BUSINESS

The IMF’s worrisome debt ordeal

Michael Posner October 10 1983
BUSINESS

The IMF’s worrisome debt ordeal

Michael Posner October 10 1983

The IMF’s worrisome debt ordeal

BUSINESS

Michael Posner

Compared with the crisis atmosphere at last year’s International Monetary Fund meeting in Toronto, the 38th annual gathering of the organization in Washington last week was a model of sober deliberation. A year ago the shadow of Mexico’s close call with default loomed over the bankers. This year representatives of the fund’s 146 member nations breathed audible sighs of relief that the global debt bomb—$650 billion and growing—had not yet exploded. Indeed, IMF officials even permitted themselves some modest self-congratulation for guiding the world across the abyss. “We have

learned a lot in one year,” crowed IMF Managing Director Jacques de Larosière. “The situation is definitely much better. But full recovery will take years. There is no question about that.” Despite the collective back-patting in Washington, however, there were undercurrents of anxiety at the proceedings. For one thing, there was a dangerous game of political poker under way between the Reagan administration and the U.S. Congress over legislation to increase the fund’s strained lending resources. But more ominously, the delegates realized that although they avoided catastrophe last year, it is still possible.

Indeed, the world’s global debt crisis is far from over. A short review of the Third World’s accounts payable would chill the blood of any banker. Brazil, the world’s largest debtor, is $2.5 billion in arrears on its giant $92-billion debt load—which is almost one-third of Latin America’s total debts. The IMF and a consortium of central and commercial banks last week agreed to pump another $11 billion into Brazil’s desperate economy. But the Brazilians are reluctant to swallow the bitter austerity medicine that accompanies the new loans. Elsewhere in the region, Mexico has made some progress but still owes a staggering $87 billion and will soon need to reschedule another $8 billion in

loans due to mature next year. Venezuela—with $35 billion owing—has paid no principal on its 1983 loans. In total, 35 nations have had to reschedule loans.

The greater fear is that one or more countries will one day repudiate their debts outright. Such a default would put many international banks at risk. The entire structure of international finance agreed upon at the 1944 Bretton Woods conference in New Hampshire would be threatened, and global trade would shrink dramatically.

To forestall such a scenario, the IMF has been pressuring the world’s bankers to continue lending to the Third World, albeit on tougher terms.

And the fund itself is trying to expand its own pool of lending resources. Earlier this year members agreed to pour a fresh $42 billion into the IMF accounts, and it has suspended all new loans pending receipt of members contributions.

But Washington’s share of the new funding—$8.4 billion—has become the victim of partisan politics in Congress and is stalled in a House-Senate budget conference. Addressing the IMF last week, President Ronald Reagan appealed to lawmakers to set aside their political squabbles and pass the funding bill. The consequences of not doing so, he warned, would be disastrous, not only for the lesser developed countries

but for the United States as well. Some two million U.S. jobs depend on the nation’s export trade. If Congress fails to act, he added, it could prompt other members to withhold their payments as well, triggering the collapse of the IMF and of the entire international monetary system.

Nevertheless, an unlikely coalition of liberals and conservatives oppose the measure. Liberal Republicans and Democrats alike see the $8.4 billion as a bailout of Western bankers who ought never to have made many of the loans and who deserve to pay the penalty of writing them off. For their part, conservatives resent the money the IMF dis-

tributes to left-wing governments.

The IMF is also seeking an emergency bridge loan of $6 billion from European and Saudi Arabian banks to meet loan commitments through the end of the year. The Saudis have agreed to a $3billion contribution but have held it back pending a move by the Europeans. And Europe is waiting for the U.S. Congress to deliver the $8.4 billion. Indeed, some European bankers feel that Washington should also participate in the emergency loan, a proposal that Treasury Secretary Donald Regan dismissed summarily last week.

Secretary Regan also won another skirmish last week. He persuaded the IMF’s powerful interim committee to adopt lower quotas for borrowers next year. Until now, IMF nations were entitled to draw as much as 150 per cent of their annual contributions to the fund. With the money available about to increase by $42 billion, that formula would have allowed debtors to dip into a substantially larger reserve of funds. But the Reagan administration, citing the need to protect IMF resources, proposed cutting access rights to 102 per cent of the quotas. After an 18-hour negotiating session last week, the interim committee agreed—although in special circumstances some nations will be eligible for 125 per cent. Still, the compromise holds for only a year; after that the IMF will again have to decide on lending limits.

Washington took an equally tough line on the issue of loans to the World Bank. Despite pleas from its president, A.W. Clausen, the administration refused to lend more than $750 million annually to the International Development Association, an arm of the bank. Nearly a third of World Bank loans finance energy development projects in the Third World, many of which the White House regards as dubious.

U.S. economic policies were also a source of acrimony at the meeting. IMF officials continue to view high U.S. budget deficits as the cause of high interest rates—and those, in turn, are a drag on economic recovery. The president, in his IMF address, pledged greater restraint on spending—but not by cutting his defence budget and not by raising taxes.

Whoever wins that argument, the bankers know that only emergency stopgap measures have so far plugged the leaks in the world’s financial infrastructure. Longer-term solutions are not even agreed upon, let alone in sight. In his annual address to the IMF, de Larosière cited three goals: economic recovery, curbing protectionist trends and keeping a check on the debt bomb. But the goals are relatively easy to define. The more urgent test is whether or not the IMF and the Western world will be able to meet them.