BAKER AND VOLCKER SAY DEBT STRATEGY WILL WORK
Treasury Secretary James Baker and
Federal Reserve Board chairman Paul Volcker have told House
leaders they were optimistic their debt strategy would work,
but acknowledged the crisis could take a sharp turn for the
worse, Congressional sources and U.S. officials said.
    Baker and Volcker gave these views at closed-door talks 
yesterday with Speaker Jim Wright and other House leaders.
    But the two architects of the Third World debt strategy
gave no indications they would abandon their plan to promote
economic growth and reform.
    "They expressed optimism about the current state of affairs,"
one participant at the meeting said.
    However Baker and Volcker, accompanied by Deputy Secretary
of State John Whitehead, acknowledged there were risks. "And if
things turned sour, they could turn very sour," a source quoted
them as saying.
    They were responding to questions from Wright, a Texas
Democrat, who called the meeting two weeks ago because of his
concern the debt crisis was deepening, an aide said.
    The Speaker asked all three men about the risks to Latin
American democracy and the danger that demagogues of either
left or right could wrest control and halt debt repayments.
    Even though the Fed chief joined Baker in expressing more
confidence in an optimistic outcome, Volcker was especially
concerned about the political risks, and in particular the 
fatigue with belt-tightening. The central banker said resolving
the debt crisis would be a "struggle".
    Since taking over the Speakership at the start of the year,
Wright has shown himself an able political adversary of the
administration on budget strategy.
    His involvement in this issue also seems to signal that
Congressional interest in the debt problem has to be taken more
seriously now than in the past.
    More worrisome for administration strategists is the
possibility that Congressional debt proposals essentially
granting debt relief will be attached to a trade bill.
    "When (Baker and Volcker) left the Speaker's office, they
knew it wasn't just talk," one source at the meeting said.
    The two economic policymakers listened patiently to
descriptions of plans for a Third World debt facility, backed
by gold reserves of the International Monetary Fund.
    The agency could buy up or guarantee developing country
debt at a discount and resell it to debtor nations undertaking
economic reforms.
    The U.S. Treasury would be required to ask other countries
for their views under a bill approved by a House Banking
subcommittee and sponsored by John LaFalce, a New York House
Democrat. A similar proposal is being fashioned by Bruce
Morrison, a House Democrat from Connecticut.
    The sources said House Banking and Foreign Affairs leaders
also attended the discussions.
    U.S. officials said both schemes are regarded by the
administration as providing debt relief. Baker said yesterday
the concept of debt relief was misguided. "If we write it all
off and declare defeat, these countries will decay and wither
on the vine," the Treasury Secretary said of an end to capital
inflows that would follow debt relief.
    Baker has said his own plan was broad and would embrace new
innovative ideas bringing together debtors and creditors.
    Baker and Volcker launched their in late 1985, calling on
commercial and multilateral banks to increase loans to major
debtors pursuing inflation-free expansion and open markets.
    "They sat down together to discuss the implications for
Latin America and feel each other out on the best way out," a
Wright aide said of the meeting. Other sources said they expect
the dialogue to continue.
    The talks come after Brazil's interest rate moratorium and
an uncompromising stand by the country's finance minister,
Dilson Funaro, after talks with western leaders.
    Some U.S. officials feel Funaro's consolidation of power
over the Brazilian economy with the ouster of Planning minister
Joao Sayad is further reason to worry.
    Another proposal, to allow regulators to grant commercial
banks more flexibility in accounting for Third World loans, has
been presented by Senator Bill Bradley, a New Jersey Democrat,
but did not come up yesterday.
    Wright, who has not hitherto concerned himself with debt,
"is concerned about the potential for damage. The Latin American
issue, at least on the surface appears to be a new danger," said
an aide, who asked not to be named.
    There are signs the Brazilian situation and a reluctance by
commercial banks to join in new cash loans even for debtors
following substantial reforms has concerned U.S. officials.
    At the State Department, Secretary of State George Shultz
is being advised the "Baker plan is going through a rough patch"
while Treasury officials are urging commercial banks to adopt
more flexible approaches to guarantee their continued
participation in the plan.
   
 Reuter
