The death of Brazilian President-elect Tancredo Neves last Sunday is the latest in a string of reverses that have dashed the premature optimism that the Latin American debt crisis was nearly over.
Without Neves, Brazil's hopes for a political consensus on combatting inflation will be much dimmer. Elsewhere, the seemingly intractable inflation in Argentina, Latin America's growing weariness with servicing hundreds of billions of dollars of debt and the apparent slowdown in U.S. economic growth are contributing to a far more difficult economic and political climate in 1985 for most of the debtor nations than they faced last year. The likely exceptions are Mexico and Venezuela.
As a result, the international financial system -- including the several hundred banks that lend to the region -- will face new strains.
Last year, a burgeoning U.S. economy soaked up so many exports from major debtor countries that they were able to keep up with foreign debt payments and rebound from the 1983 recessions. Except for a mid-summer spike, interest rates declined for much of the year, taking some pressure off the debtors as well.
Mexico, Brazil and Venezuela were paying their debts on time and rolling up sufficiently large trade surpluses to also be able to rebuild depleted foreign exchange reserves. Although Argentina, the third-biggest debtor, sparred with its banks and the International Monetary Fund last year, it finally came to terms with the international financial community at year's end and made a big payment to its bank lenders that cleared up a large chunk of its overdue interest payments.
However, even in the seeming good times last year, Chile and Peru floundered. Peru, in political turmoil, took minimal steps to cut its domestic spending and was hurt by low commodity prices. Chile, on the other hand, adopted austerity as a religion, but abysmally low prices for copper -- on which it relies for most of its export revenues -- meant that the nation did not share in the export boom and still could not generate enough money on its own to satisfy its reduced needs.
Tiny Bolivia has defaulted in all but name on its $650 million in foreign bank debt (the rest of its $3.2 billion in foreign debt is owed to other governments or multinational agencies). Nearly all banks have written off their Bolivian debt.
The New Year dawned with the region's four biggest debtors -- Brazil, Mexico, Argentina and Venezuela -- seemingly recovering or on the road, and with smaller countries economically distressed and having grave difficulty paying their debts. Analysts said there was a two-tier Latin America. The bigger economies -- the diversified nations and Venezuela and Mexico, the oil producers -- were slowly improving. The smaller, less-diversified economies were unable to recover.
The four biggest debtors are the crucial performers so far as the international financial system is concerned. Together they account for 80 percent of Latin America's foreign debt.
"I knew the headlines that were proclaiming the end of the crisis were as overoptimistic as the headlines that talked about the end of the world monetary order were pessimistic in 1983," said the head of international lending of a major U.S. bank.
Some of the progress in 1984 proved to be illusory. Brazil was building up a massive trade surplus and paying its debts, but its military regime still was spending money it did not have. Its inflation worsened. Its recovery was kindled by foreign sales, not by still-dormant domestic demand. Domestic savers still seemed to prefer the dollar investments rather than cruzeiro investments.
Argentina had let its economy slide so far and its inflation rate accelerate so much that, by the time it finally agreed with the IMF to "adjust" its economy, the measures it adopted were insufficient. Argentina was out of compliance with its IMF program before it signed it.
Both countries have been cut off by the IMF -- which provides some cash in return for the agreement and, more important, paves the way for the country to deal with its bank lenders and official government lenders. The IMF and bank cash will not flow again until they adopt new economic programs acceptable to the IMF.
The Argentine and Brazilian difficulties with the IMF accompany a deteriorating world climate. Economic conditions will be less favorable for Latin America in 1985. The U.S. growth rate is slowing, and Europe -- whose 1984 growth was almost as dependent on exports to the United States as was Latin America's -- is not picking up the slack. Commodity prices are beginning to fall again, and interest rates, although lower in nominal terms, are still extraordinarily high compared with inflation.
In addition, debtor countries are wearying of debt payments that absorb a high proportion of their export earnings and limited domestic savings. These countries still have not convinced their citizens that they have adopted economic policies that will foster growth without inflation. To a large extent, the massive foreign borrowings of the debtor nations merely replaced money that their citizens saved elsewhere -- largely in the United States.
Earlier this month, the IMF's Interim Committee -- composed of rich and poor nations alike -- urged debtor nations to take steps to reverse the flight of domestic capital and attract back some of the funds that already have fled. "If these countries could keep their savings at home, they wouldn't need a dime of foreign dollars," a banker said.
"I don't anticipate any debt repudiations," a top U.S. economic official said. But a number of countries probably will fall more deeply into arrears on their debts -- and U.S. regulators may be forced to classify loans to some countries as "substandard." Growing arrears will hurt bank earnings -- at a time when banks still are feeling the effects of the 1981-82 recession. If regulators classify a country's loans as substandard, banks will find it difficult to make new loans to that nation.
If the export sectors should slow this year -- as appears likely -- the countries will come under more internal pressure to spend dollars locally to foster job creation at home rather than ship those dollars to foreign creditors.
Brazil, the trading wonder of last year, already is experiencing a falloff in exports. Its 1984 trade surplus was $13 billion -- some $4 billion more than forecast. Now the government is projecting it will be between $8 billion and $10 billion this year, and Brazilian businessmen say the surplus could slip to $6 billion. "If that happens, Brazil will have to borrow $2 billion just to pay the interest it owes," said an international economist for a U.S. regional bank.
Because of its massive $104 billion debt and its tenuous political situation, Brazil causes the most concern among bankers and government officials. Tancredo Neves, elected the first civilian president of Latin America's biggest nation in 21 years, took sick on the eve of his March 15 inauguration and died without being sworn in.
The freshly elected government so far has rallied around Neves' handpicked vice president, Jose Sarney. But Brazilian experts say that Sarney may not have the experience, the consensus or the will to take the difficult economic and political steps required in the months ahead to deal with Brazil's inflation and budget problems -- problems that were worsened by profligacy in the final months of the military regime as the generals "took care of themselves," according to a top U.S. economic official.
Neves, a legendary Brazilian figure, had the charisma and clout to get the Brazilian Congress and its people to take the harsh measures needed to pay the nation's foreign bills and develop an economy that does not need massive doses of foreign money to grow, according to a Brazilian economist. "He would have boosted Brazil's spending on social services, but found other places to cut the budget," the economist said.
The Argentine economy is being ravaged by astronomical inflation, and the 17-month-old civilian government of Raul Alfonsin finally appears to be serious about taking measures to control it, according to a U.S. government economist.
Argentines have come to agree that fighting inflation should be the government's primary objective. "Our weekend inflation rate is [the United States'] yearly inflation rate," an Argentine economist said ruefully. Inflation of Argentina's magnitude -- now more than 1,000 percent a year -- destroys any incentives to produce or save domestically.
President Alfonsin has announced a new anti-inflation policy that is designed to reduce the budget deficit by cutting spending and raising taxes and to control the growth of the money supply. But Mario Brodersohn, Argentina's newly appointed debt negotiator, said the difficulties of checking inflation in his nation are monumental.
Brodersohn said in a recent interview that, because the nation has experienced 40 years of inflation, the government must not take only the kinds of tough measures Alfonsin announced, it also must be believed. To "break inflationary expectations," the government must forge a social compact with its unions, companies and others to ensure that everyone suffers equally, he said.
With one-third of congressional seats up for election late this year, getting a political consensus on a pain pact may be difficult, according to one economist.
Argentina's bank lenders have agreed to loan the country $4.2 billion this year, but the funds cannot be disbursed until Argentina can convince the IMF it has a program that will work. Until then, the only dollars it will come up with are those it earns from exports. Despite a bumper crop, its export picture is mixed. Its grain and meats compete heavily with U.S. food exports and are largely frozen out of a highly protected Europe. Argentina, its reserves dwindling, again is falling behind in the interest payments it owes its banks.
So is Peru, a country that long has been out of compliance with its IMF program, although its $14 billion in debts do not pose the same threat to the system as do Argentina's. Peru has been shaken by guerrilla insurgencies, spends heavily on the military to fight the guerrillas and to placate coup-prone generals) and has trouble earning foreign exchange because of low commodity prices.
Alan Garcia, who is expected to be elected president of Peru, has said that he will bypass the IMF and its economic austerity programs and seek to deal directly with the banks. That's what Argentina used to say, too. "Then Argentina learned that, with or without the IMF, a country that can no longer borrow on its own must take austerity measures and the IMF and the banks make those measures easier to take because they provide cash and trade credits," according to an international economist.
Another international economist cautioned that the situation is not totally bleak. "Every time we focus on the short run, we get either euphoric or desperate," a key international banker said. "This is a medium-term problem -- eight to 10 years -- and we've got to be prepared for ups and downs."