Debt Plan Focuses Too Much on Reduction, Banks Warn

The world’s major commercial banks warned Monday that the Bush Administration’s new Third World debt strategy may end up in failure if it places too much emphasis on debt-reduction instead of promoting more new lending to Latin American countries.

In a letter to the International Monetary Fund, the bankers cautioned that “excessive focus on debt reduction, particularly at discounts that banks regard as punitive, will result in banks’ permanent exit from future lending to middle-income countries.”

They warned that expectations about how much developing countries’ debt burdens actually can be reduced “must become realistic.” They urged authorities to give increased attention to stemming capital flight in debtor countries as a way to help them meet their debt service.

The letter, made public by the Institute of International Finance, which represents 184 commercial banks around the world, served to underscore the resistance that U.S. authorities are encountering in persuading banks to go along with the new Third World debt plan.

Banks Resist Plan

Under the plan, developed by Treasury Secretary Nicholas F. Brady, commercial banks would exchange portions of their bank debt for a smaller amount of securities from the debtor countries. The interest payments on these securities would be backed by the IMF or World Bank.

The debt burdens of these countries are increasing so rapidly that debtor countries now are sending more money back to rich countries than they are receiving. The World Bank reported over the weekend that the net cash drain from Third World countries has reached $50 billion.

But the banks, reluctant to discount their loan portfolios too deeply, have been resisting the Brady formula. Several, offered such a choice in a recent deal with Mexico, have opted to provide new loans to the country rather than trade their old ones for securities.

Moreover, Horst Schulmann, the former West German Finance Ministry official who now serves as managing director of the Institute of International Finance, said Monday that the opportunities for such Brady plan-style exchanges are limited. The plan was unveiled last March and put into effect in late summer.

Schulmann noted that the Philippines, which recently completed negotiations with commercial banks, sought to increase its borrowing rather than trade its old loans for securities.

“We don’t see a long list of candidates (for debt-reduction deals) around the corner,” he said.

He said countries such as Brazil and Argentina are ineligible for Brady plan debt-reduction deals because they have not yet won approval of domestic economic reform plans from the IMF--a prerequisite to any such swaps.

He termed Venezuela’s demand for a 50% reduction in its foreign debt burden, which Caracas has said it will seek in negotiations now under way between commercial banks and the government, as “totally unrealistic.”

And he suggested that other countries such as Chile and Uruguay might find that prodding banks into discounting their loans as part of Brady plan deals could impede prospects for them to regain access to credit markets--a major goal of many debtors now.

Some critics of the debt-reduction effort believe that it helps Third World countries more to provide them with new loan money to use to finance their economic development than to reduce their overall debt-burdens, which carries relatively less impact per dollar of help.