P.M. and U.S. rattle share a worry

Press, 28 September 1983, Page 6

P.M. and U.S. rattle share a worry

From

G. G. SHAND

in Washington

The white, wealthy Washington cabbie driving the New Zealand press contingent to the sparkling International Monetary Fund-World Bank headquarters yesterday offered probably the simplest insight on why American politicians are so hard-nosed these days when it comes to world economic problems. The conversation in the back seat was about the international debt crisis, how it affects New Zealand and whether the Prime Minister, Mr Muldoon, will successfully push his idea for a second Bretton Woods conference to sort out the mess further up the agenda at this week’s annual moneylending talk-fest. Our cabbie has probably never heard of Mr Muldoon, so he offers no opinion on that. But he knows all about the debt problems in the developing countries and in the Third World.

“I got $BOO,OOO invested for my grandchildren,” he says matter-of-factly, explaining to his startled, suddenly poor passengers that he drives to relieve the tedium of retirement. “I wonder how much of that is financing that New Brazilian subway?” Many Americans, it seems, are annoyed at discovering in recent years

that their invested assets have not all been ploughed back into the new idustry next door.

Many American banks, instead, “went mad” in recent years and invested heavily outside the United States to growth-mad, developmentmad nations such as Mexico, Brazil, and Argentina.

Thanks to the fall in world trade, these nations and others besides are now strggling to meet their interest payments, let alone the principal. That means American banks and their investors, from the oil-rich sheikhs down to down to our cabbie friend, could get caught with their pants down. Thanks to the international rescue effort by bankers last year, the international debt crisis has slipped off the headlines in New Zealand. But the talk in Washington this week is still of a crisis in world monetary management, the collapse of which would have serious repercussions to everyone, including New Zealand.

It is against this backdrop of anxiety and uncertainty that about 8000 delegates and 1000 journalists have descended on Washington to try to see if there is a way out of it. The mood of imminent disaster so palpable at last year’s joint session in Toronto has faded but as

observers repeatedly emphasise, the debt problems are far from over.

There is increasing talk in Latin America and South America of “default” or at least a “moratorium” on existing debts—totalling more than SUS3OO billion in those two regions alone. That has made for much nervous talk among bankers in their black Cadillacs as they whisk to and from private meetings to sumptuous luncheons or dinners.

The key question to be addressed at the meetings proper, which start early today (N.Z. time) is whether last year’s emergency response to the Third World debt crisis can be converted into something more per-manent-using the existing monetary and trade institutions—or whether innovative and more dramatic action is necessary to prevent a collapse of the international trade and payments system. That, in a nutshell, is what Mr Muldoon has been on about in his year-long campaign. He subscribes to the latter view that something more long-term involving fundamental reform of the institutions is necessary; and he thinks a new international, conference is the best means.

His views clearly found plenty of support from the poorer Third-World nations at the Commonwealth

Finance Ministers’ confer-. nece in Trinidad last week. However, it is already clear in Washington that talk of a conference is low on the agenda of the big economies.

Like Britain and Canada in Trinidad, the other powerful economic blocs—the United States, Japan, West Germany—are talking of yet another patch-up job, believing that the United States recovery and the proven ability of the institutions to adapt to changed circumstances will tide the world over until better times arrive. The attitude of most American businessmen and lobbyists spoken to this week is that the United States does not owe the world a living. Some even want the United States to opt out of the I.M.F. altogether.

Thus, perhaps reflecting that electorate feeling, the United States Administration again took a tough line during the round of preconference meetings last week-end. The United States Congress is strongly opposed to a significant strengthening of 1.M.F.-World Bank resources and, as it is by far the largest contributor, that spells big trouble for the Third World and its poor inhabitants.

The World Bank’s president, Mr A. W. Clausen, wants a SUS2O billion selec-

tive increase in capitalisation for the World Bankk but the United States is thinking only in terms of a paltry SUS 3 billion. The United States is said to be determined to slash its commitments to the International Development Association, which funds many development projects in the Third World, by between 25 and 30 per cent. To Mr Clausen that response would be to “ignore the massive conomic problems of the Third World ... to condemn millions to abject poverty and to invite global political instability.” Such observations make the angry and excited response of Third World Finance Ministers attending the meetings readily understandable. Such noises do not come from the New Zealand contingent because New Zealand does not qualify for such assistance, nor does it at present draw loans from the I.M.F. But a collapse of the monetary system would affect New Zealand and thus the fears held by private bankers are the real concerns of Mr Muldoon and his advisers.

Congressional reluctance to pump more United States dollars into the 1.M.F.-World Bank is a double-headed blow. Not only does it penalise the third world, it punishes the big American banks which increasingly are left holding the baby for

outstanding loans. If Argentina, Brazil, Venezuela, and others, cannot meet thier interest payments, then they have to find more money to help them out.

In 1975, American banks had SUSIIO billion in loans outstanding overseas. By the end of 1982 that had soared to SUS4SI billion.

The top nine American banks had about SUS3I billion, or more than 112 per cent of their combined capital, out in loans to Mexico, Argentina and Brazil alone. A few weeks ago Venezuela tried to organise a mass South American default on all loans but this fortunately failed. However Brazil—the largest single world debtor, owing SUS9O billion—for one, is talking seriously about a moratorium which would mean no interest or repayments of principal for a period of years.

That could mean disaster. If just one creditor broke ranks and moved legally to seize Brazillian property overseas it woud have a snowballing effect on creditors everywhere.

Governors at this week’s meetings hope that it will not come to that but according to some commentators they failed to appreciate that the tough austerity programmes enforced on these

South American and la tin. American nations do not always sit well with local; politicians eyeing domestic votes. ; Only last week the Brazilian Congress, for ex-; ample, rejected overwhelm-, ingly legislation to hold down wage increases, thumbing its nose at the, I.M.F. austerity programme. J

The perspective from; Brazil is probably best l summed up by Anthony’ Sampson, author of “The' Moneylenders,” in a recent article in an American’ magazine, entitlled “Why Brazil Scares Us.”

“ . . . When a (Brazilian)' politician looks out his window and sees mobs in the streets because he has just cut the subsidy for tortillas,, he may have second thoughts about paying back; the Yankee banks.”

In that same article another financial expert put itJ another way: “They conventional wisdom of 200,000 sullen South Americans, sweating away in the hot' sun for the next decade so Citicorp Bank can raise its dividend twice a year does not square with my image! of political reality.” i So the Brazilians may yet impose a moratorium and the Washington cabbie and all those other investors will ( be even angrier, wondering why greedy Western banks ever got into such a mess.