FROM THE BRAZILIAN point of view, it was a marvelous idea. Half of Brazil's enormous debt to foreign banks, under this proposal, was to be discounted to its present market value -- about 55 percent of the original loans -- and converted into bonds. Other people called it a partial default. When Brazil's finance minister, Luis Carlos Bresser Pereira, brought this plan to Washington, Secretary of the Treasury James Baker said promptly and publicly that it was a "nonstarter."
Mr. Baker was trying to deliver a clear warning to Brazil. It is heading for serious economic trouble if it persists in debt management schemes that the rest of the world considers frivolous. In response to Mr. Baker, Brazil has now withdrawn the debt conversion plan and has apparently agreed to stick to more conventional arrangements. That's promising. A write-down of the Brazilian debt is the wrong way to go.
Brazil is not one of the world's hard-luck cases. Its industrial power is rising rapidly. Its economy has grown spectacularly fast over the past several years -- too fast, the inflation rate suggests. It is running large trade surpluses. The reason that the market value of the debt has fallen to 55 percent of its original value is not any fundamental weakness or incapacity of the Brazilian economy. It is simply that since last February, Brazil has refused to pay interest on the loans. To reduce them to current market value is to reward the debtor country for having deliberately eroded its own credit rating.
A foreign loan that's defaulted or written down is, in effect, foreign aid -- involuntary, but genuine foreign aid all the same. The money would come out of banks' capital rather than from government budgets, but it's real money and the costs would be borne by the lending countries -- prominently including the United States. Brazil does not have the highest claim on the next billion dollars of American aid. Incomes in Brazil are more than twice as high as, for example, in the Philippines, which also struggles along under a heavy load of debt.
Brazil's handling of its debts is complicated by the inexperience of its political leadership, working in a very recently restored democracy. But the decisions on the debts come down to one essential choice: whether to stay in the international system of lending and payment or to cut the country off and live in isolation. If Brazil chooses to stay in, there will be plenty of room for negotiation on the terms. There's a lot of respect for Brazil in this country. But Brazil can't expect the rest of the world to accept multibillion-dollar write-offs of present loans while continuing to lend and trade normally. Secretary Baker gave Mr. Bresser Pereira good advice