Greedy Bankers Are Not the Villains
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LEAD: After agonizing negotiations, Mexico and its creditor banks are nearing an accord on debt relief. Even if the final agreement occurs in time for this week’s Paris economic summit meeting, there will be only modest cause for celebration. Roadblocks will continue to stymie adequate relief for Mexico and dozens of other debtor nations. After agonizing negotiations, Mexico and its creditor banks are nearing an accord on debt relief. Even if the final agreement occurs in time for this week’s Paris economic summit meeting, there will be only modest cause for celebration. Roadblocks will continue to stymie adequate relief for Mexico and dozens of other debtor nations. Third world bank debt of some $600 billion has become ruinous. Yet the banks refuse to grant sizable relief. To most observers, the banks appear cruel and shortsighted. But the major roadblock to debt reduction is not greedy bankers. It’s the bargaining structure within which creditor banks operate. Every banker knows that third world debt must be reduced. Yet no one banker makes the offer. So negotiations remain deadlocked. Jeffrey Sachs, a Harvard University economist, is a keen observer of the third world debt negotiations and serves as a consultant to many debtor nations. He describes the bargaining impasse as a ”free rider” problem. Agreements that are in the collective interest of all banks are in the individual interest of none. Suppose Bank A grants Mexico debt reduction. The goal is to help Mexico. The effect is otherwise. By reducing its claim on Mexico, Bank A leaves Mexico with more dollars in its vaults for all other creditor banks to claim. Bank A’s generosity has served only to enrich rival banks, not Mexico. So Bank A makes no such foolish offer. If Bank A believes that other commercial banks, the International Monetary Fund, or the Japanese and U.S. Governments will reduce Mexico’s debt, then the bank has even better reason to sit tight. As Mexico’s financial situation improves, Bank A’s loan becomes all the more secure. The impasse persists as long as individual banks have nothing to fear by stonewalling. But last March, the U.S. signaled a tilt in policy toward Mexico coupled with new pressure on the banks. The Brady Plan called on commercial banks to grant debt reduction in exchange for international guarantees on the outstanding balance. In the past several weeks, the Administration has tilted even more, and the banks hear rumblings that Congress may impose sanctions on those that refuse debt reduction. Stonewalling has become potentially costly. Mr. Sachs concedes that the new tilt in U.S. policy has helped break the bargaining impasse between Mexico and its creditors. But the tilt has been too slight so far to do Mexico much good. He fears that the impending accord will provide more debt postponement than actual reduction. What Mexico and the other third world debtors need is a resounding commitment by the U.S. to sizable debt reduction. Not new loans. Not financial shenanigans. Just pure reduction. So far, signals from U.S. officials have communicated no such clarity. |