The International Monetary Fund is being forced to ease the conditions on its four-month-old, $880 million loan to Chile because the debt-laden Latin American nation already has fallen out of compliance with some of the agency's terms, banking sources said yesterday.
Chile's quick derailment from the path set for its economy by the IMF worries Chile's several hundred foreign bank lenders, who are being asked to extend further credit.
The 12 major banks with the biggest stake in Chile have agreed to lend it another $180 million to tide the nation over while negotiations with its lenders continue. The European Bank for International Settlements has agreed to a similar "bridge" loan of about $300 million, sources said.
Some major U.S. bankers said, however, that Chile's economic difficulties will continue even after it gets new infusions from the banks. They said most of the Latin American countries that are heavily in debt--including Mexico and Brazil, which have foreign debts in excess of $80 billion--may also be in violation of some of the conditions on their IMF loans.
Mexico, Brazil, Argentina and Peru all have reached agreements with both the IMF and their bankers. But already Brazil has said it may need to borrow another $3 billion from its creditors. And many bankers fear new rescue efforts may have to be mounted, even if the industrialized world continues to recover from the recession that caused many of the economic problems in the Third World.
Because Chile did not comply with the terms of the Jan. 10 IMF loan, it was denied $54 million it was due to collect on March 31--the first of seven equal quarterly installments Chile was to receive after an initial $500 million payment in January.
IMF Managing Director Jacques de Larosiere, in a cable to Chile's lenders, said last month that Chile is doing its part under the IMF loan and cannot meet all of the economic targets because it has yet to reach agreement with the private banks. Banking sources said the IMF conditions--which relate to the growth of Chile's money supply and the level of its foreign exchange reserves--were set on the assumption that Chile and its bankers would reach an agreement by March 31.
Chile is seeking to ease the repayment terms on the $2.3 billion of its $18 billion in debt that comes due this year and next, and has asked its banks for new loans of $1.3 billion. The IMF conditioned its assistance to Chile on the willingness of its bankers to ease its existing debt burden and loan the country new money. Most of the banks have agreed in principle, but major bankers say it is difficult to work out the details.
In most of the Latin American debtor nations, the bulk of the foreign debt is owed by the government. In Chile, however, more than half is owed by private companies. Chile's military government, headed by Gen. Augusto Pinochet, has been reluctant to assume any responsibility for private company debts, but bankers said that position has been softening in recent weeks.
The IMF staff has set emergency, interim economic targets for Chile--De Larosiere called it a "shadow program" in his cable to bankers--that sources said take into account the failure of the banks to pump more money into Chile. The staff hopes to persuade the IMF's board of directors to pay Chile both the March and June installments if the country hits its "shadow" targets on June 30.
The IMF staff did not alter conditions that relate to Chile's government debt, targets Chile has met.
De Larosiere told bankers that Chile should meet the original conditions by Sept. 30 if it receives the new bank loans it is requesting.
The IMF sets economic performance targets as a condition of its loans to force the borrowing country to change its economic habits. Such conditions are designed to reduce the rate of inflation and government budget deficits and, ultimately, the country's need to borrow from abroad. The program also is supposed to assuage fears of private banks that borrowing countries will squander new loans.
But IMF programs are politically difficult because the enforced reduction in government spending usually increases unemployment and poverty.