BRAZIL CRISIS SPURS RETHINK OF DEBT STRATEGY
Brazil's economic crisis is forcing a
wholesale re-examination of the established strategy for
dealing with developing-country debt, leading bankers say.
    While finance minister Dilson Funaro is unlikely to succeed
in his attempt at seeking an outright political solution to the
debt problem, Brazil's suspension of interest payments on 68
billion dlrs of commercial bank debt has convinced at least
some bankers that new ideas are needed.
    "The time has come to look at the alternatives," one
seasoned debt rescheduler said.
    Even before Brazil's move, the difficulty in syndicating
the 77 billion dlr financing package for Mexico agreed to in
principle last October was prompting top bankers to examine 
the way they are managing the debt crisis.
    Federal Reserve Chairman Paul Volcker, too, spoke recently
of "debt fatigue" and the need to breathe new life into debt
rescheduling procedures.
    There are already signs of change. Japanese banks are
setting up a jointly owned firm to which they will transfer
some LDC loans in a bid to strengthen their balance sheets,
improve financial management and get tax breaks.    
    But bankers said a move toward a greater governmental role
will be gradual. "The process is such that you cannot expect
tangible progress in a short period of time," one banker said.
    Certainly, Funaro got a frosty reception in Washington and
several European capitals in the past week when he called on
government officials to explain Brazil's crusade for a
political dialogue on debt.
    Assistant U.S. Treasury Secretary David Mulford, for
instance, criticized what he called large-scale solutions such
as debt forgiveness or the creation of new multilateral lending
agencies.
    "While such approaches may have some political appeal, they
are impractical and ultimately counterproductive," Mulford told
a House subcommittee this week. He could have added that any
proposal that might be construed as a bail-out of U.S. banks
would be a non-starter in Congress.
    But bankers said the Reagan Administration could promote
accounting and regulatory changes to foster debt-equity swaps
and debt securitization and to enable banks to consider
interest capitalization as an alternative to new loans.
    Experts say the government must also make it easier for
banks gradually to write down their third-world loan books.
    Mulford, in his Congressional testsimony, urged the banks
to explore different options. "The banks should be encouraged
to look at the so-called menu approach," he said.
    Bankers said the aim would be to keep the loan syndicates
intact or, conversely, to allow small banks to write off their
exposure in a way that is not detrimental to major lenders.
    Big banks say it is unfair that small creditors continue to
receive interest on old debt even if they do not contribute to
new loans. In effect, large banks say they are making new loans
that fund the interest payments on the old debt.
    To solve this problem - and to streamline the cumbersome
negotiating process - Argentina has revived the idea of "exit
bonds", which would be issued at a discount to small creditors
in exchange for their existing debt, bankers said. The banks
would be rid of the loans but would have to recognize a loss.
    Amid the swirl of new ideas, even the role of the
commercial bank advisory committees has come under scrutiny.
    The principle of consensus on which the panels operate was
challenged recently when Citibank - ironically, the original
architect of the committee system - stubbornly refused for a
time to endorse financing offers to the Philippines and Chile.
    The strains have not gone unnoticed in Washington. "There
does seem to be a lot of speculation about the frailty of the
bank advisory committees," a U.S. official said.
    Brazil's Funaro heavily criticized the panels in London on
Monday, charging that they are unresponsive to new ideas and
that U.S. banks are over-represented on them.
    Hannes Androsch, chairman of Austria's
Creditanstalt-Bankverein, said there was some truth to the
charge. "Sentiment is growing in Europe that we're no longer
prepared to bail out the U.S. banks," he told reporters in New
York this week.
    While U.S. bankers obviously see things differently, some
have started to wonder whether the advisory committee is still
the right tool for the job.
    "The debt crisis has probably evolved beyond the capacity
of commercial banks alone, at least in some cases," one top New
York rescheduler said.
    But, with governments unable or unwilling to play a larger
role, bankers see no alternative to the advisory committee.
    "It's the worst form of government there is apart from all
the others," one banker said, paraphrasing former British prime
minister Winston Churchill's opinion about democracy.
 Reuter
