One of the more notable and persistent frailties of the human race has been its avarice in the lending of money, its poor judgment in the acceptance of credit. Jesus of Nazareth felt strongly enough about greed that he overturned the tables of the moneychangers in the temple saying, "You make it into a den of robbers" (Matthew 21:13).
In those days Caesar Augustus and his financial establishment tried to solve their balance of payments problems by taxing much of the known world, which was the reason for Joseph and Mary's hallowed trip to Bethlehem. Despite these levies the Roman empire ultimately fell, in part because, according to some historians, its emperors were unable or unwilling to control the issuance of money and credit. For example, veterans of the legions were given small farms as pensions, but they were frequently lost to mortgage lenders who combined the small farms into large estates.
Now, almost 2,000 years later, we inhabit an enormously more crowded and interdependent world of some four billion people. The poorest nations owe more than $500 billion to the rich, the major portion lent by U.S. private banks, with those of Western Europe not far behind. Twenty-six countries now claim they cannot meet the interest payments on these debts, let alone the principal.
The resulting crisis could bring down the house of international finance. And as in the past, the burden of rebuilding the house falls on the taxpayers of both the United States and some of the world's poorest nations.
In Latin America, which carries the greatest share of these liabilities and is now suffering its worst economic decline since World War II, an average of 60 per cent of export earnings is going to service debts. Many of them have already been refinanced ("rolled over" in financial jargon) several times, and will be again, with fresh money added. This crushing debt is not surprising given the fact that many governments choose to depend heavily on imported food and other necessities, while permitting the continued purchase abroad of luxury goods for their affluent classes. The poor majority, in the opinion of many experts, could grow sufficient food for their needs if their economies were re-oriented to encourage it.
Lenders have unfortunately been as greedy to make these loans as borrowers have been to accept them. The extent of U.S. bank exposure in the Third World is both imprudent and shocking. In recent years some 40 per cent of the profits of the five largest U.S. banks have come from overseas lending. For Chase Manhattan of New York, one of the largest, the figure has been as high as 78 per cent.
Almost three-fourths of this money has gone for the establishment of new, largely export-oriented industries during a period when, according to the United Nations Food and Agriculture Organization, nearly a billion of the world's people were either starving or malnourished. If the same money had been spent on the support and encouragement of self-sufficient agriculture for home consumption, including the redistribution of farm lands, tragedies such as the mass murders and civil wars now wracking Central America might have been avoided.
Embracing the remedies tried and found wanting by earlier U.S. administrations, Reagan's proposed answer to the Third World debt dilemma is to keep on lending, with the U.S. taxpayer "bailing out" its improvident banks by means of direct and indirect loan guarantees. The official rationale for this policy is that international trade must continue and expand if the poor nations are ever to meet their debts.
Perhaps the best examples of the chaotic state of U.S. multinational banking operations can be found in Mexico and Brazil. The world's two most deeply indebted nations (owing $81 billion and $80 billion respectively), they are also countries where U.S. banks are heavily involved. Together Mexico and Brazil provide an instructive example of the bail-out system at work.
During his 1982 trip to Latin America, President Reagan announced that a $1.2 billion, 90-day U.S. Treasury Loan would be made to Brazil at eight per cent interest, to tide it over until the International Monetary Fund (IMF) could arrange a $6 billion, longer-term credit. Earlier, Mexico received a $1 billion U.S. government advance payment on oil purchases, and another $1 billion more from the U.S. Commodity Credit Corporation to finance grain shipments.
Mexico also has asked the IMF for $4.5 billion, which it probably will get without much trouble. U.S. private banks, mildly reassured by these new infusions of U.S. government and international capital, are now expected to refinance more than $22 billion in outstanding loans to Mexico. Much of the refinancing will be carried out under U.S. government guarantees of one type or another.
On the surface both Brazil and Mexico give the illusion of being fair credit risks; neither are "poor" when looked at from the standpoint of available human and natural resources. Brazil is expected by most analysts to rank as an industrial and perhaps military superpower by the year 2000, and Mexico is sitting on a small sea of oil, the price fluctuations of which have been badly misjudged by both U.S. bankers and the Mexican government.
But the people of both countries do indeed qualify as poor even though the manufacturing tycoons of Sao Paulo and the leadership of the military and political elite in Brasilia—both favored recipients of U.S. credit—qualify as rich. Twenty-three per cent of Brazil's population is reliably estimated to be suffering from malnutrition, inflation currently is running at 88 per cent, and the country is spending 45 per cent of its export earnings solely to meet interest payments on external debt. The billions of dollars lent to Brazil since its 1964 military coup have not made a dent in the poverty situation. In fact, the gap between rich and poor is widening.
In Mexico average employee compensation is an estimated $4,910 per year, a million residents of Mexico City have no toilets, and every day 1,600 more people move into the capital area from the countryside in search of nearly nonexistent jobs. Most of them end up in one of the many unsanitary municipal slums. Political corruption is rampant (as it is in Brazil), and 35 per cent of export income is being used to meet interest payments.
All this in Mexico, a country that has absorbed some $6 billion of direct U.S. investment capital, in addition to loans from commercial and international financial institutions. And the Mexicans are not alone. According to World Bank President A. W. Clausen, the poor countries of the world as a group have experienced a drop in per capita income over the past two years, despite the loans they have absorbed.
Why do these countries continue to receive apparently perpetual credit and repeated refinancing privileges? In the cases of Mexico and Brazil it is important to remember that both countries are particularly good customers for U.S. goods and services (60 per cent of Mexico's imports come from the United States), and U.S. exporters cannot be paid unless somebody lends the importers the necessary foreign exchange. U.S. investors in these countries also want to know that dollars will be available for remittance of their profits.
Economist Richard Dale of the Brookings Institution observes that, in good times, private banks rush in (such as New York's Citibank, which reportedly has lent 50 per cent of its capital base to Mexico), but back out quickly when the outlook turns bad. Dale is among the few financial analysts who acknowledge publicly that a large but discreet official bail-out is under way now, and that it probably will continue. To protect their existing investments, the banks have no choice but to go on lending. Indeed the IMF, the U.S. Treasury, the Federal Reserve, and other national and multilateral "lenders of last resort" are encouraging them to do so.
Ongoing determination to subsidize and expand U.S. business operations and opportunities abroad with minimal risk to the private sector seems to be the basic motivating force behind the current international financial merry-go-round. It is also the impetus behind the administration's ideological turnabout to support an increase in the lending capacity of such institutions as the IMF.
Many observers find it hard to discern any great commitment to raising living standards in poor countries, or helping prevent an increase in starvation and social disruption through a more equitable distribution of land and capital. The nature of the exchanges of goods and services that result from the international credit game seem to be less important than just keeping the game going.
In these dealings the U.S. government, together with private banks and the multinational corporations it nourishes, has considerable leverage. As a creditor, it can threaten to suspend trade, freeze assets of debtors, or hold up investment programs. But such drastic measures probably will not be necessary. The notably corrupt and self-serving elites who govern many of the debtor nations will be sufficiently intimidated if access to luxury goods or other nonproductive uses of borrowed money should be threatened even mildly.
For these reasons it is not in the debtor nations' interest to formally repudiate their debts, though some have hinted at that possibility. It is much easier for the ruling elites to acquiesce in the continued recycling of their debts and to follow the recommendations of the IMF, which as a price for renewing its loans usually asks for reductions in social spending and wages, at the expense of the poor.
Rich lenders are usually only too willing to impose such conditionality, and would-be borrowers are embarrassingly willing to accept. The stained and worn-out Band-Aids that Reaganites are now seeking to apply to the system may well work for the time being, but not for long. Both history and the awesome dimensions of the current problem point ahead to a long period of personal suffering, social instability, and forced austerity for all concerned, whatever stopgap solution is worked out.
Vincent P. Wilber is a former foreign service officer and was a Washington journalist and legislative assistant for foreign affairs in the U.S. Senate when this article appeared.
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