Latin American Debt: Act Two

There is a distinct rumble. Is it the noise of an impending second crisis of Latin American and other developing country debtors, or is it the start-up of world economic recovery, which will gradually pull lenders and borrowers alike away from the edge of a financial abyss?

In this article I will start by reviewing briefly the elements that make Latin American debt a far graver problem than the debt of developing (or socialist) countries in other areas. I will then review developments since last fall, leading to the conclusion that a serious gap now looms between the current account deficits of Latin American countries and the external financing sources needed to offset these deficits.

This statement of the problem is followed by an assessment of the general and specific requirements for action, including a review of existing proposals and my own specific suggestions. These include measures that might be taken in the near term to improve the prospects for lasting recovery. My central thesis is that the problem remains acute and that additional measures and contingency plans are urgently needed.

II

The debt problem of developing countries is largely a Latin American one. The relative size of the debt of the region is much larger than in the case of other developing areas; its composition-two-thirds from commercial banks-gives it short maturities and commercial interest rates; and export earnings with which to service the debt are modest in relation to the burden of debt service. These features mean that the grave economic problems which have been facing most Latin American countries in the last year or so are unlikely to spread, at least with the same force, to other developing areas.

On the other hand, the regional concentration of the problem means that virtually all countries in Latin America and the Caribbean are viewed as one by commercial bank lenders, an attitude which has drastically cut capital inflows to the region, regardless of country differences, and thus makes the task of recovery much more difficult. The fact that the external debt has been built up over the last decade, but especially in the last four years, shows that the problem is not only a cyclical one but a longer-term one. As in a natural catastrophe, the first step is emergency action, followed later by reconstruction and recovery.