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Banks: The Politics of Debt

International Finance Financial Policies, Annual Report to the President and to the Congress

The National Advisory Council on International Monetary and
US Government Printing Office, 304 pp., $4.30

Report on Developing Countries’ External Debt and Debt Relief Provided by the United States

US Treasury

Security Supporting Assistance for Zaire

Committee on Foreign Relations Hearing, US Senate
US Government Printing Office

Covert Action in Chile, 1963-73 Governmental Operations with Respect to Intelligence Activities

United States Senate, Staff Report of the Select Committee to Study
US Government Printing Office, 62 pp., $ .80

I

We are living in one of the great epochs of expansion in international finance. For thousands of banks, the years from the mid 1960s to the mid 1970s have been a dizzy time. Their business has increased in value and in geographical extent. The most euphoric increase is in the developing countries, as banks set up new offices in nations from Nigeria to Peru. Some corporations, now, have almost more operations than they can count, with Citicorp of New York, for example, acknowledging “approximately 2,026 offices in 103 countries around the world.”1

Throughout the years of expansion, the political consequences of the boom have been hidden and ignored. People were busy making money. The French bankers of the Second Empire did not stop to consider the politics of finance as they lent more and more money to build ever more railroads in ever more distant countries. The bankers of the 1970s—their modern heirs—are similarly sedulous as they consider only today’s loan, to this year’s country borrowing money, not to build railroads but to explore, perhaps, for oil.

In the United States, there is a persistent illusion that the business of US banks, including their international business, is not an issue of public or political concern. But bank lending has already changed US relations with developing countries. US policy toward Chile and India, toward Argentina in the summer of 1976, is influenced by the odd, conflicting involvements of bankers and governments. The US government already pursues a politics of debt in the secrecy of the groups known as creditor “Clubs,” where countries seek to reorganize their foreign debts.

The illusion that business is private is not limited to banking. It corresponds to general changes in US policy. During the late 1960s and 1970s, the US government relinquished many of the functions of international economic hegemony that it had exercised after the Second World War, when the dollar was the main support of the international monetary system, and when most foreign aid to developing countries flowed from the United States. Since the late 1960s, the government has also permitted increasing license to US corporations as their foreign business flourished. As US arms corporations increase their commercial exports, US military assistance accounts for less and less foreign military business. Food exporters increase their commercial sales, while their exports under government aid programs dwindle.

The consequences of these changes are only now becoming evident. As the banks have grown, US financial relations with developing countries have changed from aid to private lending. Throughout the 1960s, official development assistance accounted for well over half of all US capital flows to developing countries. Now less than 35 percent are in the form of official assistance. US official aid was worth less in 1974 than in 1964, with almost all the decade’s increase in capital flows coming from private transactions, including bank lending.2 The distribution of US capital is determined, increasingly, by the preferences of private lenders. Six countries account for two-thirds of all the non-oil-exporting developing countries’ debt to banks.3 The largest US banks, to take another example, have chosen to lend to borrowers in South Korea amounts that are 14,000 percent greater per capita than the amounts they lend to people in India.4

This politics of debt was hidden during the years of the bank bonanza. But the political questions can no longer be wished away. In 1976, the financial situation of the developing countries has changed. It is now clear, as was shown in the first part of this article (NYR, May 27), that many of the non-oil-exporting developing countries will not be able to repay and pay interest on their foreign debts on schedule. This is true, above all, of the countries which borrowed money in the “good” economic boom of the early 1970s; and again in the “bad” lending boom of 1974-1975, when they needed money to buy food and oil and other essential imports. Some time in the next several years, at least some of these countries will be obliged to “reschedule” their debts, deferring payments of interest and principal.

The rescheduling need not bring insolvency and the collapse of banks. It is likely that most countries will consider their debt problems in quiet negotiations. But the negotiations will engage banks and deep political interests. The US government will be involved in every phase of the debt crisis. It is still the developing countries’ largest creditor. And it is committed through the involvement of US private banks. The twenty-one largest US banks, according to statistics made public recently by the Subcommittee on Multinational Corporations of the Senate Foreign Relations Committee, have claims worth over $20 billion on borrowers in the non-oil-exporting developing countries.5 Many of these loans are to countries that could need to reschedule their debts: $6 billion to Brazil, $1 billion each to Argentina and Peru, $162 million to Zaire.

There are three periods to the troubles to come. In the short term, during the next few months, many developing countries will remain in the depths of the world recession. By 1977, their exports should recover. But until then they must still finance a large current account deficit, as well as pay interest on earlier debts. During the last year, Zaire has defaulted on interest payments to banks, including Chase Manhattan; Argentina recently prevailed upon some of its foreign creditors to “roll over” or renew their loans, often for a period of no more than 120 days.

Beyond 1976, there are further problems. Even when their exports increase, the developing countries which borrowed heavily from private banks expect to pay a high proportion of their earnings to repay old debts. The structure of their debt is such that many loans will come due at the same time, “bunched” together in the late 1970s. Brazil, for example, will be paying interest and principal on loans dating from 1970, as well as on the shorter and more stringent loans of 1974-1976.

One issue will endure even longer. This is the question of whether the process of private lending—now providing more and more of the capital for developing countries—is a proper basis for development. Many people—in developing countries and in the US multinational banks themselves—believe that in the future, and as debt reschedulings continue, governments and public institutions like the World Bank and the International Monetary Fund should resume a much more powerful role in international lending.

Almost all countries and banks and international conferences have their own view of how to solve the new problem of debt. At the recent UNCTAD IV conference of the United Nations Conference on Trade and Development in Nairobi, these divergent views emerged more openly than ever before. The most profound difference, as the conference confirmed, sets the US government, and the Department of the Treasury in particular, on the one side, against the developing countries’ bloc on the other. The authors of the UNCTAD conference agenda favor “significant departures from established orthodoxies” in balance of payments financing, development aid, “and the treatment of contractual obligations.”6 Thus, in the UNCTAD view, the debt question can be resolved only by devising new procedures for rescheduling loans—above all, because of the developing countries’ new involvement with private lenders.

The UNCTAD conference considered a scheme for international financial reform put forward by the “Group of 77” bloc of developing countries within the United Nations. The scheme calls for the creation of a new institution, “such as a fund or a bank,” to refinance debts. One version describes an “International Bank for Debt Redemption.” The plan also proposes that the official debts of the poorest countries be canceled.7

The UNCTAD conference agenda explains that the new fund would be designed primarily to “iron out the ‘bunching’ of private debt over a longer period.” The governments of the developed countries would give money to the fund, or guarantee or buy its bonds. If it turns out that US lenders are owed, say, 40 percent of the developing countries’ debt, then the United States would be responsible for 40 percent of the fund’s capital. A country in the fund might have, for example, a seven-year loan from the Bank of America. The fund or “IBDR” would provide the debtor country enough money to meet its payments to the Bank of America. The country would continue to pay interest to the fund, and would eventually also repay the principal, but would have perhaps fifteen years in which to pay.

Such schemes are intended to resolve the developing countries’ problems in the next several years, as more of their loans come due; beyond 1980, the fund could provide a longer term basis for financing development. M. Jean-Pierre Fourcade, the French finance minister, who opposes such generalized reschedulings, himself suggested in Nairobi that governments should establish a scheme within, the World Bank to guarantee loans to developing countries.

UNCTAD officials believe that the private banks would welcome a system of this sort. “Private lenders,” they write, “are likely to take a more positive stand with regard to provision of loans to developing countries when it is known that governments, acting collectively, stand ready to refinance….” Banks, not surprisingly, would lend more money if they were less at risk.

We have a lobby,” one UNCTAD official remarked recently to me, explaining that bankers apprehensive about their foreign loans are eager to see their claims guaranteed by a new public institution. The official pointed cheerfully to the recent observations of bankers at the Bank of America. “We would like official bodies to use public guarantees for commercial loans,” one said, “or to provide longer term funds from official lenders in order to improve the structure of debt of some countries.”8

The US government’s position is that the procedures which have evolved in the last twenty years, the tried and true process of debt and penitence, are adequate to the task of containing developing countries’ debt problems in the late 1970s. Henry Kissinger suggested this view in May when he said in Nairobi at the UNCTAD IV conference that “the debt problem must be addressed in relation to each country’s specific position and needs…. The device of a creditor club is a flexible instrument for negotiations.”9

The ideas of tradition and convention come up often in the recent study of debt prepared by the US Treasury.10 As the study shows, US officials explained their philosophy in the course of justifying US participation in the 1975 rescheduling of Chile’s debts. “As the world’s largest bilateral creditor,” one official wrote, “we lay great importance on the tradition of treating debt crisis situations such as that being encountered by Chile in accordance with overall creditor financial interests and within the context of traditional multilateral arrangements.”11

The traditional procedure is for creditor countries to convene groups known as the Clubs of Paris, London, the Hague. The Clubs meet in conditions of considerable secrecy. But glimpses of their business can be seen in the US government studies under review. Countries are represented in the Clubs by treasury and other officials. The Paris Club, for example, meets in the French finance ministry. One UNCTAD study observes that “it is not clear who formally calls the group into being.”12 But the procedure is for a country facing balance of payments difficulties, and needing to reschedule its foreign debt, to approach a Club.

  1. 1

    Citicorp Annual Report, 1975, p. 38. The 2,026 offices belong to “Citicorp and its subsidiaries and affiliates.”

  2. 2

    International Economic Report of the President, March 1976 (US Government Printing Office) Table 62, p. 170.

  3. 3

    World Bank Annual Report, 1975. “External Public Debt Outstanding of 86 Developing Countries, December 31, 1973.” The debts covered are for terms of more than one year, owed by or guaranteed by “a public body in the borrowing country.” The eighty-six countries include southern European countries, Israel, and the oil-exporting countries as well as the non-oil developing countries whose debts are considered here.

  4. 4

    US Senate, Committee on Foreign Relations, Subcommittee on Multinational Corporations, “Foreign Assets and Liabilities of US Banks,” March 11, 1976.

  5. 5

    US Senate, op. cit. The statistics cover the twenty-one largest US banks’ claims on residents of eighteen non-oil developing countries, including most of the largest borrowers. They cover only those claims which are not guaranteed by US government agencies or by US corporations.

  6. 6

    UNCTAD IV, “International Financial Cooperation for Development,” Nairobi, May 1976. (TD/188), p. 4.

  7. 7

    Manila Declaration,” Third Ministerial Meeting of the Group of 77, February 12, 1976 (distributed by UNCTAD, TD/195); “Progress Report,” Preparatory Committee for the Ministerial Meeting at Manila, December 22, 1975.

  8. 8

    Robert A. Shaffer of Bank of America, quoted in Business Week, March 1, 1976.

  9. 9

    Henry Kissinger, “Expanding Cooperation for Global Economic Development,” May 6, 1976, Nairobi. In his speech, Kissinger proposes a new “International Resources Bank” to increase investment in developing countries. But in his comments on “debt problems,” he stays fairly close to what seems to be the US Treasury brief.

  10. 10

    US Treasury, “Report on Developing Countries’ External Debt and Debt Relief Provided by the United States,” January 1976. Also reprinted by US House of Representatives, Committee on International Relations, April 5, 1976 (Executive Communication 2433, US Government Printing Office).

  11. 11

    US Treasury, op. cit., p. 86.

  12. 12

    UNCTAD, “Present Institutional Arrangements for Debt Renegotiation,” February 26, 1975 (TD/B/C.3/AC.8/ 13).

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