International Finance At The Crossroads
Anis Haffar
More innovative ideas are being offered that international agencies ‘buy some of the debt' and resell it to investors in industrial nations and for the banks to exchange their loans and interests thereof for ownership in debtor countries' industries.Wealth, however, does not occur automatically in the skies. Its cultivation therefore required a conscious effort, knowing that most of the wealthy nations of today were poor at some point.
Today the amount of debt, its domestic and political consequences, and the perceived impossibility of servicing (let alone repaying) it have strengthened the resolve to examine the international banking system. The increased response from home pressures may soon outweigh any definitions of credit worthiness, and negative rates of economic growth.
There used to be a time when you could borrow 100 units of money for a year and simply paid back the 100 plus 6 of interest. Not so today. At the rising compounded rates, the chances are the debtor may default. Clearly if we stuck with the "business as usual" attitude of international lending, business could grind to a halt.
Karl Marx did not offer many clear cut solutions when he foresaw the future. But he did the next best thing: he spent his life on earth composing many, many words detailing our predicament which has come to a head today as the Argentine government realized. "By the end of December (1984), we must pay $20 billion. We don't have it. We want to pay, so how do we pay?" Then on second thoughts, "We will pay, but only if the conditions of international commerce permit us to do so."
Hence, the notion that "business as usual... do or die" contrasted with the subtleties in human sympathy designed to install confidence, trust and perhaps an in-built economic renaissance.
At issue is the 1½ percentage point increase in the prime lending rate since March this year which has added an extra $600 million to Argentina's annual interest payment, and a projected $900 million to Mexico's. Cumulatively the developing economies' capacities for trade have dwindled.
Capital and Debt
The high amounts of interests being paid on capital has had a great effect on global production as has the rise in energy prices. Economists define cap- ital as the wealth available to invest in the production of new goods. In this sense, capital represents the surplus of production over consumption.All economic systems, regardless of ideology, need capital investment to grow. In a developing economy, the people may represent capital as they performed simple tasks themselves - when certain tools and equipment were not available. This is how China set about rebuilding under Mao Tse Tung, and the resulting ability to feed a billion people as of now.
For an economy to grow, the available capital must be invested in future production and research. Without this constant ploughing back economies falter. Just as important, if capital is geared for personal or military con- sumption, an economy can fail because capital has been misallocated and produced no benefits of substance.
Once upon a time it was thought that economic recovery in the industrialized nations would diminish the unpleasant question of Third World debts. Rising interest rates tore that argument apart, with interest liabilities at record levels. New schemes are being discussed to serve as a buffer.
The national budget just released by the Nigerian military government is a case in point: an enormous sum of $784 million was apportioned to satisfy the soldiers appetite for convenience, $375m for the nation's education,science and technology, (and it gets worse) a mere $34 million for agriculture, water resources and rural development for a 100 million people. Such unsympathetic, imprudent methods of government sounded like fiction; they were real.
Poverty is simply one of those things that is the absence of something else - wealth in this case. Wealth, however, does not occur automatically in the skies. Its cultivation therefore required a conscious effort, knowing that most of the wealthy nations of today were poor at some point. Many governments have increased the national debt instead of creating capital, preoccupied with the transfer of wealth. They have borrowed and consumed instead of investing. The cost of western capital may remain high, and the increased debt will con tinue to divert a substantial portion of national income to debt service in the form of exorbitant interests.
The expense of carrying debt is punitive to everyone. When a government increases its national debt, it is borrowing money and promising to pay it back in the future. Who lends the money to a government? Just about everyone: foreign banks, individual savers, commercial houses, and the government itself through its central bank by printing the notes.
The size of the currency and capital are not synonymous, so that increasing the supply of money does not increase capital; in the end we could have more paper chasing fewer (or no) goods and services. This is inflationary when the annual growth of the money supply consistently exceeds the rate of growth of the nation's total output of benefits.
Loans from the industrialized nations have become the easy dream of capital by many developing nations. The world economic structure envisioned by the world bank and affiliates also supported this fact. But the price is high.
Interest Schemes
Once upon a time it was thought that economic recovery in the industrialized nations would diminish the unpleasant question of Third World debts. Rising interest rates tore that argument apart, with interest liabilities at record levels.. New schemes are being discussed to serve as a buffer.One approach is the "interest capitalization" method. When interests rose over a set point, the excess would be added to the principal. The lenders view such negative amortization to stretch repayment over a longer period. Other less strenuous methods included: lowering the fees that banks charge for negotiating loans; lengthening the grace periods during which a country pays little or no principal; stretching the lifetime of the loans; and writing loans for three or four years to avoid repeated cycles of yearly loan reschedulings.
More innovative ideas are being off- ered that international agencies "buy some of the debt" and resell it to investors in industrial nations and for the banks to exchange their loans and interests thereof for ownership in debtor countries' industries.
Capping interest rates: This is the latest fad. A cap could place an upper limit, say 15%, on interest rates, but debtor nations would be expected to repay excess interest once rates fell below the cap again. No guarantee existed that if interest rates climbed to the limit they would not stay there. Far from freeing the pressures of the inter national debt problem, capping would seem to postpone it.
Mexico came out with its unilateral solution: it hoped to reduce interest payments as a percentage of exports to about 30% by 1988, from about 39% in 1982 irrespective of the rise in the prime rate.
Borrow to bust
For the past few years, Brazil was described as the "closest thing to a basket case," in debt to the tune of some $100 billion. By April, the world's banks had guaranteed $6.5 billion to help this nation "stay afloat" in 1984. That is, for the time being the IMF would lend Brazil just enough money to pay the interest obligation. But when will the principal balance go away? It poised itself like a malignant cloud and growing.The banks may extract as much interest as possible, and for as long as possible with the clear possibility that interest payments could surpass the initial loan a few times over. More and more, social and political disruptions in debt ridden nations seemed to present the future outcome as people began to feel the pinch.
The demands of the marketplace sometimes make it hard to remain absolutely pure. But how can there be global prosperity when the individual economies are sick? Such a posture could cause distrust in the world's financial system. Yet international business is good business and must be encouraged, in good faith.
Creative Banking
The U.S. treasury secretary Regan said sometime ago that neither the borr- owers or the creditors will be bailed out by the Reagan administration. And that non-payment of interest by debtors wouldn't present a threat to the banking structure: "Even the ones that take a hit" - a slang for the bankers' losses - "their capital is not in jeopardy. Their earnings may drop.'The case of Chicago's Continental Illinois bank's failure contradicted the secretary's earlier optimism. The government spared much of the anguish in an effort to prevent panic and preserve the banking system; a position this writer supported. Yet the deeper sources of instability as to why the nation's seventh (perhaps sixth) largest bank went under has not been addressed. There was the bank's need for more "live" money to show on the balance sheet for the stockholders, and the debtor nations' need to pump the hard earned exchange into their own economies.
Some of the bank's nonperforming loans included one to Latin America. The international banking network is such that the taut on the weakest link jolts the entire system. Before the end of this year, it seemed likely that many other nations will have come to grips with reality. The challenge now is how the banking order can endure a world economy in which the partners can all grow in a "win-win" situation. The world has the capacity to think and do this necessary adjustment. It is in everybody's interest.
The banking industry has outgrown the era when all bankers had to do to succeed was to look fat and prosperous. Times have changed. Banks in the future will require a broad spec trum of new people capable of seeing the world in a creative way, lucid with life; literally, caring for the mother's child. Profit is necessary, it could be the means to do greater good for the living. Bank of America seemed to have taken the hint; (according to Newsweek) they have recently introduced a plan in part to encourage executives to flex with the times. It is easier to make the best things in the proper climate.
World fisheries conference
MORE than 150 countries will take part in a World Conference on Fisheries Management and Development to be held at the Rome headquarters of the U.N. Food and Agriculture Organ- ization (FAO) from 27 June to 6 July.Up to 1,000 delegates and observers are expected to attend the eight-day Conference, with most delegations headed by ministers of the highest officials dealing with fisheries affairs in their countries. Seventy internation- al agencies and organisations have also been invited.
According to FAO Director-General Edouard Saouma the meeting repres- ents "the first international effort to examine the practical realities of fisher- ies management in the context of the new legal regime of the seas.'
The World Conference will have three main objectives, according to Mr J.E. Carroz, Secretary-General of the Conference and FAO Assistant Direct- or-General for Fisheries: to seek agreement on strategies and program- mes for increasing the contribution of fisheries to world food supplies; to foster the self-reliance of developing countries to manage and develop their fishery resources; and to increase international co-operation in fisheries management and development between developed and developing countries and among developing countries themselves.
The Conference will consider a world-wide Strategy for Fisheries Management and Development and will also seek agreement on, and financing for, a number of specific action programmes.
The programmes will deal with planning, management and development of fisheries; development of small-scale fisheries; international trade in fish and fishery products; aquaculture development, and the role of fish in alleviating under-nutrition.
Of the present total catch of approximately 76 million tons a yelly only about two-thirds is actually directly consumed as food, with gh rest going to fish meal or lost the the spoilage. Since the early 1970s has average increase in the world catch has been little more than 1 percent a year, considerably less than population growth.
The challenge seen by FAO experts, therefore, is to double the supply of fish food in the next two decades, and to ensure that a reasonable share of this increase goes to people in developing countries.
