Latin America Sounding the Alarm

By Guy D. Garcia

As the New Year dawned, Mexico was bracing itself for a painful reality. Jan. 1 marked the start of the Pact for Economic Stabilization and Growth, the latest package of wage and price controls intended to help keep Mexico's inflation rate below 20%. But it will probably pinch workers, whose real earnings have fallen steadily since 1982, and add further stress to an economy already staggering under more than $100 billion in foreign debt.

The implications could be explosive. Three days after President Carlos Salinas de Gortari announced the belt-tightening measures last month, hundreds of government workers demanding pay increases stormed the legislature shouting antigovernment slogans. Thousands more demonstrated in the streets of the city. At his inauguration Salinas, who won a clouded election by the narrowest margin in the 59-year history of the ruling Institutional Revolutionary Party, again called for a reduction in Mexico's debt payments. "The interests of Mexicans," said he, "come before those of the creditors." Yet Salinas' ability to curb his country's debt burden is severely handicapped by the threatening political consequences of domestic austerity.

Salinas' is but one voice in what has become a rising chorus of debtor discontent. Crippled by stagnant growth and a combined foreign debt of more than $400 billion, Latin American governments are finding it increasingly unacceptable to shoulder interest payments for loans that only push them deeper into the red. Yet the banks that made the loans, many of them privately held U.S. institutions, have come up with few acceptable solutions.

For the U.S. Government, the ticking of the debt bomb is no less disturbing. In the 1980s new democracies laboriously replaced dictatorships in more than half a dozen Latin American countries. In Argentina the third military uprising in 20 months was dispelled; shortly afterward, soldiers won a 20% pay hike. By sweeping municipal elections in Brazil's major cities last November, the left posed a credible political threat to the government of President Jose Sarney. With nearly a dozen Latin American debtor nations scheduled to hold presidential elections in the next two years, some populist candidates lure voters with promises of radical solutions to break the debt squeeze. Unless the region's scarce capital can be shifted away from foreign- debt payment back into economic growth, the frail bloom of democracy could wither.

In humanitarian terms, the picture is equally grim. In its annual report, the United Nations Children's Fund blames the debt crisis for lowering the quality of life for almost 900 million people over the past decade. If the current trend continues, UNICEF warns, the debt problem will cause the deaths of 18 million children a year by the end of the century.

Latin American leaders are sounding the alarm on the debilitating effects of huge foreign debt in their individual political campaigns. Venezuela's newly elected President Carlos Andres Perez won a resounding victory with promises to ease debt repayments that have subjected the once wealthy nation to "conditions of poverty." In Mexico, Salinas' chief opponent, who made the debt issue a central theme of his campaign, garnered more than 30% of the vote. Argentina's outgoing President Raul Alfonsin warns that the huge drain on capital reserves not only smothers Latin American economic growth but also breeds the social unrest that precipitates political revolt. "Unfulfilled expectations engender despair," he said, "which is the appropriate climate for authoritarian adventures."

Alfonsin speaks from hard experience. Last month's military mutiny is only one manifestation of the country's worsening political problems. Restive citizens, plagued with a downward spiral in the standard of living and an inflation rate of nearly 400%, are finding the populist promises of the resurgent Peronist party increasingly alluring. The government of Mexico is under continual pressure from leftist opposition parties that have used anger over the debt issue to whip up nationalist feelings. "In economic stagnation," says Salinas, "democracy can wither and politics turn into social conflict."

It may already be too late to prevent that outcome in Peru, where an inflation rate of some 1,700%, a shrinking economy, food shortages and stepped-up attacks by the Maoist-oriented guerrilla group Sendero Luminoso (Shining Path) have brought the country to the brink of disaster. After taking office in 1985, President Alan Garcia Perez advanced boldly against his country's crippling debt. He unilaterally pledged to limit payments on Peru's foreign debt to 10% of export earnings. But his strategy only plunged his country deeper into trouble. Foreign banks were wary of extending desperately needed new credit. Says one diplomat: "If you are a relatively small debtor like Peru, you cannot play hardball with the international system."

That is not expected to stop the finance ministers of Mexico, Brazil, Venezuela, Argentina, Uruguay, Peru and Colombia from sending a joint proposal on debt reduction to the Group of Seven major Western industrial powers. At a meeting last month in Brazil, the Latins decided to approach their creditors united but without confrontation. Yet all agreed they must convince the creditors that a reduction in debt payments is an "indispensable condition" for economic recovery.

There is a growing awareness among Western leaders of the need for workable solutions. French President Francois Mitterrand has suggested allowing an organization like the International Monetary Fund to buy depreciated Latin debt and accept interest payments in line with the loans' discounted value. Author John Kenneth Galbraith and Harvard economist Jeffrey Sachs call for the Latin Americans to declare moratoriums on their current interest payments and pay only as much as they can afford. For some nations the plan would be tantamount to debt forgiveness, which would force banks to write off the loan- loss reserves they have set aside against the possibility of defaults. But countries that have tried to declare moratoriums, like Peru and Brazil, have learned they merely forfeit all chance of fresh credit. Yet another plan, advocated by James Robinson III of American Express, urges creation of an international debt-management authority. The body would buy all outstanding downgraded bank loans. The difference between the loans' current discounts and their face values would be absorbed by the contributors to the authority, comprised mainly of wealthy countries. Once the loans are settled, the debtor countries would be eligible for new investments from other sources.

Far more palatable to commercial bankers is a mixed formula of voluntary and negotiated debt reduction between the banks and debtor nations. Last September Brazil signed a package worth $82.1 billion that includes an $8.3 billion net reduction in debt in 1988 and 1989, and $5.2 billion in new money. Venezuelan economic officials are considering a novel way to raise $1 billion that would make future oil sales a guarantee against new credits.

Perhaps the most unusual proposal to date comes from a Peruvian economist, who has suggested swapping debt for the creation of an antidrug fund. Under the scheme, debts held by overseas commercial banks would be handed over to the central bank of the debtor. The commercial banks would be able to write off the debt as a loss and donation for tax purposes, while the debtor country would put a percentage of the debt into a local currency deposit. The interest would be directed into an antidrug fund for financing crop substitution and other development projects in areas where cocaine is produced.

In the end, Latin American governments are increasingly looking to the U.S., and particularly the incoming Administration of George Bush, for both leadership and financial help. The President-elect has said he wants to take a "whole new look" at the problem, but aides say his proposals will probably be more evolutionary than revolutionary.

While such assurances sound all too familiar, many Latin leaders are hopeful that this time words may translate into action. Bush has acknowledged the "enormous problems" debt poses to "our own hemisphere." But it remains to be seen whether the U.S. will finally have a leader who understands that a solution to the Latin debt crisis is in America's own interests.

With reporting by Gisela Bolte/Washington, John Borrell/Mexico City and Laura Lopez/Rio de Janeiro