IF YOU ever fancy an afterbours drink in Manhattan, give Wall Street a miss. It is usually deserted by midnight.
But on 1 April, the 3am silence was pierced by the shrill tones of bankers, desperate to whistle down cabs before anyone could make an unauthorised withdrawal from their wallets.
They had been working late, rescheduling some Argentine Dans - one more episode in the International Debt Saga.
Economic commentators agonise over possible defaults and the Financial Times — whose subs diligently replace any reference to 'slump' with the anocuous sounding 'recession' - chucks the word crisis around ¿e confetti when it comes to aternational debt. Why the anic?
JOHN HARRISON and SOB MORGAN explain.
The South owes the North a hell of a lot of money which it may never spay. And bad debts brighten peo*e. About 800 billion dollars are owd. enough money to buy everything aree weeks or so. The main debtors re in Southern and Central America. razil owes around $90 billion and Mexico, Venezuela and Argentina are — l mera-lock.
Last year, the world's largest one andred apital backing of some $160 billion. I they were forced to write off only alf of Latin American debt, they muld go bust.
begins a decade ago ter OPEC quadrupled the price of Arat oil producers gained an exa isi zillion a year — enough to buy and a half ralist output in those days. *: much of it to Western banks.
Since banks make money by lenang at interest. they went after new Third world governments med perfect. They were keen to or:ow to pay tor their massively infuel bills. They also looked the prices of primary comCities — the bulk of Southern exhad doubled over renaus couple of years. Anyway, her. Jid a sovereign state last go Banking whizz kids signed up for ering classes in Spanish and bad Mexican restaurants became chic. ti world governments increased sorrowing from Western banks sold oerween 1973 ihe bankers began to have seor i thoughts. Things were turning Generals, politicians and cocaine kaers had stolen a fair amount of money, diverting billions into Swiss bank accounts knows just The tabloid nasties lap up swindles, does cromist. But the corruption was a condary problem.
Far more important was the fact all major governments (except 2 our in the UK) went for harsh combined of world They from the South.
the OPEC raising presidential through the root come.
the 1981.
of billion, almost twice its total exchange reserves. many cough up $26 billion. the The banks. terrified ments erect barriers to repel imports The end of the seventies brought reducing further turns of the screw. In 1978-79 redoubled oil prices, again fuel import costs. After his victory, clamped down on monetary policy further, sending dollar interest rates The crunch had Soaring interest rates jacked up South's debt servicing costs 1982. $20-25 billion between 1979 and 1981. he proportion of Latin America s export earnings diverted into Western bank vaults rose from 18 per cent in tina took 1974 to 25 per cent in 1981. In that year the South was due to repay $129 since.
foreign Mexico, with reserves of $4 billion, was supposed to day, major downturn. defaults, opted to reschedule much debt. Rescheduling amounts to extending the period of a loan, thereby the debtor's allillal repayments. It can be highly profitable for the banks, who charge fees for the exercise.
In 1981-2, ten countries rescheduled debts for the first time, more than in the fifteen years of 1956-70. Some $250 billion were involved. The crisis hit the headlines SURIC! LI Brazil announced that it could no longer service (i.e. pay the interest on and the proportion due for repayment of) its debts. Mexico and Argenthe same line Debt has seldom been out of the news since.
Much of the left seems to think that the international banking system is so fragile that it could collapse any triggering a crash that would make 1929 seem like a minor cyclical That scenario is just about conceivable, though in our view unlikely (for reasons that will become clear).
Dubious debts because someone stands money and nobody Iront-ime candidate for tne loss is tne person who owns the money, and the! know it. inal:swas crechcompanie sharks break arms The banks couid handle writing off some debts by digging into their capital and reserve. have to do so soon, and have been taking precautions. creased its capital by 19 per cent since 1982. Bank reserves are up by about 20 per cent worldwide. absorb defaults in this way, their shareholders are the losers.
If the banks were forced to absorb bad debt in excess of their capital and reserves then depositors would also iose out. since the banks would be unable to repay borrowing in full. was But ties.
Northern Laxe Jay up inflation.
Their $34 billion Back-of-envelope calculatons suggest that if all Latin American debt written ott in this way, the average depositor would lose about 5 per cent of their money.
would governments really allow the world's major banks to go bust? Surely not. They • would bail them out, just as the Bank of England rescued the so-called fringe banks in the property crisis of the early sevenSuch a bail-out would cost the working Governments could finance it only by raising creating additional money. The first option would cut packets directly. The second would reduce their value by pushing Since neither banks nor governments want to foot the bill, they are trying to make the South pay weapon is the world's heaviest debt collection agency - the International Monetary Fund. The Fund arranges rescheduling, but only on certain terms. These invariably include severe deflation to cut imports, thereby freeing foreign exchange for interest payments. It has been spectacularly successtul to date.
Imports into Latin America fell from $98.4 billion to $56.3 billion in 1983. The net inflow of loans and investment fell from $38 billion to $4.5 billion. Payments of interest and profits abroad rose from $29.1 billion to