Latin American Debt: What Kind of Crisis?

LATIN AMERICAN DEBT: WHAT KIND OF CRISIS? Barbara Stailings J.hird World debt is widely regarded as one of the principal problems facing the world economy today. The total volume of the debt is now around $600 billion, up from only $100 billion a decade ago.1 About two thirds ofit is owed to the private banks, which typically make loans on the basis of a floating interest rate. The combination of rapidly growing debt and floating rates means that borrowing countries have been paying increasingly large percentages of their export revenues for debt service. For a substantial number, the burden has proved too heavy, and reschedulings have been sought. Although the "scare scenario" that predicts defaults leading to the imminent collapse of the international financial system is clearly exaggerated, serious problems do exist. Some concern the safety of the banking system. Others center on the adverse consequences for world growth if the import capacity of Third World countries is sharply curtailed. Finally, political and economic crises threaten to engulf the Third World itself if external finance is restricted too much, leading to economic depression in those countries. Looking beyond superficial generalities, it is clear that the so-called Third World debt problem is essentially a Latin American problem. About half of all Third World debt is owed by Latin American countries; 1 . There is substantial variation on estimates for total Third World debt, ranging at least between $500 and $700 billion. These figures come from OECD, External Debt ofDeveloping Countries (Paris: OECD, 1982). Barbara Stallings is associate professor of political science at the University of Wisconsin—Madison. She has published various articles on international finance and on the International Monetary Fund and is currently completing a book entitled Latin America and the U.S. Capital Markets, 1900-1980. 27 28 SAIS REVIEW the percentage ofprivate bank debt is an even higher—60 percent.2 Also, nearly all the Third World countries with payments problems are found in Latin America. Every major Latin American borrower except Colombia has recently renegotiated its debt or is in the process of doing so. A glance at the figures on debt service shows why: Eight Latin American countries have service payments that exceed their total export revenues.3 It is possible to be even more specific, however, since a small number of Latin American countries can be identified as the real focus of the problem. These countries include Mexico, Brazil, Argentina, and Chile. Together they account for 36 percent of total Third World debt and 45 percent of bank debt.4 An illustration of their importance is the recent estimate of William R. Cline that, if they failed to pay interest on their debts for a single year, the capital of the nine largest U.S. banks would be cut by one third, thus raising the cost of credit and exacerbating unemployment in the United States itself.5 It is therefore on these four countries that this article will focus. It will examine the composition of their debt in comparison with other Latin American and Third World countries and the ways in which they got into their current predicament. It will also look at the solutions being proposed and their likely effects. Finally, some policy recommendations will be suggested. A key theme will be that, contrary to the view many bankers seem to hold, the Latin American region is not homogenous. The four countries to be discussed include sharply different patterns of debt and economic policy. These differences must be taken into account in devising responses to the debt problems. One of the major difficulties in analyzing Third World debt is the lack of detailed data on an up-to-date basis. World Bank data are very useful for public sector medium- and long-term debt, but they have a one- to two-year lag. Furthermore, data on private sector debt and shortterm debt are generally not included. It is short-term debt that has provided the most volatile element in many of the renegotiations over the past year. The reason can be seen by comparing the World Bank figures on debt service ratios (interest plus amortization as a percentage of 2.Pedro-Pablo...