Up the River Plate without a paddle

Press, 14 May 1982, Page 12

Up the River Plate without a paddle

From “The Economist,” London

“Latin America is frozen" — one banker’s dramatic way of saying last month that the financial ripples from Argentina’s invasion of the Falkland Islands have spread quite as far as did those from Poland's political crisis last year. While short-'term loans and exportrelated credits from Western banks to non-Argentine Latin American borrowers are continuing more or less as normal, longer-term loans have dried

up. If that continues for any length of time, Latin American countries, more dependent on short-term loans, may face difficulties. Bankers are already becoming concerned about the amount of short-term debt that developing countries have to repay. Last month the wellregarded Amex Bank Review estimated that developing countries’ debt-service ratio (repayments of interest and principal as a percentage of export earnings) has leapt from 32 per cent in 1977 to 50 per cent in 1981. Amex’s estimates include short-term debt which others too often ignore. Bankers have always had a “block” mentality. Just as the Polish crisis sent them scurrying to cut off credits to the whole of Eastern Europe, so Argentina’s crisis has set them to rethinking all their South American lending. Three contributing factors:

® Banks’ boards tend to be less discriminating than lending officers, who are sometimes more capable of assessing that the economic ripples from a straitened Argentina may lap only gently, if at all, on Venezuela’s shores. The boardroom view says that the whole of Latin America may be destabilised and should be avoided, for the time being.

® Banks have been looking for an excuse to jack up the

"spreads" (their turn) on much of their international lending. © Many countries in Latin America were already making bankers nervous about the level of their external debts and their ability to continue servicing that debt.

Argentina is now in a special category. Some bankers think it will have to reschedule its external debts later this year, even if there is an early settlement to the Falklands dispute. Paradoxically, since any rescheduling will have to take place after some form of I.M.F. conditional credit is in place, Argentina’s runaway fiscal deficit could then be under firmer control than anything that its Economics Minister, Mr Roberto Alemann, could have achieved with his preFalklands proposal to cut 10 per cent off the armed forces’ budget

Most affected by a prolonged recession in Argentina could be in northern neighbour Uruguay, 15 per cent of whose 1980 exports went south. It has been hard hit by the world recession and is talking of asking the I.M.F. for a three-year extended fund facility worth about S26OM — of which it already plans to draw down 80 per cent. Bankers have been unresponsive to Uruguay’s soundings on a SIOOM mediumterm loan for the Palmar hydro-electric. project

Argentina’s hostile western neighbour, Chile, seems to have slipped its latest credit on to the market unaffected by the Falklands. A S7SM ( seven-year syndicated loan for the country's largest private bank, Banco de Chile, is reported to have found enough takers. But it is a special case, on otfer only to Arab banks — latecomers to international lending and therefore not yet stuffed to

the gunwales with Latin American loans.

The price of this latest loan to Chile is high — a reflection of bankers’ pre Falklands nervousness about Chile’s escalating debt (officially put at $12.6 billion at the end of 1981, but estimated privately to be about $15.5 billion). Chile's debt-service ratio this year is likely to be around 70 per cent — higher than Brazil's, and Mexico’s. Add to that the fact that more than two thirds of Chile’s external borrowing has been by hardpressed private companies ($2 billion by Banco de Chile itself, owned by the Vial group, eight of whose 12 quoted companies made a loss in 1981) and the Argentine straw could break Chile’s back.

Another of Argentina's neighbours, Bolivia, has such an intractable debt problem that a drying up of medium-term loans will pass almost unnoticed. Bolivia has an agreement with banks to reschedule three years' debts from April, 1980. Nobody is going to lend it medium-term money until that agreement expires. It has turned to the 1.M.F., which is waiting .for more government spending cuts before it forks out.

Neighbouring Paraguay is also virtually unknown to international bankers. Its last publicised loan was for SBSM last October. Before that it had touched the banks for a mere S7M in long-term money since 1978.

With bankers now shying away from Latin America, the main impact-on Paraguay will be to slow down the huge hydro-electric projects on the Parana River — Itaipu on the border with Brazil, and Yacyreta on the border with Argentina. The $8 billion Yacyreta dam was already plagued with problems before the

Falklands invasion. Disagreements over contractors and allegations of corruption were rapidly cooling bankers’ ardour.

Other Latin American countries, even if far away from Argentina, are in no fit state to withstand a prolonged credit blockade. Peru probably needs to borrow over $3 billion this year, and at one stage looked a candidate for rescheduling. A provision agreement in March with the 1.M.F., for a S9OOM three-year credit, soothed bankers’ nerves. But the credit has still to be approved by the I.M.F. board and negotiations have been stormy. The I.M.F. was. miffed by Peril's blatant insinuations that *it wants “cheap” I.M.F. money to pay off its commercial bank debts, and by suggestions in the Peruvian press that the I.M.F. was being steamrollered into the agreement against its better judgment New bank loans for Peru are moving suspiciously slowly.

Even O.P.E.C. members Ecuador and Venezuela could find the going tough. Both countries

have borrowed heavily on the back of oil revenues that show no sign of increasing. Ecuador's debt-service ratio is close to Peru’s. Its Finance Minister, Mr Jaime Morillo, was in London and New York three weeks ago making soothing noises to the financial markets from which his country hopes to draw about $1.7 billion this year.

Venezuela is in the lucky position of having already borrowed more medium-term money from international banks in the first quarter of this year than in the whole of 1981. Its decision not to invite some British banks to a meeting in Caracas at the end of April to discuss its future borrowing is seen as a reprisal for the British banks’ last-minute withdrawal from a loan for Banco Industrial de Venezuela earlier in the week, rather than a demo in favour of Argentina.

Venezuela is certainly in no position to dictate terms. Bankers are sated with Venezuelan loans and fed up with its chaotic borrowing programme and appalling data

collection ("worse than little Honduras," savs one banker).

All these countries’ debts pale into insignificance’beside the big two. Mexico and Brazil have more external debts between them than all the rest put together. Brazil has a momentum of its own. Its irrepressible Planning Minister, Mr Delfim Netto, said in Bonn at the end of last month that his country had already lined up half this year’s external borrowing requirement, and a S39OM eight-year loan for the oil company Petrobras was being enthusiastically increased to S3SOM at the end of the month.

Mexico is the bankers’ big worry — but for reasons that go way beyond the Falklands squabble. ’ Declining oil revenues, external debt repayments of about $l7 billion due this year and a huge budget deficit mean that loans available to Mexico typify what bankers are prepared to give Latin American borrowers right now — very short-term money and loans to help their own domestic exporting customers.