Only a year ago, major Latin American debtors appeared on the brink of defaulting on hundreds of billions of dollars of international loans. A global financial panic loomed.
Today, those same nations appear to be working their way out of the worst economic difficulties they have faced in two generations -- although the process will be slow and may yet produce the crisis that so far has been avoided.
"We're seeing genuine, realistic concern about a financial crisis recede further and further every day," according to Donald G. McCouch, executive vice president of Manufacturers Hanover Trust Co., the nation's fourth-biggest bank and an important international lender. Latin American debtors had accumulated huge debts -- then in 1981 saw the world economy, and demand for their products, collapse at the same time that interest rates exploded.
Countries such as Mexico and Brazil took painful economic steps designed to decrease their need to rely on foreign borrowings. In return for this so-called economic adjustment, banks delayed repayment of maturing debts and lent new funds to the debtors to keep enough money flowing to the nations until the "adjustment" took hold. The International Monetary Fund, the multinational financial rescue agency, sanctioned the programs and kicked in some funds of its own.
Many observers said the process would not work, that the international monetary system was prescribing a bandage, while the debtor countries needed major surgery. Even to those who designed the "adjustment process" -- the banks, international financial officials and the countries themselves -- there were many second thoughts.
The so-called adjustment programs -- which involved severe government spending cuts, clamps on wage increases and currency devaluations -- triggered severe recessions in both Mexico and Brazil. Venezuela, without an IMF imprimatur, followed a similar program with similar results. Banks, especially small U.S. institutions new to the international lending game, balked at ponying up more funds when they believed Latin American nations would not repay loans already made. More than once, the fragile world financial order seemed ready to fracture.
Today, however, the process seems to be working. Banks have taken some losses, but there have been no massive defaults. Workers in debtor nations suffered through the austerity program and the recessions. Economic growth, spurred in large part by a surge in exports, is again growing, although at a more sluggish pace than the nations were used to. Mexico, Brazil and Venezuela, which account for nearly 70 percent of the region's $350 billion of foreign debts, say they will need no bank loans in 1985. Moreover, world economic conditions appear favorable for continued economic improvement in 1985, according to William R. Cline of the Institute for International Economics.
The U.S. recovery, which slowed in the last half of 1984, seems to be regaining momentum. The United States is a major export market for Latin America -- and a major source of the foreign exchange it needs to replace bank loans. Other industrialized economies seem to be recovering, too. Interest rates are declining, welcome news for the debtor nations, which still must continue paying interest on their outstanding debts -- $250 billion of which are bank loans.
In addition, Argentina -- which had battled the banks rather than take the kind of austerity moves accepted by Brazil, Mexico, Venezuela and other smaller debtors -- finally reached an agreement with the IMF and its bank lenders.
The Argentine decision -- based on an assessment that a 700 percent inflation rate that was worsening was a greater danger to domestic political stability than a recession -- removed the major source of conflict in the 30-month-old debt crisis. Argentina, with $47 billion in debts, is the region's third-biggest debtor -- behind Mexico and Brazil, which each owe about $100 billion.
As Argentina was reaching its first pact with the banks and the IMF, banks and other major debtor countries were devising new arrangements to make it easier for countries to stay current on their debts. Most principal payments are due before 1990. The new arrangements will stretch out repayment of those debts for more than a decade and simultaneously ease the interest terms.
The banks sacrifice some interest income and tie up funds for far longer than is normal. But by making it easier for debtors to pay, the banks reduce the risk that countries will repudiate paying back the principal.
Mexico, which triggered the crisis in August 1982 when it announced it had run out of money, was the first country to negotiate a long-term repayment plan with its key bank lenders. The plan, which stretches out repayment over 14 years, still needs the approval of the 800 banks that have made loans to Mexico.
Nevertheless, bankers and analysts warn that it is too early to declare that the Latin American debt crisis -- and therefore the threat to the international financial system -- is over.
Another U.S. recession, a serious protectionist move by Western nations against Latin American exports or another surge in interest rates could undo almost overnight the progress made by the large Latin American debtors.
Any or all of these events could plunge the world banking system into a reality of massive defaults that so far has been no more than a nightmare. Even if economic conditions remain favorable, the debtor nations could weary of the debt burden that will sap their resources for years to come.
For the most part, the debts were contracted to finance economic growth rates on the order of 6 to 7 percent a year -- rates that may be high by standards of industrial countries but that Latin American officials said were necessary to create jobs for a rapidly growing population.
The chief international economist for a major U.S. regional bank said she questions whether Latin American governments can continue indefinitely to use a large portion of their export earnings to service old debts while their economies crawl along. Indeed, several smaller debtor countries -- none of them big enough to trigger the cataclysm that could ensue if Brazil, Mexico, Venezeula or Argentina collapsed -- are feeling the burden of the debt crisis far more than their large neighbors.
Chile has done everything the IMF asked. Nonetheless, it is chafing under the burden of debts and low prices for the commodities, principally copper, it must export to earn foreign exchange.
Peru, on the other hand, has fallen far out of compliance with the programs set down for it by the IMF and is sinking faster than Chile. The Andean nation is nearly six months behind on its interest payments, and is straining to keep from falling farther behind so that U.S. regulators and banks will not be forced to put their loans on problem lists.
A default by a Peru or a Chile might not destroy the system, but it could revive enough fear among investors and lenders in the industrialized countries that the hoped-for return of major debtors to "normal" economic relations with the rest of the world could be delayed.
Cline said that the major Latin American debt problems in 1985 will be concentrated in smaller countries that in themselves pose no threat to the system. Nevertheless, Cline said, the way the problems of these countries are dealt with could be the method used if big debtors face another crisis.
And while the world's attention has focused on Latin America -- where nearly every nation is unable to pay its debts on time -- other developing countries face debt crises, too. The Philippines is struggling with a $24 billion debt load. Many Eastern European countries -- notably Poland and Yugoslavia -- have severe difficulties, while the sharp decline in oil prices hit Nigeria hard.
Nevertheless, despite the problems that linger, bankers and government officials said that the developments of 1984 vindicate the approach taken by the IMF, the industrial nations and the banks themselves.
The approach assumed that the countries were not insolvent, but merely temporarily short of cash, caught in a temporary bind by a worldwide recession that depressed demand for their exports and a U.S. anti-inflation strategy that pushed up the rates they had to pay on their large debt burden.
Many argued the opposite: that Latin American nations would never be able to handle the debt load; that unless massive amounts of the debts were written off -- with both banks and taxpayers in industrial countries eating the losses -- the world financial system would collapse under massive Latin American debt repudiations.
"We've demonstrated to ourselves and to our skeptics that there was a long-term strategy in place that so far has led to satisfactory stopping places," according to the head of international lending for a major multinational bank.
In Mexico, for example, the earliest efforts were no more than first aid. Enough funds were pumped into the country to keep it from collapsing, giving it a breathing spell to adopt an economic strategy.
After the austerity program was put in place in early 1983, the banks kept enough funds flowing to allow the government to stabilize the economy and get it growing again.
Now, Mexico needs no new bank funds, and the long-term repayment plan prepares Mexico to resume normal economic relationships with the rest of the world.
"The same pattern, in different degrees, is applicable to Venezuela and Brazil," the international banker said. The plan will be similar for Argentina, another banker said, although that nation is at the same stage today as Mexico and Brazil in early 1983.
Neverthless, the plan could go off course.
Tancredo Neves, the newly elected president of Brazil and the first civilian to hold the office in 21 years, appears willing to follow a path similar to the one devised by his military predecessors. But an intractable inflation rate -- in excess of 200 percent -- could throw the plan off course. Brazil has more debt than any developing country, with $100 billion.
Mexico's $96 billion places it a close second. Mexico's willingness to hold to its economic plan could be thrown off by upcoming elections. Traditionally, its politicians have found it hard to keep tight purse strings when an election looms.
Venezuela -- which could avoid the IMF because its oil revenues were high enough to enable it to pay its interest -- could see its austerity program thrown off by another sharp decline in oil revenues. Mexico, too, is heavily dependent on oil for foreign exchange, but has been rapidly increasing its non-oil exports. Venezuela exports little else.
Newly cooperative Argentina has a fractious political system that may derail the government's anti-inflation program. That program, like those in other countries, is designed to restore the confidence of native investors.
In Mexico, Venezuela and Argentina, the governments were borrowing development funds from foreign banks at the same time that local investors, worried about the erosion of the value of their funds, were putting money in the United States and other industrial nations.
Overvalued currencies made it cheap for these investors to buy dollars and worsened the so-called capital flight.
"More of the problem could be solved than you would think if Latin Americans had more confidence in their countries' economic policies and invested their money at home," said one bank economist.