VENICE -- Allen Wallis, undersecretary of State who does the advance work for President Reagan on the ecomomic summits, emphasizes that these meetings aren't designed for negotiations or decision-making. Rather, they bring the heads of government directly into discussion of economic issues that normally they shun.

Nonetheless, these summits can get new initiatives started. And right now, the leaders have a chance to take a bold step on the Third World debt problem. When Citicorp decided to put $3 billion in reserves against future losses, it served up a golden opportunity for a new approach to the debt issue.

Citicorp's action -- followed by Chase Manhattan and other banks -- demonstrated that the banking system is in a much better position now to take systematically planned losses than it was in 1982.

To a considerable extent, credit should go to Treasury Secretary James A. Baker III and his famous debt initiative, which introduced the first major break from conventional attitudes about debt by stressing the need for economic growth instead of austerity among the big debtors in Latin America.

The time has come to take the next strategic steps that are critical not only for the Third World borrowers, but also to maintain the viability of the banking system -- especially the U.S. part of that structure. The communique to be issued Wednesday is expected only to endorse the idea of a wide "menu" of options for help to debtor nations, apart from conventional loans. This is a good idea, but more will have to be done.

A forthcoming study by William S. Cline of the Institute for International Economics outlines in detail how broad this menu might be. Cline concludes that widespread debt forgiveness, especially among the four biggest Latin American borrowers, is not warranted.

His relatively optimistic assessment -- based on a hope for continued rich-nation expansion -- would continue to build on the Baker plan, while tidying up the process of bank lending to include such things as debt/equity swaps and allowing banks to convert existing loans to "exit bonds," which allow smaller banks to withdraw from the debt negotiation process by trading their loans for low-interest bonds.

Many experts, however, are convinced of the need to go well beyond what this summit seems poised to do -- preserve and expand the Baker plan, possibly through increased official lending that takes up the slack in commercial banks' willingness to move new money into the Third World.

Percy S. Mistry, for one, is an economist who has just quit the World Bank as senior financial adviser to teach at Oxford, after presenting a detailed plan for a Debt Restructuring Facility to World Bank President Barber B. Conable Jr.

Conable, so far, has rejected Mistry's proposal, which builds on ideas that have been advanced by Princeton University's Peter B. Kenen, Rep. John LaFalce (D-N.Y.), Sen. Paul Sarbanes (D-Md.), New York banker Felix Rohatyn and others. It would set up a new international entity to buy up debt at a discount from the debtor nations, then pass along the benefit of the discount to the borrower.

"It is imperative to seize the moment, and take actions which the {banking} system can absorb in a gradual manner, instead of running the risk of a sudden shock which may yet crack it," Mistry told Conable.

As John Makin of the American Enterprise Institute recently wrote, "no magic plan exists to solve the problem." But that doesn't mean that nothing can be done, or that the effort to take major strides past the Baker plan or the Bradley plan -- which calls for interest-rate relief or debt forgiveness in some circumstances -- should be abandoned. Several American legislators are at least trying.

Robin Broad and John Cavanagh of the Carnegie Endowment for International Peace suggest that the Third World countries must generate more growth from within, relying less on being pulled along by the richer nations. But this will require basic land and other reforms that won't be offered voluntarily by dictators, or instigated by the status-quo managers of the World Bank and International Monetary Fund, Broad and Cavanagh say.

Mistry may not have a "magic plan," but he's got a logical scenario that seems to hang together. He points out that while developing country debt now accounts for less than 7 percent of the total assets of American banks, against more than 10 percent in 1981, the debtors are in worse shape. Third World debt has grown by 62 percent and -- worse -- debt service has grown from $88 billion a year to $141 billion, a 60 percent increase. This has created the intolerable situation under which there are enormous net transfers from the less-developed countries (LDCs) to the richer nations.

Mistry contends that the time has come to restore a better balance between the deterioration of the debtor countries and the improved position of the creditor banks.

The banks haven't been making the additional loans anticipated in the Baker plan, but are prudently reducing their exposure -- a trend that will increase in the wake of the Citicorp and Chase Manhattan reserve actions.

The dwindling of new bank money -- recognized by Baker in his call for a new "menu of options" -- puts more pressure than ever on the World Bank and the InterAmerican Development Bank to plug the gap.

According to Mistry, these institutions are now "rapidly approaching the limits" of their lending capacity. In the absence of new capital, he warns they are being placed "in a position of increasing financial jeopardy."

What is needed is Baker plan Phase II that will reverse the outflow of money from the Third World to a positive inflow once more, and to do it in a way in which the debtors as well as the banks benefit from writing down the inflated debt totals.

"Debt 'relief' must be achieved through market mechanisms rather than by fiat or political negotiations between debtor and creditor countries," Mistry suggests.

He offers a "Baker II" plan modeled along the lines of the Municipal Assistance Corp., engineered by Rohatyn, that pulled New York City off the ash heap. As suggested by LaFalce (but funded in a much different way), a Debt Restructuring Facility (DRF) would buy up, at a discount, the debt of Third World countries whose performance would be monitored by the World Bank.

The DRF would be capitalized by the United States, Japan and other industrial countries at $30 billion -- of which 10 percent would be cash, the rest callable, spread over three or four years. It could borrow at a 10-1 gearing ratio (conservative compared with commercial banks), which would allow it to issue up to about $300 billion in its own securities in exchange for loans now held by commercial banks.

Assuming an average discount of 25 percent to 30 percent, this new facility could acquire $400 billion to $450 billion of LDC debt -- while wiping out $100 billion to $150 billion.

If this writeoff were concentrated in the 17 countries in the Baker plan, Mistry says, it would wipe out about one-fourth of their outstanding debt, and cut their debt servicing cost by around $10 billion to $12 billion.

The costs of such a plan seem tiny against the potential benefits and the prospect that it might avoid a financial crash that could ensue if we wait too long. Sure, there may be bugs in this and other variations of the financial intermediary idea. But it would be dangerous to sit back and wait for the Baker plan to take off, as Cline seems to expect. Rather, it is a time for new ideas to be generated, examined carefully, and put into effect.