Former Brazilian finance minister Mario Henrique Simonsen told a Washington audience yesterday that, to manage the current global debt crisis, the International Monetary Fund must be put in charge of all lending to developing nations, issuing guidelines to the commercial banks on the nature of their loans to debtor nations.
Simonsen, who addressed a discussion sponsored by the Institute for International Economics, added that IMF guidelines "for lending to debtor countries will have to be continued for a number of years."
Also yesterday, former assistant secretary of State Robert Hormats told a congressional committee that, unless Western leaders abandon their "defensive" effort to correct the weaknesses of the international financial system, the debt and other financial problems of this decade will overshadow even the strains of the 1970s.
Hormats, now a Goldman, Sachs & Co. vice president, said that the world economy is in "a precarious state." Testifying before the Senate Foreign Relations subcommittee on international economic policy, Hormats sketched out a seven-point program, including a major beefing-up of the IMF, to head off a crisis.
Hormats noted that commercial banks are becoming more cautious in the present situation, which increases the burden on the IMF. In these circumstances, the IMF, "if too stringent in establishing loan conditions , will undermine the [borrowing] country's political cohesion or its government, and thus its ability to take any form of economic action at all," Hormats told the committee.
Simonsen, who was a key figure in the rapid growth of the Brazilian economy and the build-up of its foreign borrowing, said that a "snowball of debt" had struck the Third World beginning in 1982, as international trade began to shrink and interest rates began to soar. He said that even knowledgeable bankers were shocked when the full magnitude of the money owed by countries such as Mexico and Brazil (each about $80 billion) was disclosed.
The former Brazilian minister, now director of a graduate school of economics in Rio de Janeiro, said that the IMF and banks "should develop a routine through which the IMF will determine the [developing countries'] borrowing needs." Under his proposal, commercial banks would not be free to pull out of their loans, as many of them now want to do. That inevitably would lead to defaults, he said.
A related proposal made over the weekend by Sen. Bill Bradley (D-N.J.) calls for consolidation of developing countries' existing debt. In a speech to international financial leaders in Davos, Switzerland, Bradley suggested creating an authority through either the IMF or World Bank to buy up existing loans, including nonperforming loans, at a discount.
Bradley also suggested convening a new Bretton Woods conference, a step that Hormats said would not by itself bring about the progress needed.