The Bankers Al

Scan page 8

The total foreign debts of Third World countries have risen from $60 billion in 1970 to $600 billion now - and that's an underestimate.

Poland, Mexico, Argentina, Brazil — the crises multiply Why? And could it lead to a Great Crash? Bob Sutcliffe | Latin America's mountain snowbulling collapse of credit... the US in Wall Street crashed in 1929. Could the same happen to the reports.

YOU need a steady nerve to read the Financial Times these days. It is all shocks, horrors and sensations about dizzying currency fluctuations, rumours of bankruptcies and debt crises. And through the individual dramatic episodes a general underlying theme insistently repeats itself - the problem of rising debt.

In the first few days of December the pink pages read rather like the screenplay of a Hollywood disaster movie (to be titled 'Bankruptcy' perhaps or 'Crash'). Like all disaster movies it has hundreds of sub-plots set in far-flung exotie locations.

As the December dawn breaks over - Dracula's castle in Transylvania, not far away, over the Carpathian mountains in the valley da the Denube, a impassive dark-suited bureaucrats board their flight to London. They are on their way to talk to a group of equally darksuited bankers about their inability to pay the $2 billion they owe next year to a total of 200 banks. world's banking system today? Total debt as (1982 estimates)

Figures show total Mexico debt in $bn Chile Peri (8D) : • 10)

Colombia Other nezuela Bank debt!

I * Goods and services 1 To banks in BIS of export earnings* 38)

Irazil reporting i Meanwhile, on the same day (December 8) a group of dark-suited French bureaucrats could be found sweating in the Arabian desert where they were. trying to borrow another $2 billion from Saudi Arabia to prop up the wilting franc.

Simultaneously, another group of dark-suited bureaucrats Mexico City were preparing to send telex messages to term as % of total -- Venezuela L Peru r- Mexico *-Colombia Argentini -- Chile |-Brazil the headquarters of some of the 1,400 banks to which the Mexican government owes money that it cannot pay, asking for more time to pay the $9 billion due over the next few months. And all the while, their colleagues wore engaged in organising the $35 million which Mexico has to pay as interest on its debt every day (the price of one cheap meal a day for every citizen of Mr sco!).

Aficionados of disaster movies will know that such a series of cameo events are designed to arouse intimations of a massive catastrophe. But this disaster has not yet occurred. And even the pessimists cannot say exactly what form it might take.

Indeed there are experts in world banking circles who are arguing that the disaster movie is the wrong format for interpreting all these events. What is happening, they say, illustrates the extraordinary flexibility and capacity for survival of the immensely complex world financial system.

The worst that is occurring through the present undeniable debt crisis is that the financial system is being obliged tu negotiate an awkward corner. But its road-holding qualities are excellent and there is no danger of the vehicle plunging over the cliff.

Evidence

•Pienty of evidence could be amassed to support buth sides of this argunent - buth the catastrophist and the sanguine perspectives. There is no simple way to decide between them since on the question of credit and debt there are no clear-cut rules.

A catastrophist would Debt service ratio Principal % 50 100 T Chile Morgan Guaranty: BIS: Official sources

Interest

1982 est Argentina WILLA Mexico 1978 tota ll Brazil VIA. Venozuela * Debt service VIIII Colombia as % of exper earnings Peru point to the fact that at present the amount of debt in the world is vastly greater (not only in absolute size, but in relation to the value of production and income than at any other moment in the history of capitalism. But, on the other hand, that statement has now been true for a decade or more and the great crash has not yet occurred. There is in theury no limit to the amount of credit which can be created by the banking system since the whole system of modern capitalist money is based ultimately on faith.

Billion

While noone disagrees that the level of debt is now the highest ever, equally, noone • really knows how high it actually is. The structure of international credit is now so immense that it is impossible to estimate the figure exactly.

The most generally agreed figure is that for the underdeveloped countries as a whole the total debt has risen from $60 billion in 1970 to probably over $600 billion now. But this estimate is not satisfactory for various reasons.

First of all it is only supposed to refer to medium and long term debt and it excludes short term debt which the underdeveloped countries' agents may borrow, sometimes for a matter of hours, in order to pay for needed imports. Since the banks do not reveal it (many of them would be afraid lo do so for fear of the repercussions) noone knows the size of this short term debt, but it could easily add another $100 billion to the total.

In any case medium and long-term are not terms easy to define; and much of that kind of debt is not declared by the banks either. The United States Securities and Exchange Commission has just shocked some of the US commercial banks - by demanding that they reveal more information about their loans to countries which are in debt repayment difficulties. Some of them fear that to do so will lead to runs on their banks.

The net result of underdeclaration of loans has been revealed during the debt crises of the last year or so. Whenever a country has been forced to reschedule all its debts and so estimates of the total have to be revealed, they have always been much higher than the total previously estimated in the available official figures. Argentina's debt was thought to be about $12 billion until the recent crisis, when it was discovered to be well over $20 billion. The same is true of Poland and Mexico.

The estimates also exclude privately held debt in the Third World, such as the debts of manufacturing and commercial companies, and of private Third World banks.

On many counts then the $600 billion figure is an underestimate. The true figure could already be approaching $1 trillion, or SAFE DEPOSI!

AME RICA:

UNHIONN BANK about $500 for each inhabitant of the underdeveloped capitalist countries.

The real burden of this level of debt depends on many factors. In the first place the debt is of many different kinds. Some of it is to other governments who have usually shown themselves willing to reschedule it without much problem. They do not particularly need the money since their loans were not commercially motivated; and continuous rescheduling allows them to maintain some leverage over the government of the debtor country.

Banks

Other debts are to suppliers and to banks and these are the debts which since 1970 have been rising most rapidly.

The proportion of debt to the banks rose from 20% in 1974 to 36% in 1980 (in Latin America the rise is from 21% to 56%). And the proportion owed to suppliers (trade credit) is now 7% of the total.

These kinds of debt are much more burdensome since they are made originally for commercial reasons and thus the banks and suppliers are less willing to reschedule, though they can be induced to do so if the rescheduling does not New York gold dealers Wall Street band represent a perpetual postponement.

The commercial "debt i also for shorter terms than the official debt. As a resul the average maturity of the underdeveloped countries? debts has been shortening fast. And the average rata of interest has, until the last few months, been rising.

For most of the 1970. this did not have the effed of increasing very fast the repayments and interest due as a share of the export earnings of the underdeveloped countries. They rose from 14% to 19% over the decade.

But there was a sudden change at the beginning of the 1980s because of a bunching of repayments due in a short period and also because the recession made a sudden dent in poor countries' export earnings.

That has meant that the debt servicing obligations (repayment of principal and interest) due next year are for a few countries well over 100% of their expected export earnings. Mexico, Brazil, Argentina, Chile and Ecuador are a'l in this category. Those countries just have no way of paying unless they borrow from new creditors in order to repay the old.

This shift in the situation has been sudden and has taken the ground from under most of the argu-

----- pull-quotes -----

1L0 IH1 'Bank debt. short-