Tension is rising between the Latin American debtors and their creditors. There's a strong inclination in Washington to assume that everything will work out adequately in time, as the world's economic recovery raises exports and Latin America's ability to pay. Maybe so. But there's increasing reason to think that it won't happen soon enough to avoid fearful political strains on Latin governments. The most illuminating case, and certainly the most important, is Brazil.
To avoid default on its gigantic foreign debts, Brazil has been negotiating with the International Monetary Fund for a loan. But the negotiations have been difficult, and the tentative agreement last week is not likely to be formally accepted by the IMF before October. Meanwhile, in Brazil, there is increasing discussion of a moratorium on debt payments on grounds that changes in the world economy have made the present burden, and the IMF's lending conditions, unreasonably onerous.
When it lends, the IMF--properly and necessarily--sets conditions requiring the borrower to get its economy in balance. The question is how far to go. Brazil had been indexing wages to the inflation rate; that's always a formula for trouble, but it was an established custom. The government has now scaled the indexation back to cover only 80 percent of wages. In a country where the inflation rate is in the range of 150 percent a year, that's bitterly unpopular. The IMF also believes that the government must move directly on spending and monetary policy to get that tremendous inflation rate down. That's good advice and, in a perfectly stable world economy, there wouldn't be much doubt about Brazil's ability to adopt it.
Unfortunately, stability is in short supply and interest rates have been rising as the recovery begins. Since most of Brazil's debt is financed at floating rates, the effect of this increase on the country's foreign obligations is immediate. In contrast, the benefits of recovery for Brazil's exports, and its ability to pay, will come along much more slowly.
Brazil has good reasons to avoid any sort of default or moratorium on its debt payments. It has a strong economy, it is in a process of rapid industrialization, and like the advanced countries it requires access to world markets. Default on debt jeopardizes the whole network of international credit on which its trade depends. But as interest rates rise there comes a point at which conventional adjustment and repayment policies are no longer realistic. The recent rate increases may now have brought Brazil close to that point.
It's time for the IMF and the commercial banks to consider alternatives that could reduce current interest payments, for Brazil and perhaps other debtors, until the world recovery and the revival of their export trade are further advanced. Any agreement of that sort would have to be acceptable on both sides; it can't be imposed on the banks. But it would be infinitely preferable to have the initi- ative come sooner, from Washington and New York, than later from Latin capitals besieged by the political reaction to economic failure and disappointed hope.