BANKS TOLD TO CUT LOAN RATES TO LDCS

BANKS TOLD TO CUT LOAN RATES TO LDCS

Commercial banks should consider cutting interest rates to below-market levels on loans to some less developed nations, a banking executive suggests.

The proposal, by Bruce R. Magid, the Bank of America's director of international economic research, was offered as a new approach to helping highly indebted countries unable to win new loans from commercial banks.The proposal, he said, is not aimed at assisting such nations as Brazil and Mexico, which, he said, have the economic strength to service 100 percent of their debt at market rates, but to help smaller, more fragile economies, such as Ecuador and Costa Rica.

Mr. Magid outlined his idea at a hearing by two House Banking Committee subcommittees.

Temporary interest rate relief, he said, is in our view far superior to the creation of an international debt facility for buying commercial bank debt at a discount.

He said the Bank of America continues to support the so-called Baker initiative, which calls for more lending by international agencies and commercial banks to help developing nations grow out of their foreign debts.

That approach, he said, may finally have started to produce positive results.

Mr. Magid said that a Bank of America analysis indicates that last year 28 highly indebted developing nations, in the aggregate, improved their export-to-debt and debt-to-gross national product ratios.

He forecast a higher average real growth rate for these countries of 2.5 percent in 1988 and continuing improvement in their export to debt and debt service ratios.

Bank of America, he said, believes that present debt strategies will succeed, if they are maintained for another eight to 10 years.

Still, Mr. Magid said, more might be done to help a group of mid-level developing nations that can service only a limited amount of their foreign debt at market rates.

The Bank of America proposal is closely tied to World Bank programs. The World Bank would determine the sustainable debt service capacity of qualifying countries. Interest rate relief would go only to countries conforming with World Bank-endorsed economic reforms.

To get the interest rate relief, a country would have to stay current in its interest payments. If its debt servicing capacity improved, its interest rates would be adjusted upward.

Among the proposal's advantages, said Mr. Magid, are that it links debt payments more closely to a nation's debt service capacity and increases the probability that a country will make the political commitment to honor its revised contractual obligations.

In separate testimony, Manuel Johnson, the Federal Reserve Board's vice chairman, strongly endorsed the Baker debt plan. He said the Third World debt situation is becoming much more stable, particularly in view of Brazil's and Argentina's announced plans for new economic reforms.