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The Brazilian Moratorium and the LDC Debt Overhang
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12952 |
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CURRENT ISSUES
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5 / 1987 |
2,907 Words |
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Penelope Hartland-Thunberg
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When in late February, Brazil abruptly and unilaterally announced a moratorium on interest payments due to its foreign bank creditors, other sovereign debtors were clearly energized. Those in the midst of debt negotiations such as Mexico, Argentina, and the Philippines stiffened their stance; the Argentine finance minister on his way to the United States for debt discussions, for example, ostentatiously stopped in Brazil en route. Those LDC (Less Developed Countries) leaders who had been trying for several years to form a debtors' cartel to push together for debt relief had their hopes renewed: The largest debtor was using the muscle of its $104 billion debt to work for "justice." Is concerted action by the debtors likely? Would a "debtors' OPEC" endanger U.S. or world financial stability? What is the solution to this complex issue?
Since it exploded in mid-1982, the debt crisis of the LDCs has hung as a menace not only over the borrowers but over their major commercial bank creditors and the entire international financial system as well. The threat, a consequence of the size of the debt and its heavy concentration in a small number of the world's largest banks, was the reason subsequent tremors rippled twice through the system (occasioned by actual or rumored difficulties in two large LDC creditor banks: Continental Illinois and Manufacturers Hanover Trust) but, fortunately, dissipated quickly. Meanwhile, the debtors themselves, under the leadership of the International Monetary Fund (IMF) and with the unenthusiastic cooperation of the creditor banks, have maintained, with some small exceptions, interest payments on their debt and have not directly been the source of destabilizing tremors in the international financial system.
Like the other debtors, Brazil has been forced for nearly five years to husband with great care its foreign exchange earnings in order to pay interest on its external debt; like most of the others, Brazil has paid nothing on its principal since 1982. As debt has come due, the debtors and creditor banks have met in often prolonged negotiating sessions to restructure the existing debt, postponing first for a year to two, then for longer periods the principal due in the next year or so. These restructuring agreements typically entail additional, new credits extended by the banks to the debtors - additions forced on the existing creditor banks by the IMF.
Breaking with all precedent in 1982, the IMF made its aid to sovereign debtors conditional on new credits from the banks. Until then, the fund had worked with countries in balance-of-payments difficulties to design a program of curtailed imports, expanded exports, and internal changes in economic policies consistent with this shift in trade - all without any reference to foreign creditors. After 1982 the prestige of the fund and its previous successes with such adjustment programs were sufficient to induce the creditor banks to acquiesce to IMF pressure and extend their exposure in the troubled debtors - although not infrequently behind-the-scene persuasion from the U.S. Treasury Department and the Federal Reserve (and similar institutions in Europe and Japan) was necessary to gain the agreement of all creditor banks, which numbered in the hundreds.
In part as a consequence of such restructuring agreements, the outstanding foreign debt of the LDCs grew from about $750 billion in mid-1982 to $1 trillion at the end of 1986 (some of the recent increase is due to the depreciation of the dollar). In many cases, the new lending never left
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