Brady Plan at Risk as Banks Balk at Third World Loans

The Brady Plan--the Bush Administration’s new program for dealing with the Third World debt problem--has suffered a new, possibly crippling blow and may require major surgery before it can be made viable again, bankers and debt experts say.

Even as the world’s finance ministers publicly praise it, the plan--named for its author, Treasury Secretary Nicholas F. Brady--has run into serious new resistance from commercial banks, which served notice last week that they have no appetite for lending more money to Third World countries--a key element of the U.S. proposal.

Publicly, the U.S. Treasury and the finance ministries of other nations have been contending that the Brady Plan--which provides for actual debt reduction rather than just new loans to Third World nations--is intact.

“All players in this game must make their contributions in order to solve this problem,” West German Finance Minister Theo Waigel said Tuesday. “The Brady Plan has added additional possibilities and options. It’s up to the banks to try to use them.”

Behind the scenes, however, the United States is scrambling to rescue the plan, either by cajoling banks to provide more loans or by repackaging it to revive the so-called concerted lending program in which the world’s commercial banks participated before.

Concern Building

Late last week, senior Treasury officials called in top bank executives for a tete-a-tete that turned into a shouting match between the two sides over what role each should play. Despite the heated emotions, U.S. officials say nothing was resolved.

Now, concern is building at high levels of the Administration that a hobbled Brady Plan could trigger a national security problem. Without sizable new money from banks, Latin America could quickly plunge into serious political turmoil.

In an unusual move designed to coax bankers into cooperating more fully, President Bush met at the White House on Tuesday night with finance ministers and central bank governors from the 10 largest non-Communist industrial countries and some 30 commercial bankers from around the world.

Some analysts are expecting Bush to mention the need for more bank lending in his speech before the 152-member International Monetary Fund and its sister organization, the World Bank, this morning. “We want to keep the momentum,” a U.S. official said.

Little Relief Seen

The problem essentially is one of stark arithmetic:

Although the Administration has publicly emphasized the new feature provided by the Brady Plan--the machinery for reducing the size of a country’s debt and the interest it must pay--experts say that debt reduction alone cannot provide enough for countries to stay afloat.

William Cline, debt analyst for the Washington-based Institute for International Economics, points out that reducing a country’s debt by $1 saves it only 10 cents a year at most--the cost of interest. But providing that same country with $1 in new loans gives it 90 cents to use.

Michel Camdessus, managing director of the IMF, which is holding its annual meeting here this week, noted Tuesday that the major goal in helping debtor countries is to keep their economies going and pay their bills while they revamp their policies to get back on their feet.

Because the governments of the rich industrial countries do not want to foot that bill, new bank lending is a critical element in any new debt plan. “Lending has to be large enough to finance the growth and economic reforms of the debtor countries,” Camdessus said.

Ironically, experts say the increased resistance from commercial banks stems partly from the structure--and the timing--of the Brady Plan. Under the previous Third World debt plan, drafted by former Treasury Secretary James A. Baker III (now secretary of state), the government cajoled commercial banks into providing sizable new loans. In return, it allowed them to keep the book value of the loans at 100 cents on the dollar, no matter how shaky they were, so that the banks did not have to write them down and record losses.

Chance to Get Out

But the Brady Plan gave the banks a choice: They either could continue new lending or they could write off portions of their debt in exchange for new government securities whose interest payments were backed with money from the IMF--opening the door for them to get out.

“The Administration didn’t really intend for it to be that way, but it wound up giving the banks an opportunity to exit the whole process,” said Robert D. Hormats, a former State Department economic policy-maker now with Goldman, Sachs & Co., a New York investment bank.

Because of these and other concerns, Brady’s proposal drew fierce opposition initially from the Federal Reserve Board and the National Security Council, and it was revamped during its first few weeks to place more emphasis on the need for continued bank lending.

Indeed, most provisions of a recent Brady Plan package negotiated with Mexico involved new lending rather than debt-reduction proposals. And a later debt deal concluded with the Philippines was made up almost entirely of new loans. Talk of debt reduction seemed to ebb.

But in recent weeks, the Administration has stepped up its rhetoric about the debt-reduction aspects of the Brady Plan, and Latin American governments have been pressuring the banks to discount sizable parts of their debts.

To the banks, that meant they were being asked to take a double hit by discounting their debt substantially and by providing billions of dollars of new loans at the same time--a formula unlikely to go over well with bank stockholders.

Last week, several large commercial banks balked and announced that they would boost the amount of money that they place in reserve to cover potential losses on Third World loans, virtually guaranteeing that they will slash new lending to barely more than a trickle.

Lewis T. Preston, chairman of Morgan Guaranty Trust Co., one of the biggest lenders to Third World countries, warned that banks would not be willing to continue financing more Third World debt relief unless the governments of major industrial countries provide cash incentives.

Morgan’s turnabout was one of a flurry of such pullouts. Chase Manhattan Bank and Manufacturers Hanover Bank announced similar moves. And the Institute of International Finance, the banks’ own voice in Washington, criticized the Treasury plan.

Creditor Fatigue

To be sure, at least some U.S. banks--Citicorp, the nation’s largest lender among them--have said they plan to continue making new loans to Third World countries, albeit with substantially more strings attached than once was the case.

And the smaller regional institutions already had cut back sharply from their earlier days of massive lending. Indeed, debt analysts say the most striking development in the debt situation over the last three years has been creditor fatigue--a tiring out of lenders.

Nevertheless, the latest opting out by commercial banks seems likely to darken the outlook for managing the Third World debt problem successfully--and makes it decidedly more difficult to extend the Brady Plan much further.

Although the commercial banks most likely will provide the needed new loans to carry out the settlements reached with Mexico and the Philippines, countries not as credit-worthy, such as Argentina and Brazil, may find themselves unable to obtain the huge amounts of cash that they need.

What seems likely to some analysts is that the authorities may have to begin searching for new ways to induce banks to return to the fold, either through a relaxation of federal bank regulations on foreign loans or through some sort of tax incentives, or both.

For the moment, however, both sides seem to be holding firm.