latin America’s economic problems from boiling over into political turmoil.

Although Mexico and commercial banks are expected to reach agreement soon on the outlines of a debt-reduction package, support for the new U.S. approach remains generally lukewarm among creditor banks and debtor nations alike.

And analysts warn that for all the high-flown rhetoric about the benefits of reducing some of the region’s debt, the plan will be unable to provide even minimal debt relief beyond the case of Mexico and one or two other larger Latin American countries.

“I haven’t been able to find anybody outside of the U.S. Treasury who thinks this plan is viable,” said Alan J. Stoga, international debt analyst for Kissinger Associates, a New York-based consulting firm. “There is criticism of it from virtually all sides.”

The U.S. debt proposal, unveiled with fanfare by Treasury Secretary Nicholas F. Brady March 10, marked a major departure from the previous strategy. That plan, formulated by Brady’s predecessor, James A. Baker III, asked banks to lend even more money to debtors such as Mexico and Brazil. The Brady proposal, by contrast, seeks to reduce national debt burdens by asking banks to forgive portions of the debt in return for International Monetary Fund and World Bank guarantees for the remainder.

But critics quickly spotted two problems with the Brady proposal. First, reducing debt rather than providing new loans simply could not produce the amount of relief that debtor countries require to finance their needed economic overhaul as well as to resume growth. Second, other industrial countries did not want government-financed institutions such as the World Bank and IMF to use taxpayer dollars to underwrite any concessions the banks might make.

As a consequence, although U.S. officials do not acknowledge it, the Brady plan has changed since being unveiled. There is now far more emphasis on new lending rather than debt reduction. Second, the roles of the World Bank and IMF have proven far smaller than the Administration first envisioned, reducing the amount of available debt reduction.

What the expected accord with Mexico would accomplish is to blunt, at least for the moment, the prospect that the growing dissatisfaction with the Brady plan might seriously embarrass President Bush at next weekend’s seven-nation economic summit in Paris. French President Francois Mitterrand, always ready to upstage the United States, has invited leaders of 22 debtor countries to an eve-of-summit dinner to discuss Third World debt.

Mitterrand’s gambit--designed to drum up support for a rival French proposal to boost liquidity worldwide to help underwrite debt-reduction efforts for Third World countries--was not expected to get very far at the summit. The seven leaders still were expected to reaffirm their support for the Brady proposal, albeit unenthusiastically.

But U.S. officials had feared that a blowup of the negotiations with Mexico might have enabled Mitterrand to push through a call for a worldwide conference on the debt issue. That almost certainly would have wrested control of the situation from the United States, weakened the dollar and led to additional chaos and increased political restlessness in Latin America.

Even so, the medium-term outlook is far from sanguine. The debt situation in the region has been deteriorating rapidly. Argentina is in its worst financial straits in years. Brazil just last week suspended or delayed some payments on its debt. Venezuela’s situation is uncertain.

Political Situation Cited

Six months ago, virtually all the region’s countries except Peru and Costa Rica were maintaining debt payments. Today, however, only Mexico is paying on schedule. And several, such as Argentina, are on the brink of a debilitating currency crisis.

What is more, the political situation in Latin America is becoming steadily more alarming. Years of hyperinflation and declining living standards have radicalized the small but emerging middle class in most of the larger debtor countries, making it all the more difficult for the new democratic governments in the region to maintain popular support.

Argentina’s incumbent government has already lost to the radical Peronist party, and Brazil’s centrist political machine is under serious challenge for the November election. Venezuela, whose economic problems earlier this year led to riots in which almost 300 persons were killed, is in something of a political limbo. Mexico so far still is doing well, and the government is enjoying strong popularity but officials here worry that could wane.

Until late this past week, even some Bush loyalists had been searching for alternatives. The White House National Security Council, concerned that other Latin American debtors soon may follow Argentina on a more radical path, had been pondering an aid plan for Mexico to keep the situation from mushrooming into a full-blown political problem.

Machinery Bypassed

And on Wednesday, Baker, who is now secretary of State, took a U.S. appeal for $1 billion for the Philippines directly to American allies in the Pacific, effectively bypassing the Brady plan machinery.

Indeed, the pressure for an accord between Mexico and the banks has come mostly from the Administration, largely with the summit “deadline” in mind. Although Brady had refused for weeks to inject himself in the talks, aides said he spent much of the past two weeks trying to keep the talks from falling apart--an outcome that could have scuttled the entire debt strategy.

As late as Thursday, Brady was professing to be unconcerned over whether a debt-reduction agreement for Mexico could be reached before the summit. “It would be very exciting if it were done in time by the summit, but to me, if it isn’t done by the summit it’ll be done shortly thereafter,” Brady told reporters then.

The fact that the impasse between the Mexicans and the banks has continued so long spawned increasing resentment in the government of Mexican President Carlos Salinas de Gortari. “The U.S. really is not providing the leadership that it used to, not on our own situation, not on the debt problem as a whole,” a well-placed Mexican official said before the pact was signed.

Stakes Growing

To be sure, for all its difficulties, the Brady plan has not gone entirely sour. The Group of Seven, a forum for finance ministers and central bankers of the countries whose leaders will participate in the summit, has endorsed the proposal, despite some dissension.

And the IMF and the World Bank quickly agreed to allocate portions of their loans for debt relief. The two organizations already have lent sizable sums to Mexico and Venezuela under the new Brady formula, and Japan has pledged to contribute $6.5 billion to help underwrite efforts to attract banks to discount some of their loans to debtor countries.

What happens next in the new debt strategy still is unclear. Despite the expected accord for Mexico, there are not many other candidates in sight for debt reduction. International officials say Venezuela simply does not want to undertake the kinds of sweeping economic reforms that would be required to qualify for the Brady plan. Costa Rica is a possibility. But the rest are unlikely to win any concessions from the banks.

Meanwhile, the stakes are growing. A Mexican official pointed out that the debt issue “is not just a financial problem, but one that goes to the heart of determining whether there is political stability in the country. My worry is when the solution comes, it will come too late.”