The Latin Debtors Cry for Help

By Stephen Koepp

Not long ago, moneymen started to look upon Latin America's ominous $370 billion debt load as the crisis that went away. The borrowers were gamely trying to make their payments and shape up their economies. But last week several Latin countries sent out new distress signals. Mexico's Finance Minister Jesus Silva Herzog, whose country's financial condition has been devastated by falling oil revenues, rushed to Washington to seek aid in closed-door meetings with Federal Reserve Chairman Paul Volcker, Secretary of State George Shultz and Treasury Secretary James Baker. Meanwhile, Peru suddenly withdrew its gold, silver and cash reserves from U.S. banks to prevent any effort by Washington to freeze them. When foreign ministers and finance chiefs from five major debtors--Brazil ($104 billion), Mexico ($97 billion), Argentina ($49 billion), Venezuela ($32 billion) and Peru ($14 billion)--gathered late in the week near the Uruguayan seaside resort of Punta del Este for an emergency meeting, they drafted an urgent plea for more lenient terms from Western banks.

By far the most desperate borrower is Mexico, which estimates that it may need $9 billion in new loans this year just to meet interest payments on its foreign debts. Only last year, bankers considered Mexico a model debtor because it had managed, through an austerity program that restricted spending at home, nearly to catch up on its foreign bills. But the plan was beginning to break down even before two crushing blows that have pushed the country close to default: last September's Mexico City earthquake, which saddled the country with $4.5 billion in damages, and a 50% drop in petroleum prices since November.

Mexican President Miguel de la Madrid Hurtado declared in a speech Feb. 21 that his government can tighten its belt no further and that it is time for some "sacrifices" from international bankers. The President proposed that Mexico's payments be reduced to what it can afford, but he offered few specifics. Some Mexican officials have hinted that the country wants a stretched-out repayment schedule and a reduction in the average interest rate on its loans from 10% to 6%, which would reduce its annual debt-service load by $4 billion a year.

While most bankers might concede some of those terms rather than see Mexico default, they are concerned that whatever they grant one country will be demanded by the others. Indeed, the ministers who convened at Punta del Este issued a communique demanding "significant changes in existing agreements, in particular with respect to interest rates."

Even though other Latin American nations are in somewhat better shape than Mexico, they contend that over the long haul the debt burden could cripple their economies, stir social unrest and conceivably bring down their shaky governments as well. Declared Argentine Foreign Minister Dante Caputo last week: "This debt is the epicenter in the fragility of our democratic systems."

Yet little progress has been made toward putting into effect the so- called Baker Initiative, a plan proposed by the Treasury Secretary last October that called for $29 billion in new loans from commercial banks and international lending agencies like the World Bank. Debtor governments have described the plan as well intentioned but too small in scale to do the job. U.S. bankers, for their part, fear that any more dollars they lend will simply go down the same chute as their earlier loans. In any event, the Baker plan's long-term therapy is of scant use to Mexico, which needs a bailout right away. The Reagan Administration seemed sympathetic to Herzog's appeal last week, but gave no indication about what kind of financial help it might be considering.

The fall of oil prices has drained other South American petroleum producers too. The plunge has soured the comeback hopes of Venezuela, which relies on crude sales for 90% of its export income. A predicted loss of roughly $2 billion in oil revenue for 1986 forced Venezuela last week to ask for last-minute concessions in an agreement it signed with international bankers for rescheduling payments on $21.2 billion of the country's debt.

Brazil, however, which imports 49% of its 990,000-bbl.-per-day consumption of crude, will get a big boost from less expensive fuel. The country expects its 1986 oil bill to be $2.8 billion instead of a previously estimated $4.8 billion. The developing world's largest debtor, Brazil has been able to keep up with its payments lately, thanks to a roaring economy that grew 8% last year. But the country will have to curb that feverish growth to cut inflation, which reached 233% in 1985 and appeared to be headed for 500% this year. Last week President Jose Sarney announced a "life-and-death struggle" to halt the spiral by freezing wages and prices for a year and virtually abolishing the country's cost of living adjustments in such things as rents and contracts.

Argentina has made dramatic progress in quenching a raging inflation rate that exceeded 1000% in mid-1985. The government, which imposed wage and price controls last year, expects inflation to be just 28% for all of 1986. But like that of the other debtors, Argentina's improvement is tenuous. One potential threat is the fall in the price of corn, wheat and other grains, which provide about 45% of Argentina's export earnings.

Mexico's current crisis could benefit all the debtors by finally changing their relationship with Western banks. Previously, the financial institutions kept giving the debtors tide-over loans, which had barely enabled borrowers to meet their payments on old debts. The strategy allowed bankers to pretend on , their books that the loans were solid ones, but it led to endlessly increasing debts for the borrowers. If banks hope to collect on those loans someday, they may have to accept the idea of giving the borrowers a break on interest rates, even though it will eat into their profit margins.

With reporting by Harry Kelly/Mexico City and Frederick Ungeheuer/Punta del Este