Only days after his July 28 inauguration, Peruvian President Alan Garcia imposed the types of economic austerity measures that overnight would have restored the nation to good graces in the international financial community -- as a similar program had done for Argentina six weeks earlier.
But instead of seeking rapprochement with the International Monetary Fund and the world's big commercial banks, which have lent Peru about $6 billion, Garcia invited confrontation.
He told the private banks that they would receive no interest payments for the forseeable future. And he limited interest payments to other creditors to 10 percent of the country's export earnings. More than half of Peru's $14 billion in foreign loans are from other governments and multinational institutions such as the IMF and World Bank, and the government's total interest bill is about $1.3 billion a year.
Garcia also barred IMF officials from even visiting the country -- let alone trying to work out an agreement with the agency that could pave the way for new loans for his economically ravaged nation. He further threatened to pull out of the IMF, which serves as the world's international financial rescue agency. In September, he took the almost unprecedented step of skipping a payment due the multinational institution.
Garcia's predecessor, Fernando Belaunde Terry, left Peru a domestic and economic mess. For nearly his entire five-year term, Belaunde appeared unwilling or incapable of taking steps to counter Peru's nearly two decades of economic distress. During the final year of his term, he permitted overdue interest to mount.
Peru avoided becoming an international economic pariah because bankers and international financial officials knew Belaunde's term would end soon and they did not want to add to his successor's difficulties.
But to the consternation of the international financial community and many Peruvians, Garcia, 36, appears to be courting the renegade status that Belaunde avoided.
He has insulted top United States and IMF officials. He blames the industrial world for Peru's woes. When U.S. regulators belatedly downgraded the status of Peruvian loans on the books of U.S. banks, Garcia said the deterioration was not in Peru loans but in the "international system of unjust capitalism." The government newspaper La Republica called the action "aggression" in a headline.
Garcia is not the first Latin American leader to rail against the foreign debt and the IMF. Nor is he likely to be the last.
But he is the first politician to adopt many of the painful austerity measures the IMF usually requires and then fail to parlay the action into an IMF pact and a new lending agreement with banks.
Banks and the IMF generally provide fresh money to ease the initial impact of austerity programs -- which usually include stiff cuts in government spending, tight monetary policies, sharp currency devaluations and other actions designed to wean countries off the virtually unlimited foreign loans that were available in the late 1970s and early 1980s. "I don't understand it," said one Peruvian banker. "He is isolating Peru from the rest of the world for what seems like no good reason."
But Garcia associates and Peruvian observers say the charismatic new president has good reasons.
IMF programs are little more than palliatives, short-term actions that move cash flows around but do not address the medium- and long-term issues of improving economic well-being, according to economist Claudio Herzka.
Central Bank President Richard Webb said Peru benefited little from its past borrowings and that it will be good for the country to live without any foreign money. Reaching agreements with the IMF is time-consuming and diverts the attention of government officials from the task of redirecting Peru, Webb said.
And remaking Peru appears to be Garcia's goal. He is attacking the social and political ills that Peruvians long have moaned about privately but have never taken on publicly: from corruption in the civil service and the police to the overwhelming presence of the military in politics and society.
He has vowed to redirect resources away from Lima to the rural regions -- to halt the invasions of impoverished Indians to a capital that already cannot sustain itself and to create the agricultural efficiency the country needs. "He has to go back to agriculture," said Herzka. It is the only sector of the economy that offers the types of productivity increases that Peru needs to stimulate the entire country on a long-term basis, Herzka said.
To wrest control of the country from a small elite, he is seeking to develop a competent corps of bureaucrats and to broaden participation in political parties, according to Lima publisher and commentator Mirko Lauer.
But Peru is a country beset with overwhelming poverty and troubled by increasing violence.
Even when the rest of Latin America appeared to be prospering in the late 1970s, Peru was sputtering, according to Central Bank President Webb. Per capita income today is about where it was 20 years ago. Unemployment in Lima approaches 30 percent, and hundreds of thousands of citizens scratch out an existence as street vendors or as employes in the vast underground economy. Many university graduates are forced to take jobs as day laborers.
A Maoist guerrilla movement, the Shining Path, that has been active in the South for years has spread its attacks to the capital.
Garcia's biggest goal is to give the country hope and a feeling of togetherness, according to a Peruvian economist. Garcia sacked 120 top police officials because of their suspected involvement in drug trafficking and fired senior military officials fighting the guerrillas because of brutality against noncombatants. He has moved against the growing drug trade in the northern jungle near Colombia.
"Those are the kinds of actions that earlier governments would not even countenance," one Garcia supporter said.
"Garcia is finally trying to do something. Finally we have a government," said Javier Inguinez, a professor at the Catholic University of Peru.
Many observers said Garcia's pugnacity in the economic arena is not only rooted in his belief that the international economy is unfair and unjust but also in a realization that popular support among the masses is needed as a bulwark against the powerful interests that the Garcia administration threatens. Garcia has a 90 percent popularity rating today, and his adamance on the foreign-debt issue only serves to enhance and increase it.
But these same observers said that Garcia's crusade to remake Peru may founder because he will cut the country off from the foreign investments the country needs to make substantial improvements in its nearly feudal economy.
It is an economy in which 40 percent of the population earns 2 percent of the income. Its industry is small and inefficient. Its agricultural sector lacks proper technology -- and farmers are flocking to Lima, where conditions may be wretched, but still are better than in the countryside.
Other countries have gone months or years without paying their debts in full and have voiced similar but not quite so strident attacks on the IMF and the banks. "But those words have been used for domestic consumption," one international banker said. "Even Argentina, at the height of its problems with the IMF last year, still talked rationally in its dealings with the international community."
"It's only a question of how you do it. He's burning bridges he later may regret torching," a Peruvian banker said.
Already Garcia has had to back off some of his austerity measures -- designed to contain a 300 percent inflation rate -- for fear that long-ravaged Peruvian industry would be obliterated.
He also has been forced to put on hold his plan to revitalize the agricultural sector and rely on rising farm productivity and growing farm income as the vehicle for stimulating domestic industry.
Instead, to keep Lima from exploding and demand from plummeting further, the Garcia government took steps to increase urban incomes slightly, permitted selective increases in some prices and embarked on an emergency public works program.
It also put import restrictions on nearly 250 items, a move that will force Peruvians to buy locally made products.
Several economists and international economic officials said that Garcia will be forced into short-term economic measures regularly and will be unable to deal effectively with Peru's crucial long-term problems. They include creating export industries to substitute for traditional sources of foreign exchange such as minerals.
Industry Minister Cesar Atala said that the world no longer demands the traditional exports of Peru in the same quantity, and -- as a result -- at the same price. If 1979 prices prevailed today, Peru would earn about $5 billion from its exports, not the $3.2 billion it expects to reap, Atala said.
He said the debt crisis is a byproduct of the fundamental shift in world demand. "If we could solve that, we wouldn't be talking about the debt, we'd be paying it," he said. "In the meantime, we can't afford to."
Garcia and his top aides have reached the judgment that, unless the rest of the world agrees to its terms, Peru will go it alone. The country already has nearly $1.5 billion in foreign exchange reserves and will accumulate more by squeezing Peruvians with dollar-denominated accounts and forcing them to convert the dollars into soles.
Its industry is running so far below capacity that it will be several years before the country needs big quantities of foreign money to invest in expansion. Until then, the country's reserves and its $1 billion trade surplus are big enough to provide for the growth in imports that would accompany a three- or four-year domestic economic expansion. Like most developing countries Peru must rely on imports to provide vital components and spare parts for its industry.
Central bank President Webb said the whole point of the foreign debt strategy is to make it possible to finance growth of 4 to 5 percent for the next several years without having to rely on foreign funds.
"We don't need fresh money, we're better off without it for the next five or 10 years," he said. "Not only might it be badly used, but the effort that needs to be made to live on our own won't be made if it's available."
That judgment is not widely shared in Latin America. Argentina followed that course for a while but later rejected it. Mexican Finance Minister Jesus Silva Herzog said last week that the Peruvian solution is not for Mexico.
Bolivia, which is in far worse shape than Peru, has decided after two years of isolation that it is in the country's interest to make an attempt to rejoin the international financial community. Aides to new Bolivian President Victor Paz Estenssoro pointedly told the country's bank lenders that Paz believes Peru's confrontational approach to be pointless and self-defeating.
"I don't mind that Garcia has so many people at work trying to remake the international economy to his liking," said a Peruvian banker. "But I wish he'd have one or two working on the way the economy works today -- just in case he fails."