While the White House was agonizing last month over whether to release a controversial $75 million loan to Nicaragua's revolutionary government, a committee of international bankers approved an innovative restructuring of close to $600 million of Nicaragua's foreign debt.
Participants in the nine-month-long negotiations said they were "very difficult" and both sides made important concessions. The happy outcome of the talks sheds some light on the character of both Nicaragua's new government and the giant international banks that have extended huge amounts ofcredit all over the Third World.
The agreement demonstrates that the Sandinista revolutionaries now ruling Nicaragua have decided not to follow the example of their allies in Cuba, which repudiated their foreign debt and eventually isolated the country totally from the Western economic system.
It also showed that the international bankers -- generally considered a pretty conservative bunch -- can be more flexible and effective in dealing with revolutionaries than is the U.S. government.
The agreement with the banks will give Nicaragua a big boost when its economic team goes to Paris next week to begin negotiations for restructuring the $200 million debt owed to the governments of the United States, Spain, West Germany and Japan.
The agreement announced last month on repayment terms for $582 million that Nicaragua owes about 120 banks was worked out by a high-level Nicaraguan negotiating team and a steering committee of 13 banks that hold about 52 percent of the debt.
Members of the steering committee include Citibank, (with $56 million in claims,) Bank of America, Royal Bank of Canada and First National Bank of Chicago.
The agreement has been submitted to the other creditor banks, and so far 86 banks, holding 90 percent of the total debt, have approved.
Under the restructuring, Nicaragua has 12 years to repay the debt with a five-year grace period on the principal. The past due interest will be capitalized, and during the first five years only 7 percent interest will be paid on that amount. The difference between 7 percent and the interest Nicaragua normally would be paying is to be put in a pool and refinanced between 1986 and 1990.
Richard Winert, a New York investment banker who advised the Nicaraguan negotiators, called the agreement "a good deal for both sides."
"Nicaragua gets five good years of breathing room to rebuild its economy . . . The banks got complete recognition of the debt and agreement to pay a commercial rate of interest."
When the Sandinista guerrillas overthrew dictator Anastasio Somoza 14 months ago, there were fears in the international financial community that the debt would not be repaid.
Although the Sandinistas had announced before taking power that they intended to restructure the debt -- estimated at between $1.5 billion and $1.6 billion -- the country's economy was in such bad shape that the bankers feared some revolutionary leaders would be tempted to repudiate the debt.
Estimates of the damages sustained in the war varied from 25 percent to 37 percent of the gross national product.
The mismanagement and corruption of the Anastasio Somoza government was so great that when the dictator and his friends fled the country in July of 1979, Nicaragua's foreign reserves had fallen below $3 million, according to a U.N. report.
Somoza had begun to default on the forgin debt as early as the fall of 1978, and a total of $600 million was due by the end of 1979.
The international bankers' fears were intensified when Sandinista commander Daniel Ortega hinted in speeches at the United Nations and the nonaligned nations' summit in Havana that certain debts incurred by Somoza would not be paid. Ortega and other Sandinistas said some of the loans went directly into the pockets of the Somoza family and their friends, while others were used to purchase weapons used against Somoza's opponents.
"Some members of the Sandinista Front felt the Cuban role on repudiation might have been the right way," said one banker, "but the technical people were in favor of the traditional way."
As in other cases, the Sandinistas' policies turned out to be more realistic than their leaders' speeches might indicate. Once the former guerrilla commanders sat down in government offices and looked over the books, they apparently decided that they would have to do business with the international banks and had better try to get the best deal they could.
There is also evidence that even the Sandinistas' Cuban allies advised them not to cut themselves off from the Western economic system. Mexico, another ally that takes a leftist economic line in international forums, was instrumental in setting up Nicaragua's meetings with the bankers' steering committee, which began in December.
One of the strengths of the Sandinistas is their ability to win the support of people who might not seem at first glance to be the revolutionary type, but who have the technical skills -- particularly in economics -- that Nicaragua's new government needs so badly.
Key people on the team negotiating the foreign debt were Arturo Cruz, an economist who worked for a decade for the Inter-American Development Bank in Washington; Joaquin Cuadra, a lawyer; and Alfredo Cesar, a young manager with a masters degree from Stanford.
Participants said the talks got off to an auspicious start when Nicaragua recognized that it was responsible for all debts incurred by the Somoza government, and -- after some discussion -- the past due interest. But the Nicaraguans' proposal for a repayment schedule -- 25 years at 7 percent interest -- was "unacceptable," one banker said.
"They felt they had to be very careful and make the payments over a long period because they wanted to rebuild the economy," he said. But if they could not work out a more "realistic solution," some of the creditor banks would lose patience and take legal action on their own, blocking Nicaragua's exports and imports, he added.
"Some of these banks hadn't been paid for a year or a year and a half," he said.
By June, six months after the negotiations had begun, it looked like they had reached an impasse. The ground was broken when the Nicaraguan negotiating team went to New York for a meeting at Citibank headquarters on Park Avenue with some members of the steering committee.
At that meeting, the Nicaraguans agreed to recognize an unspecified commercial interest rate going forward on the principal of the renegotiated loan. They continued to insist on 7 percent on the past due interest (about $90 million), promising to begin paying the next year when export crops are harvested.
Again the bankers insisted that their negotiating group would break up if no "commercial solution" were reached.
With both sides threatening to walk out at various points in the meeting, the payment period was bargained down from 25 to 12 years and the Nicaraguans agreed to pay a rate ranging from one to 1 3/4 percent over the London bank rate on the interest going forward.