Responding to pressure from the international bankers' lobby and the U.S. Treasury Department, the International Monetary Fund said yesterday that it would require a Third World debtor nation to pay overdue interest on its debt to commercial banks before the IMF would advance it any more money.
Until today, IMF Managing Director Michel Camdessus -- while philosophically agreeing with bankers' complaints that debtor nations are less creditworthy if they are in arrears on their payments -- had insisted that economic problems for many Third World countries were so severe that the IMF couldn't hold up a loan package while the banks and the debtor countries were working out their own negotiations.
The breakthrough came over Brazil, which is the world's largest international debtor. Camdessus told reporters at a news conference that before submitting Brazil's application for a $2 billion loan to the IMF Executive Board, "we will need to be sure that negotiations with the banking community are firmly launched with a good prospect of a satisfactory conclusion. ...
"It is essential for Brazil to give confidence to its creditors, normalize its situation, reduce its arrears."
Approval of an IMF loan would come only after the agency is convinced that Brazil's negotiations with its commercial bankers are "developing in good faith and leading to an agreement," Camdessus said.
Earlier this week, Horst Schulmann, director of the Institute for International Finance, wrote the IMF and its sister agency, the World Bank, on behalf of large banks, demanding that the two agencies quit lending money to Brazil and other Third World countries "until they stop adding to their arrears." Third World countries owe more than $22 billion in past-due interest to commercial banks, of which $8 billion is owed by Brazil.
Treasury Undersecretary David C. Mulford supported the banks' position and seemed to go one step beyond. He warned Camdessus that the United States would not endorse the Brazilian loan unless the logjam on arrears was broken. Asked about Camdessus's step, Schulmann said yesterday that he had heard encouraging language, but that "the proof of the pudding will be in the eating, and the eating would be a substantial down payment on its arrears." He said Brazil is expected to have a $15 billion trade surplus this year, which should help to work off its debt to commercial banks.