By Father Eugene Ryan, SSC

Bursar General of the Columban Fathers

ONE TRILLION DOLLARS. This is the amount owed by Third World countries to the richer nations I did not gradually mount up over a period of 30 or 40 years: It mushroomed in the last 15, and is still growing alarmingly.

This debt is effectively strangling the Thrird World and reducing it to a state that border on slavery. It is tearing apart the economic and social fabric of Latin America and bringing with it what Pope John Paul II recently called a ‘state of inhuman poverty.’ Even the Wall Street Journal refers to the ‘intractability’ of this debt problems and ‘its crushing human toll.’

Many Latin America countries are now so deeply in debt that all their new loans are devoted entirely to paying the interest on the old ones. The result is more debt and yet more interest. They owe so much that to pay it they are siphoning off funds they need desperately to alleviate crushing poverty at home.

The countries of Latin America are responsible for over $400 billion of this trillion dollar debt. $ 400,000,000,000.00: four hundred thousand million. Interest payments on this debt gobble up such a huge slice of export earnings that in  effect these countries are working for the International Monetary Fund, the World Bank, and the a consortium of private banks.

Between 1982 and 1985 Latin America somehow managed to pay back over $106 billion to foreign banks. At the same time they were getting poorer, and fast. Living standards fell 10% in Mexico, 14% in Peru, 17% in Argentina, 25% in Brazil, 30% in Bolivia and a staggering 35% in Venezuela.

Say Cardinal Arns of Sao Paolo, Brazil: It’s impossible to go on this way: we have already taken everything the people had to eat, even though two thirds of them are already going hungry. We must stop giving blood and misery of our people to pay the First World’.

Brazil paid back $69billion in interest between 1979- 85 and its only reward is to be deeper in debt than ever. The Ministry of Planning estimated in 985 that two-thirds of the populations were undernourished. Yet Brazil now trail only the U.S. in the Food exports- soybeans, orange juice chicken and coffee head the long list of food exports.

Bolivia’s Medical Council found in 1986 that 80% of Bolivia’s live in poverty and half of that number live in misery. Of every thousand children born, 253 die before the age of three. In Peru nutritional studies have shown a steady increase in children’s food deficiency. In Lima 24% of all children were undernourished in 1972. By 1985 that figure had jump to 36%. This is the human face of what many of the world’s financial institution regard as a’ technical problem.’

It is not difficult to understand why this debt is the overriding problem for the Third World. Any assistance or any solution that is not taken in the framework of this problem is only a patch that will never hold anyway since the whole fabric is rotten.

HOW DID WE GET THERE? How in the name of all that is holy could countries rack up such debts in such a short time?

Buying on credits is the only way to for most people to afford home ownership or fund their own or their children education. The vast majority of them pay back their loans successfully and are better off as a result. In the same way, there is nothing infamous or irresponsible about corporate or national debts. It is an integral part of the workings of a modern economy. Our world today could hardly function with out it. So how could a normal economic phenomenon like national debts turn into such an intractable problem?

The ingredients that went into this mess were mainly greed, corruption, stupidity and expediency with a very small dash of honesty and common sense. Like most other messes in this world we find quite a few factor involved.

Until 1973 the Latin America debt was not a great problem. Then came the oil shock. Led by Saudi Arabia’s sheik Yamani, the petroleum exporting countries formed a cartel (OPEC) and raised the price oil. They did not just raise it they blow it right out of water. On October 15th, 1973, Persian Gulf oil was $3.65 a barrel. When the cartel finished their meeting, oil was jacked up to $17.00 a barrel. The Latin American countries had no chance. They had one choice-borrow more money to pay for the oil or watched their economies grind a halt. They borrowed up to this, private banks held only 22% of the Third World Debts, but they wanted the larger slice of the action. Here was their chance. In the next eight years they pushed this sliced to 60%. They were now in this game in a big way. The International Monetary fund, The World Bank, the other government agencies steeped out of the way to make room for the high rollers. Even they did not have that sort of money. Then came the second shock. In 1979 the price of oil was raised again from $ 17.00 to $ 34.00. This was the final straw. The destruction of the debtors nations was well on the way. Now they were getting so heavily into debt they could not pay the interest.

After the first oil shocked in 1973 the debtor nations were barely keeping their heads above water. Any further waves could drown them. And inevitably, the waters got tougher- a lot tougher.

As rising oil prices fuelled inflation, interest rates started to rise. They reached a peak in May, 1981, when the interest rate hit a staggering 21.5%. You will get some idea of the effect of this when consider the result of mere 1% rise in rates: Brazil annual payments go up by $580 million and all of Mexico’s tourist earnings for a year are wiped out.

            But we are not finished with the disasters.

            As the world started  to go into recession ,commodity prices tumbled. The price of thirty primary commodities, on which the Third World depends heavily for export, shrank 34% between 1974 and 1985. For the First World this was a bonanza. The economist estimates that the West saved %65billion in 1985 alone in lower commodity prices- complements of the Third World.

            Reeling from this triple blow- the oil price rise, the interest rate rise, and the fall of export prices, Latin America was now getting into spiraling debt situation, borrowing just to pay interest on the debts. The strain was too great and the first crack appeared in 1982. Mexico threatened to default.

            WE CAN NOT EXONERATE the military Juntas and civilian elites who run the Third World countries. Their inefficiency and corruption has contributed very largely to the present economic morass and its consequent toll of misery.

            Morgan Guarantee Bank estimated that between 1983-85 out of all the new loans given to Latin America 70% were shipped back out. This is grand larceny on the grandest scale. A lot of these billions left literally in suitcases. The Bank even stooped low enough to send couriers for the money. One banker in 1986 admitted that his bank regularly ‘sends a guy with two empty suitcases’ to Mexico City- and this despite the fact that Mexico was broke again and currency controls were in effect.

            A former U.S. State Official points out: ‘Bringing back even a fraction of the $130 billion or so in “flight capital” would take care of the region’s debts- servicing problem for years to come.’

            Any chance? Not a hope. There are so many countries, too many people, too many hiding places.

            During the ten years 1972-82 the OPEC countries were awash with money and so banks were awash with money to lend. This meant ‘easy money’ for the Third World countries. Who jump in immediately? The Generals, and there were a lot of them around in 1972.

            The International Peace Research Institute in Stockholm estimates that 20% of the Third World debt can be attributed directly to arms purchases. Between 1978 and 1985 the Third World ordered an estimated $258 billion in arms and actually took delivery of $220 billion of it Included in this were 13,960 tanks and self- propelled guns, 27,605 armed trooped-carriers, 4,005 combat aircraft, and 34,948 surface-to-air missiles.

            We have seen that oil prices soaked up 25% of Latin America’s external borrowings. Military spending accounted for another 20%, ‘capital flight’ for a further 15%. That really did not leave too much for productive development- and even that was savaged by waste and theft.

            The Dominican Republic has a debt that has been steadily rising for well over ten years. When asked where the money went, Vicinio Castillo, one of the legislators, said in disgust: ‘It just went.’

            Bolivia got a bigger oil refinery than it could ever need. It has never operated above 30% of capacity. It cost $200 million - $120 million over the estimate. The same thing happened with the metal and oilseed processing plants. Yet there is nothing for health, education or basic agriculture.

            General Anastasio Somoza pocketed most of the funds for the reconstruction of Managua after the earthquake. In fact, his hand was in the till right until he was forced to out in 1979. The country owned $4 billion. He left $3 million in the Treasury.

            In assessing culpability here we must bear in mind how the banks threw their customary caution to the winds. They were reckless in their haste to get into this lucrative game. They were fully aware of the extent of inefficiency corruption and outright theft. The proceeds of these activities were welcomed back into private accounts in these very same banks. Most of the people responsible for the mess are either out of the office or outside the reached of the law of both. The victims of this- those citizens who were effectively ripped –off now find themselves paying the penalty, as Cardinal Arns has said, ‘in low salaries and hunger.’

            THE WHOLE THIRD WORLD debtor- to- debtor relationships resembles a giant poker game. We see the classic poker game tactics of bluff and counterbluff. The tragedy is that the stakes are the lives and well-being of millions of people.

            To paraphrase Winston Churchill: Never in history have so many nations owned so much money with so little hope of paying back .’ It is frightening game for lender and borrowers alike.
            There are five players in this game: the International Monetary Fund (IMF), the World Bank, the Bank of International settlement (BIS), the Private Banks, and the Debtor Nations. How ever, standing behind the table, and not taking part officially, are the two must powerful ‘players’ of all: the group  of Ten and the U.S. Government.

            The group of Ten is made up of the General Banks Governors of ten of the World’s wealthiest countries: the U.S.A., Canada, Japan, Britain, France, Germany, Italy, Belgium, the Netherlands and the Sweden. Because of their wealth and this group effectively controls the IMF and the World Banks, and for all practical purposes they are the Banks of International Settlements. The U.S. by the special rule has de facto veto power on all the important decisions of the IMF.

            The Banks will not move with out approval from the IMF and the World Bank

            If you were a debtor nation how would you rate your chances in the company? The two onlookers can see your hand and they control all the other players at the table!

            Blinded by the vision of huge profits and their haste to into the game the banks dispensed with their normal caution. In their greed the banks had been totally reckless-they have acted with complete disregard for what their customers were doing with their loans and what the outcome might be for their own shareholders.

            In 1983 the total combined capital (shareholder’s equity) of this ten banks was $22.6 millions. Their loans for Mexico, Brazil, Venezuela, and Argentina alone came into $40.4 billion. When the bank loses its capital, it must by law close its doors. That was 1983. Today their position is infinitely worse. You can see why they do not sleep well at night. If this country said: ‘Enough is enough we are not going to pay’ then the loans would be in default, and would have to be written by the banks. In the process all the shareholders’ Equity would be wiped out, and more. And it is that more that spell bankruptcy.

            After five years of make –believe the banks are beginning to show some realism. The market- place give them no option. In July 1986, the firm of Shearson Lehman placed a market value on the debts of Brazil, Argentina and Mexico. In July, 1987, they were valued again.

            The economist reports: If loans were to be valued or sold market prices, the Banks’ loss would be twice as bad a they have admitted to. Even worse, the downward drift of prices shows no signs of stopping’.

            The banks are shaky and worried. That part of the reasons for their violent action at even a whisper of default.

            For the countries who cannot pay there are no bankruptcy proceedings. So why Third World Nations simply declare the bankruptcy and forget about their debts? Take what happened in 1982 when Mexico hinted at default. 44% of the capital of the nine largest U.S. banks was tied up in Mexican loans. If Mexico defaulted, 44% of the banks capital would have to be written off, and their stocks would plummet on the market as shareholder fought to sell out. If other debtor nation followed suit, worldwide financial panic would be inevitable. The U.S. Treasury, the Federal Reserve, the IMF, the World Bank and the private banks all hit the deck as a team. Mexico had no chance. She got some concessions, dropped default threats, was loaned more money, and ended the day more in debt than ever.

            The debtors are isolated at the gaming table. The IMF, the World Bank, the BIS and the private banks are interrelated, or have cosy business arrangements with one another. They have an underlying unity of purpose that surfaces at the slightest hint of default.
The only hope for the debtors is to present a united front to their creditors. Despite their cultural and political differences there are signs that this happening. They meet regularly at ministerial level and are actively considering rebellion against the IMF and the other creditors.

            So far, the rhetoric has greatly outweighed the action. However realizing the penalties that can be invoked by the creditors it is not surprising that when IMF will cracks the whip, they all eventually fall into line. They are realistic enough  to know that they dare not to cut off other access to a new capital, and that eventually, whatever they propose must be acceptable to their creditors.

            IS THERE A SOLUTION? In May of this year, standing in the rain in Villarica, Paraguay, Pope John Paul II, told 300,000 campesinos that living a Christian life ‘does not mean simply accepting with resignation the difficulties you encounter’.

            The World debt problem is manageable. What is worrying and troublesome is not the debt itself, but the combination of debt and instability with its consequent economic paralysis and human misery.

            For a country to keep paying beyond its mean ultimately leaves only default or political upheaval as option. The only hope for attacking poverty is economic growth, and it cannot be generated under the burden of debt.

            Robert McNamara, President of the World Bank, was very pessimistic about our hopes of lessening the gap between the rich and poor nations. The problem is not a matter of economics, he said but a question of morality.

            None of the billions owed by the Third World have been paid back- in fact most of them are now even more heavily in debt. The prevailing strategy has been to keep muddling along. It is becoming clear to both sides that this approach is no longer enough. Up to now all discussion has been financial or economic, but a Robert McNamara pointed out, the moral dimension of this problem must be faced.

            The news is not all bad. A good omen for the future is the seriousness of discussion on this debt problem. The proposed solutions are becoming as ‘numerous as the sand of the seashore.’

            We could not be qualified to attempt a solution on our own. However, we are qualified to have our own principles clearly defined- in other words that we would be consider essential in any proposed solution and what we would reject out of hand.

• A clear line must be drawn between ‘old debt and new debt’. What is past is past. Economic growth cannot be generated such a burden of debt.
• To a large extent the old debts must be written down by the banks.
• No debtor should have to borrow just to pay interest. And that stage a debtor would need emergency assistance and advice- not unthinking escalation into further debt.
• Growth inquires investments, not just in infrastructures but also in education, in health, and in social welfare.
• No variable interest rates should be permitted, and all existing one should be rescheduled to fixed rates. For Latin America, a 1% rise in interest rates means 1.6 billion in extra payments each year. Interest rate can swing by a lot margin than this.
• Debt Service payment should never exceed an agreed percentage of export earnings.

You do not have to be financial genius to come to a reasonable understanding of this problem or what it is doing to our lives and hope of the people of Latin America.

Our duty as Christian is to first inform ourselves and then inform others.