''THE ARMY MOVED TO WIPE OUT SNIPERS in the hills of Caracas today after the government suspended civil rights and imposed a nationwide curfew to combat the worst violence in 31 years of democratic rule." So reads a frightening Associated Press dispatch from Venezuela's capital, where riots triggered by the austerity program of President Carlos Andres Perez have left over 100 dead and Latin America's best-established democracy badly shaken.
After seven years of falling living standards, many Venezuelans are unwilling to tolerate the higher food prices, bus fares and electric rates their government has been forced to impose in order to obtain a $1.5 billion advance from the International Monetary Fund. Creditor banks may applaud the aggressive market-oriented reforms imposed by a newly installed president with socialist inclinations, but with them or without them, there is little prospect that Venezuela's economy will grow in 1989. Meanwhile, inflation is expected to top 70 percent this year, fed by repeated devaluation of the
bolivar.Three thousand miles to the south, Argentina's two largest business organizations have withdrawn their support of the anti-inflation "spring plan" put forth in August by President Raul Alfonsin. Argentina, like Venezuela, is out of reserves; the austral has collapsed since the central bank stopped propping it up last month. Inflation is on the rebound, with devaluation driving prices up 10 percent in February alone. Barely two months before the May 14 presidential election, the economic situation looks grim.
Against this background, the Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. issued an astonishing report last week contending that no legal changes are necessary to encourage banks to write off developing country debt. The paper, reportedly written primarily at the Fed - officials of the FDIC have previously disagreed with some of its conclusions - was designed to head off potential Bush administration proposals to change banking regulations in order to reduce foreign countries' debt burdens.
As our Richard Lawrence pointed out on this page Wednesday, banking regulations do inhibit banks from accommodating debtor countries in a variety of ways.
Capitalizing interest payments - simply adding them to the principal balance each quarter - might offer a few countries with strong growth potential the chance they need to outgrow their debts, but current banking rules would require banks to classify such loans as non-performing and set aside reserves for them. Reducing interest rates and forgiving principal are also discouraged by regulations.
Would different rules make a difference? Perhaps. Once banks forgave loans owed by Bolivia, whose debts were small and repayment prospects
, the country was able to assemble an economic program that is producing major gains in per capita income.
In addition, an emerging aspect of the debt problem has yet to be faced in Washington.
A large and growing share of developing country debt has been written down by creditor banks and sold on the secondary market at a fraction of face value. Although the new owner may have purchased a Brazilian loan for 25 cents on the dollar, Brazil's debt service obligations remain unchanged. Were Brazil a private company, a bankruptcy court could reduce its obligations to all creditors by a proportionate amount. With no corresponding legal provisions governing sovereign debt, however, Brazil continues to owe the face value, and corresponding interest payments, to the debt's current holder. In the United States, the "debt crisis" will have diminished as the debt is marked to market, but in Brazil it will continue unabated.
This is not strictly a bank regulatory issue; many buyers of developing country debt are not banks. But without legislative action, the potential benefits of bank write-offs will not be passed along to borrowers.
To date, the Bush administration has had nothing constructive to say about Latin American debt. Because of its technical complexity, the issue is difficult for Congress to address in the absence of administration proposals. But unless the administration offers a legislative package, Congress will have no choice but to seek to develop a program of its own.
Argentina, Brazil, Mexico and Venezuela, Latin America's four largest debtors, all face payments crises now. Unlike previous suspensions of debt service, the current problems occur at a time when each country's foreign currency reserves are severely depleted.
If seven years of debt crisis have demonstrated anything, it is that there are no easy answers. But in a year in which voters in Argentina, Bolivia, Brazil, Chile and Uruguay will elect new presidents, Latin Americans need to hear that the United States is offering concrete proposals to reduce debt burdens and allow economic growth. Events in Venezuela offer a chilling picture of the alternative.