Preston Martin, the vice chairman of the Federal Reserve Board, offered a few thoughts the other day about easing the debt burdens of the Latin countries. His purpose was presumably to be helpful, but the effect was profoundly mischievous. His suggestions were drawn from the menu of familiar ideas that have been repeatedly considered and, for good reason, set aside.
By raising them again now, he created an impression abroad that American policy is about to change -- an impression that is, according to all the evidence, quite wrong. But it threatens to undercut the structure of international agreements and understandings that has been laboriously put together. That is why the chairman of the Federal Reserve, Paul Volcker, responded with an unusually explicit rebuke from Tokyo, where he is attending a meeting. He found Mr. Martin's comments "incomprehensible," he said, ". . . unfortunately and unrealistically suggesting that there are unorthodox approaches to deal with the international debt problem."
Mr. Volcker was chiefly addressing not Washington but the Latin American capitals. He and many others in this city have spent much energy persuading the leaders of the Latin countries that the various alternative proposals would in fact turn out to be more onerous for their countries than the present debt repayment schedules. Many Latin pol have in turn put their own careers at stake in persuading their constituents. The week in which President Raul Alfonsin leads Argentina into a drastic campaign against inflation is a remarkably inopportune moment for a U.S. offical to hint that perhaps there are easier ways to meet the strains on that economy.
And, unfortunately, there is no easier way. Mr. Martin spoke of a possible cap on the debtor countries' interest payments. Any arbitrary limit imposed by governments on interest payments to the banks would immediately end any further bank lending to those countries. That would paralyze their trade, at great cost to their standards of living. Another of Mr. Martin's suggestions would have some international agency take over the loans from the banks. But it is altogether desirable to keep the banks' assets and their profits tied directly to the prosperity of the Latin countries. It keeps them more responsive than many of them would otherwise choose to be.
Mr. Volcker has brought his ruler down hard on Mr. Martin's knuckles, and no doubt there will be a deep chill at the next board meeting. But Mr. Volcker had to make it clear immediately that Mr. Martin was not speaking for the Federal Reserve Board. The debt structure is too fragile to allow ambiguity regarding the government's intentions.