When Alan Gracia took over as president of Peru in July 1985, he said that the nation was too poor to pay the massive interest payments to its banks and other creditors, such as the International Monetary Fund. So Garcia limited debt payments to 10 percent of the country's export earnings.
The policy appeared to pay off at first. The dollars he saved by refusing to pay the debts sparked a big consumer spending boom. The economy grew 1.9 percent in 1985 and 8.5 percent last year.
But the nation, far poorer than most of its neighbors, is running out of industrial capacity and the ability to import goods vital to production, because it has largely depleted its foreign exchange reserves.
The country's trade surplus -- besides foreign capital, the main way debtor nations come up with needed dollars -- dwindled to only $5 million last year from $1.1 billion the year before because domestic consumers were buying goods that otherwise would be exported and because banks, which have received virtually no payments on the $6 billion they loaned Peru, have reduced their short-term lines of credit on which the ability to export depends.
The Garcia administration is running a massive federal deficit that critics feel will spark a return to heavy inflation and kill the boom.
Garcia, blaming private domestic banks for the country's ills, tried to nationalize them last month in a move analysts said was an attempt to shunt criticism away from his economic policies. Garcia is also fighting an expensive and dangerous war against Sendero Luminosa rebels as well as an internal political power struggle with his former deputy, Luis Alva Castro.