issue 168 - February 1987
Developing countries ran into debt effortlessly, but it caught up with them very fast. They - particularly their poorest people - are having to bear the consequences. And in the end someone is going to have to admit that the debts cannot be repaid.
So, where do we go from here? Third World countries over their heads in debt. The banks running scared in the other direction. Peasant families being asked to pay back money they never had. A fine mess all round.
Bad enough. But the world doesn't seem to have come to an end.
Not for the banks it hasn't. But many people in the debt-stricken countries have moved closer to the brink. The real value of wages in Peru and Argentina fell by more than 16 per cent in 1985 - when overall demand was restricted so as to reduce imports.' In Zambia the price of maize meal, the staple diet, was doubled in December 1986 when subsidies were removed - 15 people were killed in riots.
Sounds like the IMF at work again. I thought they were out of the picture.
Only in some places. Many of the poorer countries, particularly in Africa, have been relying on the IMF the whole time. Indeed most countries have substantial debts with the international aid agencies.
But even those countries that had been borrowing heavily from the commercial banks now find the IMF joining in too. The problem for banks is that individually they don't have much political clout: they need the IMF to help them to act together.
A smaller bank which had joined a herd of others in a syndicated loan to Nigeria, say, might decide it was time to trot off along its own path. Seeing the loan unlikely to be repaid it could consider writing off Nigeria as a bad job. If its loans there were small and it had sufficient reserves to cover the losses this would probably make sense. But it would imply that everyone in the herd should admit that loans to Nigeria were not recoverable. For the larger banks with bigger loans at stake such a burst of honesty could have disastrous and possibly terminal effects on their balance sheets.
The IMF, seeing the possibility of such collapses, has been whipping the world's banks into a sort of creditors' cartel. The idea being that everyone should collude to keep the whole banking system afloat.
Collude? Doesn't it make sense for them to co-operate?
It always makes sense for people to cooperate. But in this case you might wonder how the bankers can preach to others the virtues of the free market and international competition and yet restrict competition amongst themselves.
Anyway, the IMF has been getting the banks together and encouraging them to lend more so that interest payments can keep flowing back to them. As long as interest is paid the fiction can be maintained that borrowers are credit-worthy.
To be fair to the banks - and I do want to be fair...
So I've seen.
Yes, you can't fault me on that. Credit where credit is due. The banks have expressed unease about these 'involuntary loans' - lending more money to a bad debtor is clearly bad banking. But they are colluding (co-operating) for the time being. As for the debtor countries, they will go along with this game too - even if it now means dealing with the IMF.
The cartel that deals with Nigeria is typical. One bank takes the lead; in this case it is Barclays. The group says that it will lend more money to Nigeria if the country also signs an agreement with the IMF. They are confident that the usual IMF conditions will squeeze money back out again. The IMF in turn says it will only sign a standby agreement if Nigeria will agree terms with the commercial banks. All in all a very effective pincer movement
They've really got a grip on Nigeria's assets.
And faced with this kind of united opposition, it takes a lot of nerve to renege on debts. If you did you would be unlikely to get money in the future from any source, private or public.
Of course if the debtor countries got together and formed a cartel of their own they might be able to stand their ground. And a group of Latin American debtor nations, the 'Cartagena Group', does meet regularly to co-ordinate its strategy towards the banks. But there have been few signs that they are ready for a head-on clash.
In practice two things are happening. You could call these the 'Mexican mixture' and the 'Peruvian pattern'.
Are you making this up?
Only the alliteration. Most of this story is too far-fetched for any fiction writer to get away with it.
Let's start with Mexico - which, you might remember, was where the banking bubble first burst. Indeed this is the country which has also set the pace in renegotiation. Mexico has managed to change the terms of $77 billion of its foreign debt. Now it can take longer to pay existing loans and it has received new money to pay off the interest. But once again the interest rate will vary. In this case it will float fractionally (13/16 of one per cent) above the interbank rate - which is what international banks are charging each other for loans.
Doesn't seem too excessive.
It's a lot when you owe $77 billion. Many Mexicans are complaining that it is far too much - that they should have been charged two per cent less than the interbank rate. And on top of this Mexico has promised among other things to privatize state industries as well as open up the country to freer competition from foreign enterprises.
But the Mexicans are now discovering that they were let off lightly. Mexico's large neighbour to the north was evidently nervous of the prospect of creating too much poverty and unrest just across the Rio Grande. So it decided to support these (relatively) generous terms.
Nigeria, which is not within swimming range of Texas, has had to pay rather more 11/4 per cent above the interbank rate.
Sounds like some form of discrimination to me.
Interestism? Non-Mexicanism? Safe-distance-away-ism? Whatever it is there are some countries which are finding it very hard to swallow. The Philippines broke off talks with creditor banks (led in this case by the US bank Manufacturers Hanover) when they insisted that the interest margin should be even higher. 13/8 per cent above the interbank rate. The Bank of Montreal in particular was adamant that the Mexican deal should not be taken as a precedent.
With the banks behaving in such a tight fisted fashion many other countries may be tempted towards the 'Peruvian pattern'.
I'm supposed to ask about Peruvian patterns, I suppose.
You're finally getting the hang of this. Peru's President Alan Garcia argues that since foreign debt can ultimately only be repaid by earning foreign exchange through exports, Peru's debt repayment will be limited in any year to 10 per cent of its exports. Shock and horror was expressed by the IMF at such an outrageous point of view, and when Peru missed a payment deadline to the Fund in July 1986 it was immediately declared ineligible for future loans.
The IMF office in Lima was shut down - to much popular glee.
They might as well have defaulted completely while they were at it.
That would have been more dangerous. The country's assets overseas might well have been seized; AeroPeru could have lost quite a few planes that way. But all in all, while it is now more difficult for some Peruvian companies to get credit, Garcia's stand doesn't seem to have done them much damage.
Zaire has come to a similar conclusion. It had dutifully been toeing the IMF line until it discovered that it was spending 25 per cent of export receipts on servicing the debt. Now it too will refuse to pay more than 10 per cent.
What Peru and Zaire and most of the debtor countries have realized is that, even with the new money coming in through renegotiation, they would still be paying out more than they were receiving. The poor countries are now financing the rich - to the tune of about $30 billion a year.
That doesn't make much sense to me.
Nor to a few million other people. Even the US Government has been having similar doubts. These surfaced in 1985 when Treasury Secretary James Baker proposed what was called the 'Baker Plan'. It was nothing dramatic, but was at least a recognition of the problem.
His argument was that only economic growth in the debt-stricken countries offered any prospects for the future. So Baker wanted to see much more money being pumped in by the commercial banks - and also by the World Bank. The World Bank was to be pushed into the driving seat instead of the IMF because it is supposed to promote a country's development rather than just balance the books. Even the World Bank loans would still be conditional on the countries reforming their economies more along free-market lines. But this money would at least help staunch some of the financial haemorrhage.
This Baker sounds like a sensible type.
Well, the writing on the wall was getting larger and larger - almost impossible to miss. And it wasn't just spelling out the damage that the traditional IMF policies had been wreaking in the developing countries, but also underlining the harm that was being done to the rest of us.
When the developing countries are forced to cut back imports, this means, naturally enough, that we can export less to them, UNCTAD has estimated that the drop in developed country exports to the debt-stricken countries in Africa and Latin America cost the rich countries two to three million jobs between 1981 and 1984.2
People who worked in banks would have been safe enough, of course, since the banks earn even more money in fees every time there's a renegotiation.
I'm beginning to wonder if I might take up banking.
Don't jump too soon The banks have got away with all this so far because of a general nervousness that if they collapse we might all go down with them. But that's no reason why they should not start to take losses from their operations in the Third World. After all this is where a lot of their profits have come from. The world's largest bank, Citicorp in the US, made a third of all its profits in 1984 from just four countries:
Brazil, Mexico, Venezuela and Argentina.3 The escalating interest rates, though not caused by the banks, had a very happy outcome for them.
They just took the money and ran?
More or less. What they should have been doing in the last four years since the debt crisis broke is building up substantial reserves (by retaining profits or selling more shares) to offset their likely losses from problem countries - a minimum of 20 per cent of the value of the loans. They accumulated some reserves - but nothing like enough. The US and British banks are the worst offenders.
The US banks account for about a third of the loans to the ten largest debtor nations in Latin America. But they have set aside only five per cent as a reserve against problem loans. The largest of the British banks (which account for about 12 per cent of the loans to the same countries) have only set aside five to ten per cent.
Maybe I'll join a bank somewhere else.
There are certainly more responsible places. Canadian banks are required by the Government to allow for 10 to 15 per cent losses. And most have done so. And in other countries banks have taken up a safer position. West German and Swiss banks have reserves of between 30 and 50 per cent. And the Swedes operate at around 50 per cent.
So you can see why some of the banks are taking such a hard line on renegotiation. If it comes to a question of 'Who pays?', many of the banks and their shareholders have already decided that it won't be them.
So who will?
There's not much choice here. Lots of people benefited from the original loans - from the banks in the rich countries to the wealthy elites who exported the funds overseas again. But when the poor countries have to pay up it almost always involves squeezing money out of the whole population at once - and particularly by reducing government expenditure.
Those who rely most on government spending are the poor. So it is the poor who pay. And after many years of steady improvements in health there is now evidence of rising malnutrition in ten African countries as well as in Bolivia, Brazil and Chile.1
That's pretty bad - but at least everyone can see what's going on.
That doesn't necessarily mean anything will be done about it. Even the Baker Plan seems to have stalled. The commercial banks show no signs of relenting on the terms on which they will renegotiate old loans. And the World Bank seems unlikely to get the kind of funds it needs to make any impact on the problem. For all Secretary Baker's concern, the US Congress at the end of 1986 refused to vote the extra funds to the World Bank that would be needed.
For the time being we are left with the Mexican and Peruvian options - both of which imply considerable sacrifices by the poor.
Now. Are you ready to think the unthinkable?
The fact is that most of the debt cannot be repaid. Those countries who do try to pay find themselves hemmed in on all sides.
First there are the financial pressures. Banks in the rich countries are demanding payment. Payment can only come from increased foreign exchange earnings. But other businesses in the rich countries are demanding protection against such increased exports. (The US for example has just slapped a tariff on orange juice from Brazil because it was selling too well). And that's quite apart from the competition that would-be exporters will meet from other developing countries: it isn't possible for everyone to increase their exports at the same time, and certainly not at a time of international recession.
Then there are the political pressures. The IME and the World Bank are demanding the kinds of 'adjustment' that bite into living standards. But the poor already on the breadline can't make many more adjustments. Increasingly they will be taking to the streets to shout their protest.
The position is untenable.
I can cope with that. So what's next?
Where or when is not clear. But one country or another, Brazil, Mexico or the Philippines, perhaps, is eventually going to refuse to pay.
And a mechanism will have to be devised to cope with such a default. There have been suggestions, for example, that a new international organization should be created to take over the loans from the banks. The debt would be 'bought' from the banks at a discount - they would only be paid, say, 80 per cent of its value, so they would finally have to admit to losses. Then the new organization would postpone repayment for a very long time.
A dozen or more different schemes have been proposed. And most of these involve mixtures of writing off the debt and simultaneously increasing financial flows to the developing countries. Eventually circumstances will force the world into taking one combination or another - and deciding what to do in the future.
The present looks enough of a handful.
And the future looks just as tricky. Because if we do stop removing capital from the developing world and start investing more, we need to look very hard at how this should be done. Is the new money going to be used as badly as the old? The prospect of the World Bank having a heavy influence on the direction that developing countries take is hardly an appetizing one.
Are we going to see the sort of development that will promote productive industry, that will help distribute wealth rather than concentrate it, that will invest in the health and education of children - that will have political freedom as a high priority? You couldn't stick around for another couple of hundred pages could you?
You haven't got a couple of hundred pages - thank goodness.
Well maybe next month, or the month after. There's plenty more where this came from.
What we need now is a financial agenda for the future.
I think I can wait.
I knew you'd be fascinated by all this - though you managed to disguise it very well. Mind you, I'm a bit uncertain about your idea of going into banking.
It's a fine profession.
But are you convinced you're approaching this in the right spirit, with the right intentions: service to humanity, building for the future, prosperity for all? You surely can't just be thinking about making money?
1 Adjustment with a human face, UNICEF. to be published early in 1987.
2 Trade and Development Report 1985, UNCTAD.
3 Profits out of poverty?, War on Want, 1986.
If it's printed it seems true. But you might be having
Co-editor: The wisecracking, omniscient editor and the restless, sceptical reader. Why did you think it would be helpful to conjure up two such artificial personae?
Stalker: They don't seem to be that artificial to me, Well, maybe omniscient is a bit strong. I suppose it's more the way I would like to see the characters. If we were all really like that it would be easier to acquire a knowledge of the world.
As it is, we all know a little about a lot of things and try to ask intelligent questions to fill in the gaps. I myself would like someone just behind my shoulder the whole time for when I get completely confused. The idea of the 'guardian angel' has a lot to recommend it. I don't think the concept was designed for this purpose, but I'm sure it could be appropriately developed.
Co-editor: Your reader seems to wander between being bored and being knowledgeable, between having international tastes and sympathies to having authoritarian, quasi-fascist tendencies. Is this lack of control on your part or a calculated attempt to embody the whole of the NI's readership in one character?
Stalker: Almost certainly a lack of control. But it could be too that we each have some of these tendencies within us. It's just that social convention makes certain questions and attitudes politically unacceptable, so they are easier to keep hidden.
In the case of reading a magazine, there is a decent cloak of anonymity - on the reader's part at least. So there's no reason why it all shouldn't come out. I think I'd draw the line at introducing racism though. And sexism probably wouldn't have got past my co-editor.
Co-editor: This is a very light approach to what is a very serious subject. Even if you have succeeded in entertaining people throughout, what makes you think they will remember anything you've said?
Stalker: I think that as long as people remember that it was possible to absorb some of the information - and can remember where to retrieve it from - this will have been a worthwhile exercise.
Frankly I know I won't remember all of it either, certainly not the statistics. Much was accumulated in conversations with other people and in reading quite a few books. But I can remember whom I talked to, what I read and what I felt at the end of it all.