Third World debt problems are so great that they may yet trigger a banking and financial crisis, according to international financial experts testifying to Congress yesterday.
The austerity measures being forced on nations in financial crisis, such as Mexico and Brazil, are so severe that they may push some borrowers to renege on their foreign debts rather than go on squeezing their economies in order to meet debt payments, warned three Latin American experts testifying at a joint hearing of two House subcommittees.
The three were Raul Prebisch, an Argentinian development economist who was secretary general of the United Nations Conference on Trade and Development; Pedro-Pablo Kuczynski, a former government minister in Peru who is now president of First Boston International and a managing director of The First Boston Corp.; and Jorge Sol-Castellanos, El Salvadoran senior fellow at the Institute for Policy Studies in Washington.
A fourth, William Cline of the Washington-based Institute for International Economics, was somewhat more optimistic that the present method of dealing with the debt crisis would succeed.
The "valley may be so deep and so wide that we may not get to the other end of it," Kuczynski said. He pointed to "a real danger that from the point of view of the countries themselves, the adjustment programs are too difficult to put into place."
The debt crisis has been handled so far by a series of financial rescue packages, put together under the guidance of the International Monetary Fund. In exchange for more money from commercial banks together with loans from the IMF itself, borrowing nations have agreed to implement strict economic policies intended to depress growth and cut imports.
Cline said that while there was a risk that these packages would unravel, so far the biggest debtors have agreed to them.
"In my view, debtor countries should not be expected to consistently compress their essential imports in order to afford a trade surplus necessary to pay heavy and growing debt service," Prebisch said.
Prebisch and Sol supported the schemes for converting some Third World debt into longer-term, low interest debt, but Kuczynski and Cline said that these schemes would cost too much to be supported by rich nations and would lead commercial banks to lend less overseas.
Kuczynski said, however, that commercial banks will likely be forced to lower the fees and interest spreads that they are charging on rescheduled and new loans. He described these as "somewhat excessive."
Brazil, with more than $80 billion in foreign debt, has already failed to meet the IMF targets that it agreed to in February and is on the brink of bankruptcy. An IMF team is now in Brazil to discuss new government measures aimed at bringing the nation back into compliance with IMF targets.