The Third World debt crisis is over. Crisis implies acute emergency. There isn't any. Everyone's suffering: debtor countries, commercial banks and industrial nations. But the pain is constant and dreary. It's more like cancer than a car crash.

Mismanagement of the debt crisis must now rank among the Reagan administration's great failures of economic and foreign policy. The fatal flaw has been to regard the debt problem as a banking matter, when the ultimate stakes involved fostering democracy in the debtor nations and restoring sounder world economic growth. The administration subordinated these goals to helping commercial banks avoid losses on their Third World loans.

The foolishness of this approach is now obvious. Huge debt burdens have wounded new democracies in Brazil and Argentina. The same thing is now happening in the Philippines. Mexico's economic prospects have deteriorated sharply, raising the danger of political instability. Much of Latin America is economically moribund. Since 1981, U.S. exports to the region have dropped by more than a third.

Even the banks haven't been helped. The value of the banks' loans inevitably reflects the health of the debtor countries. As their prospects have worsened, the loans become increasingly worthless. No one ever thought they could be fully repaid. But if the loans were worth, say, 70 or 80 cents on the dollar a few years ago, they may now be worth only 40 to 60 cents. A few banks are candidly recording huge writedowns; other banks will surely be forced to follow suit.

Getting out of the debt mess has always required a political bargain: granting the debtor countries some debt relief -- that is, forgiving some of the loans -- in return for economic reforms. There's nothing novel or immoral about this approach. If Brazil were a company, it would have long ago entered into bankruptcy proceedings, where such deals are routine. Creditors reduce their claims, while companies reform their managements.

Unfortunately, there's no bankruptcy process for countries. No one should think that the recent proposal from Mexico and J.P. Morgan & Co., a bank holding company, is an adequate substitute. The plan is complex. It calls for Mexico to buy back some of its bank debt -- perhaps for as little as 50 cents on the dollar -- with 20-year Mexican bonds. In turn, Mexico would partially collateralize its bonds by buying U.S. Treasury bonds. If Mexico defaulted on its bonds, banks would get the U.S. Treasury bonds.

To call this plan a breakthrough, as some analysts have, is an exaggeration. True, it involves some debt relief. But even if the plan works as intended -- and that's not yet certain -- the effects will be modest. Mexico's debt burden will drop only slightly, and it's doubtful that a similar scheme can be applied to Argentina, Brazil or the Philippines. More important, there's no explicit connection between debt relief and economic reform.

By itself, debt relief is no panacea. Peru suspended debt payments, but its prospects are worse than ever. It nationalized its banks and inflated its currency. But reforms require debt relief. To generate dollars to repay their loans, debtor countries are being forced to run massive trade surpluses. Creating those surpluses requires repressive economic policies: new taxes, lower government spending, higher interest rates -- anything that will suppress economic growth and imports.

Debtor countries are crippled. Writing in "The New Republic," the secretary for economic planning in the Philippines explains: "{Y}ou have a soldiery that is paid less than $100 a month... . From this amount, they have to buy their uniforms, their boots, their rations. The government cannot raise their pay because of competing demands -- infrastructure, social welfare, education... -- after the debt service {has} been paid."

The upshot is that debtor countries can't maintain reforms for long. Many reforms are painful; they involve eliminating wasteful subsidies or closing inefficient state-owned companies. Taking these steps is difficult when countries face prolonged austerity to service foreign loans. As Harvard economist Jeffrey Sachs notes, voters and politicians correctly feel that they're sacrificing simply to fatten the profits of foreign banks.

So debtor countries are caught in a vicious circle of political and economic decay. Their economies are drifting, their governments discredited. Most major debtor nations -- Argentina, Brazil, Mexico -- have temporarily embraced reforms. All have retreated. Governments avoid unpleasant choices by printing money. There's a brief burst of economic growth, followed by rising inflation and a reduced ability to pay the debts. In 1987, Brazil's inflation hit 370 percent and Mexico's 150 percent.

The banks fostered this vicious circle. To maximize short-term profits, they made new loans that were used to help repay the interest on the old loans. Technically, this expedient avoided defaults. But it's been an absurd process with perverse results. The developing countries' debt burdens rise, their economies suffer and ultimately the banks' loans drop in value (see table). The banks maximized short-term profits and long-term losses. But even when the banks declare losses, there's no mechanism to translate their accounting actions into a legal form of debt relief. The debtor countries still owe 100 cents on the dollar.

The time for debt relief was 1985 or 1986. It never offered a perfect solution. The International Monetary Fund could have administered the program. But only the United States could have promoted such a scheme, and the Reagan administration refused. Instead, it backed the banks' foolish strategy. The administration wouldn't tackle all the uncertainties. The banks would have screamed at absorbing losses; debtor countries would have resisted outside pressure for reforms. There was no guarantee that reforms, once undertaken, would be maintained.

The list of vexing problems was endless. The only argument for debt relief was that the alternative of drift was worse. Doing nothing would undermine economic recovery and democracy in the debtor nations. Sadly, events are vindicating that prophecy.

Since the onset of the debt crisis in 1982, debt burdens have increased. This table shows countries' foreign debts as a percentage of their exports. ----------------------- -------1982-----------1987* Argentina.............. .......405%...........554% Brazil................. .......339............471 Mexico................. .......299............366 Philippines............ .......269............309 Venezuela.............. ........84............278

*estimate

Source: Morgan Guaranty Trust Co.