SO FAR, the banks' losses on their Latin American loans have been slight. The banks have written off very few of those loans. Most of the borrowing countries are stronger and better able to carry their debts than they were five years ago, when the threat of default first arose. Because most of the big banks are now building up their internal reserves against possible losses in the future, they give an impression that the whole structure of Latin debt is collapsing. But the impression is false. The banks are dealing not with current write-offs of their loans, but with the possibility of future write-offs.
Chase Manhattan Corp. has just reported a loss of $1.4 billion in the spring quarter. The reason was that it added $1.6 billion during the spring to the reserves out of which it would meet defaults on loans, if and when they happen. The bank has taken money out of one pocket and put it in another, but the money still belongs to the bank. The loans that Chase Manhattan actually wrote off during the spring totalled a much more modest $113 million -- of which $95 million were loans here in the United States. Its foreign loans are holding up pretty well.
So why are the banks building up their loan loss reserves now? This epidemic of prudence has been triggered by Brazil's decision last February to suspend interest payments to the banks. Brazil was warning its lenders not to press it beyond a certain point; the banks are responding with a show of financial strength. Deeper reserves mean a better position in the negotiations ahead. From the banks' point of view, the strength of the stock market here also makes it a good time to build reserves. The market has already discounted the prospect of losses on some of the Latin loans, allowing the banks to build up their reserves -- at the expense of normal operating profits -- without suffering any great drop in the prices of their stock.
But coping with the past debts is only half -- and the less important half -- of Latin American's financial need. Those countries will continue to need new credit if they are to trade and develop their industrial capacities. The banks are reluctant to put up new money. But new money is essential to their economic growth, and growth is essential if the past debts are to remain manageable. It's a circle. The banks' attention to their reserves is an interesting tactical development. But the key to carrying the Latin countries' debt successfully is new credit -- and whether the world can find an orderly way to keep it flowing to them