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could not repay."
The roots of tbe situation líe in
the early 1970s.
In 1973 oil-dependent economies
worldwide rocked in the wake of a
West e rn money . M a n y Third
World nat ions, on the other hand,
desperately needed to finance thei r
now-ballooning balance of payment
deficits.
Loans to Developing Nations
by
the Nine Largest U.S. Banks
Amounts as of Dec. 31 , 1982
The following countries have asked for resched·
uli ng of their loan payments. (European bank
figures weren ' t avallable at t ime of publicati on.)
loans as a Percent
loans
of Stockholders'
Country
(US$ blllions**) Equlty (capital)*
--------------------------
Brazil
14.2
49 percent
Mexico
13.1
45 percent
Venezuela
7.6
26 percent
Argentina
5.6
19 percent
Chile
3.2
11 percent
Yugosl avia
1.4
5 percent
Poland
O.7
2 percent
--------------------------
•u.s.
banks have lesa lhan 10 percent of lheir total
assels al risk in international debl. Yel, under lhe bank·
ing syslem, cerlain major portions of banklng assets are
required lo be held in reserve and cannot, under normal
conditions, be used to cover defaulted debt. Funds used
lo cover such debt would come fr.om slockholders' equl·
ly, which, wilh required reserves sublracted, can be
lhought of as what a financia! lnstitulion would have
remainlng if il paid off i ls creditors and fulfilled deposi·
lors' demands.
• •equivalenl to lhousands of mlllions in Brilish usage
S a udi A r a bia, the
United A rab Emirates,
Kuwait and other OPEC
nat ions began depositing
their surplus oil money in
Western banks for rein–
vestment. T he banks, in
turn, quickly loaned these
deposits out to nat ions
whose soaring oil bilis
were crippling their econ–
omies.
At firs t , it appeared
botb lucrative and safe.
"Countries don't go bank–
rupt" was the widespread
belief.
The Rush Beg ins
As the world neared the
end of the 1970s, soaring
inflation and rising inter–
est rates lu red prívate
bankers more toward in–
ternational loans.
Ins tead of mere mi llions
::>ource: U.S Federal Reserve Board
major crude oil pr.ice increase. The
Organization of Petroleum Export–
ing Countr ies (OPEC) flexed its
muscles and almost overnight shot
many government deficits into the
fi nancia! stratosphere.
As govern me nt s wo r ldwi d e
scrambled to cope with the shock,
pr ívate bankers realized al} oppor–
tunity to ease the crisis. The OPEC
nations, because of the price explo–
sion, were suddenly awash witb
of dollars, hastily assem–
bled financia! consor t ia in America
and Europe pressed thousands of
mill ions of dollars into the hands of
governments in Latín America, Asia
and Africa. Called " jumbos" in
banker 's language, these massive
loans quickly increased tbe pr ívate
sector's loan share to abou t 60 per–
cent of the total.
T he resul t? International loan
debt skyrocketed 850 percent! In
bar ely a decade, Eastern Eu ropean
Can aCountryGo"Bankrupt"?
a nd Th ird World countries in–
creased their obl igations by more
than 700 percent.
What would j us t ify such an
incred ible r isk?
The developing count ries bor–
rowing the vast sums looked to
inflation for assistance in r epay–
ment. With the U nited S tates and
Europe Iocked into double digit
inflation, it appeared that the loan
could be cheaply repaid with depre–
ciating currency. On the bankers'
s ide, t he re was a n
incr e d i ble
amount of money to be made. A
major American business magazine
adds, "Major banks [also] earned
fat fees for arranging those mega–
buck loans."
The Roof Caves In
H aving recycled the pet rodollars
from the 1973-74 oil crisis, bankers
seitled back. Despite a few minor
fluctuat ions, many thought a solid
source of income had been hit
upon.
However, shock waves reverber–
ated through European and Ameri–
can corporate board rooms when,
followi ng th e 1979 wor ldwide
recession triggered by a second
major oi l price increase, P oland
info rmed its c redi tor s t h at it
couldn't make the U.S . payment
duein 198 1.
As banks scrambled to hastily
reschedule the Polish repayment, it
quickly t>ecame obvious to tbose on
the inside that muc h of the inte rna–
t ional aggregate debt was anchored
to a base of fiscal quic ksand .
Quietly, many financia! institu–
tions began to press Amer ican and
E
conomists specializing in
the international debt
threat assume generally that
national bankruptcy is not
possible under present
conditions.
bankruptcy proceeding.
No such international
court of bankruptcy now
exists, nor is there an
internationally accepted
body of laws that would
govern such proceediflgs.
monetary and physical aid .
One economist equates a
national declaration of
default with an act of
Settlements (BIS) and the
U.S. Federal Reserve
System are working
feverishly in cooperation
with lending institutions,
debt-ridden countries and
other governments to
renegotiate this debt and
reschedule payments.
Bankruptcy
per se
is a
legal concept. lt would
reqúire a court of law to
arbitrate and to define the
boundaries and
responsibilities of any
unilateral national
16
Yet national declaration
of either bankruptcy or
default would radically
affect the defaulting
country, instantly cutting
itself off from additional
war.
Today, while about $200
thousand million of the
aggregate international debt
is considered in
de tacto
default, central banking
systems as the lnternational
Monetary Fund (IMF), the
Bank for lnternational
The problem with any
major rescheduling program
is that future economic
shocks and recessions
cannot be fully foreseen
and could topple any
arrangement.
The
PLAIN TRUTH