Why Bankers Have the Jitters

By Christopher Byron

Monumental Third World debts shake the IMF meeting

It was the sort of week that served perfectly to concentrate the minds of bankers and finance ministers. The occasion was the 37th annual meeting of the International Monetary Fund and the World Bank in Toronto, and while none of the moneymen faced the immediate prospect of hanging, a few must have wondered whether they were in for a bit of financial drawing and quartering. For, as unsubstantiated rumors of everything from a cash squeeze on a major West German bank to a possible pending loan default by Bolivia swirled about, the somber-spirited financiers found themselves wrestling with the difficult task of trying to shore up sagging confidence in the world banking system.

Since last month, when Mexico virtually defaulted on $80 billion it owed international banks, money managers around the globe have had a bad case of the jitters. While the Toronto meeting was going on last week, there were reports of still more Latin American financial troubles. The heads of the central banks of Chile and Argentina were summarily removed from their posts, and Argentine officials began looking for new loans so that the country could meet payments on a $40 billion debt. Jacques de Larosiere, the managing director of the IMF, told the assembled moneymen in Toronto: "The world economic situation is very complex and difficult, perhaps more so than at any time in the postwar period."

Most finance ministers and central bankers attending last week's meeting urged a dramatic and prompt increase in contributions by IMF member states as a way to help boost the organization's capital reserves, from a current level of $67 billion to perhaps as much as double that amount. That would not only provide more funds for the IMF to lend out to developing countries, but would also decrease those nations' dependence upon private banks for money.

But the U.S., which as the IMF's largest single supporter contributed $14 billion to the fund during the current four-year period, has been arguing that the fund's reserves are already ample. American officials, headed by Treasury Secretary Donald Regan, maintained that if the IMF had the extra funds, it would lend them out too indiscriminately and thereby fuel inflation. Said one top Treasury Department official: "If they've got the money, there is always the pressure to use it."

Yet the grim backdrop of worrisome economic developments around the world led the U.S. to soften its initially tough stand and agree to speed up the timetable for reaching an accord on the amount each member should contribute. Also the U.S. launched a drive to set up a new "crisis fund" to be tapped in times of real emergency. Most key members seemed responsive to the proposal, which is, for now at least, still largely in the talking stage.

Last week's modest progress toward increased IMF lending did little to resolve the fundamental weakness in the world financial system. Over the past eight years, excessive lending by banks to Third World borrowers has been used for everything from industrial development to helping finance budget deficits. As a result, Western financial institutions now have more than $540 billion in loans outstanding to foreign borrowers. Even the IMF's associated institution, the World Bank, currently headed by former Bank-America President A.W. Clausen, has seen its portfolio of Third World loans rocket upward in recent years, though most of the loans have been for financially sound projects with a high probability of success.

On the other hand, as worldwide economic growth has slumped deeper and interest rates have shot up alarmingly, defaults and reschedulings of commercial bank loans have multiplied, raising fears of a kind of domino effect of international banking collapses. That grim prospect came uncomfortably close to actuality last month when Mexico declared it could not make its payments. Such action would have left such blue-chip U.S. lenders as BankAmerica, Chase Manhattan and Citicorp holding bad loans of more than $10 billion.

Though the U.S. and other industrial nations have managed to cobble together a package of some $1.85 billion in credits to help the Mexican government meet its obligations for the next few months, longer-term aid will likely have to come directly from the IMF. The government of President Jose Lopez Portillo has asked for between $4 billion and $5 billion in three-year credits, but before granting it, the fund is expected to insist on a package of tough austerity measures that may include higher taxes and a sharp cutback in government spending.

The IMF is arguing that such steps are needed to strengthen the country's finances, but whether Mexico will prove amenable to adopting those measures remains in doubt. Adding to the uncertainties, the Lopez Portillo government two weeks ago appointed a socialist-oriented economist, Carlos Tello Macias, as head of the Mexican central bank, replacing the director, who had unexpectedly resigned as the financial crisis deepened.

Whatever the fate of Mexico, officials at the conference warned that there could be equally grave consequences if banks suddenly became overly cautious and started refusing to lend money to Third World governments at all. Having put out easy loans to those countries for the past decade, bankers cannot now abruptly snap their wallets shut without imperiling the economies of several weak borrowers. Both borrowers and lenders now face a very delicate financial situation, and it may require the talents of a magician more than those of a banker to solve the problems.

-- By Christopher Byron.

Reported by Jay Branegan/Toronto

With reporting by Jay Branegan

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