First of All, Slash Away the Old Debt : Latin America: As in bankruptcy, let a third party determine just how much of the region’s obligations really should be paid.

Frustrated by the slow implementation of Treasury Secretary Nicholas F. Brady’s new debt strategy for Latin American, President Bush recently appealed to commercial bankers for support. But the President’s appeal is not likely to produce much action--at least not until the objectives of the Brady strategy are clarified and some teeth are added to it.

The first thing Brady should do is decide whether he wants the banks to provide new loans to Latin America or to significantly reduce their debt claims. The banks would prefer not to do either; they will certainly not do both.

The fact is that new borrowing makes no sense for most Latin American countries. They are saddled with huge, unpayable debts and should not be adding more. Piling new debt on old is simply postponing the day of reckoning, not solving the problem.

Indeed, the great majority of Latin American nations have already stopped paying interest on their commercial loans. Of 19 Latin American countries, only four--Mexico, Chile, Uruguay and Colombia--are current on interest payments. Thirteen have failed to service their debts for more than a year, and Brazil and Venezuela have also fallen into arrears. New money will not help these countries. It will be used for back-interest payments, not to finance investment.

Why should banks make new loans when their old loans are not being repaid and are now worth only a fraction of their face value? This has kept the banks from lending to most of Latin America for the past four years. Since 1986, only Brazil, Mexico and Argentina have obtained any significant commercial credit. A year ago, Brazil received the last major package of loans. Brazil never touched the money; it went to cover interest accumulated during a year-long payment moratorium.

Banks do not want to lend to any Latin American country, whether it is repaying or not. For seven years, Mexico has paid every dollar of interest on time and has undertaken wide-ranging economic reforms. Yet no bank is prepared to voluntarily lend to Mexico. Colombia, the only country that has regularly repaid principal and interest, has not been granted new financing.

As one bank official said: “It is largely futile . . . to expect significant future participation by banks in loans of maturity over one year.” In short: Latin America should not count on commercial banks for any more large-scale capital inflows. Several American banks recently reinforced that message by expanding their reserves against losses from Latin American loans.

Latin America cannot regain access to commercial credit until its economic performance eliminates the risk of non-payment. That is why debt reduction is vital. By contributing to economic recovery, debt reduction is more rather than less likely to lead to renewed bank lending. Latin American countries will be considered credit-worthy not because they have paid off past loans but because bank officials have been persuaded that they can repay new loans.

But the banks have shown no more willingness to reduce their Latin American debt holdings than they have to provide new loans. What is needed to resolve the debt crisis is something akin to international bankruptcy proceedings. A third party--not the banks or countries--should decide how much of the debt should be paid.

Those countries prepared to pursue sound market-oriented economic policies should have their debt obligations cut back to a level that they can afford to pay--that is, a level consistent with their longer-term growth needs. For half or more of the countries of Latin America, that means virtually wiping out their debts. Anything less will simply prolong the debt crisis.