LDC DEPT PROBLEMS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84B00049R001102640010-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 2
• Document Creation Date: December 22, 2016
• Document Release Date: March 15, 2007
• Sequence Number: 10
• Publication Date: August 27, 1982
• Content Type: REPORT

Approved For Release 2009/04/01: CIA-RDP84B00049RO01102640010-6
Perspective
International
Economic & Energy
0
Weekly
27 August 1982
Mexico's severe financial crisis is dramatic evidence of the mounting financial
problems of the less developed countries. We expect the LDCs' medium- and
long-term external debt to approach $550 billion by yearend, up from $150 bil-
lion only seven years ago. Although an increasing number of countries have
been in arrears on their debt payments, and many of these have required debt
relief, until this year all were small with an aggregate debt of only $10 billion,
or some 2 percent of the total debt of non-OPEC LDCs. Now, including
Mexico and Argentina, countries in evident financial trouble have nearly 25
percent of total LDC debt.
Mexico's pursuit of overambitious development goals, past heavy borrowing,
and the Mexicans' sudden loss of confidence in their cwn government's
economic management underlie the current severe liquidity crisis. Mexico is
essentially out of foreign reserves yet faces the need to repay more than $30
billion in short- and long-term loans over the next 12 months. In what looms as
the world's largest debt reschedulin?, Mexico City will probably seek to roll
over more than $20 billion in short-term bank debt and to stretch repayment
t,,rms on maturing long-term credit. If strong Mexican leadership proves
lacking, the process of building a consesus for an austerity program will be
slow, leaving creditors nervous and the Mexican financial situation unstable
for at least several months.
Argentina-the third-largest LDC debtor-faces serious debt repayment
problems in the wake of economic disruptions triggered by the Falklands
conflict. The resignation this week of the Economy Minister and the Central
Bank president in a dispute over economic policy can only reinforce bankers'
fears about Argentina. We expect that Argentina will be forced to seek a
formal rescheduling of the $15 billion in debt obligations coming due in the
second half of 1982.
Other LDCs are also encountering financial difficulties because of depressed
export earnings and rising debt servicing burdens. Many of them are
increasingly vulnerable to loss of banker confidence, especially since more and
more of their debt is short term. Candidates for debt problems include Chile
and Peru and, particularly if oil prices remain soft, Venezuela and Nigeria.
Secret
GI !EEW 82-035
27 August 1982
Approved For Release 2009/04/01: CIA-RDP84B00049RO01102640010-6
 ?~, Sngret
Secret
27 August 1982
Approved For Release 2009/04/01: CIA-RDP84B00049RO01102640010-6
Like Mexico and Argentina, Brazil is spending well over half of its export
earnings just to pay interest on debt. So far, however, Brazil continues to
obtain new credits, albeit at a high cost. Growing numbers of Brazilians are
publicly discussing the voluntary renegotiation of all or part of Brazil's $80 bil-
lion debt as a way of alleviating external constraints on domestic growth. Some
Brazilian economists have called for the major Latin debtors to seek a
collective renegotiation. Despite the debate, we believe that there is no support
for voluntary debt renegotiations in Brazilian Government circles or indeed in
other Latin capitals.
The Mexican and Argentine crises are bound to stimulate a great deal of
concern about the stability of the international financial system. Although
reschedulings by Mexico and Argentina will not of themselves impair the
profitability or solvency of the creditor banks as long as full interest payments
are made, they are likely to make bankers and regulatory authorities a great
deal more nervous about financial exposure not only to those countries but to
other LDCs.
While LDC financial problems are not limited to Latin America, its debt
management difficulties have the most serious implications for the United
States. Any visible role the US Government and US banks take in resolving
Latin economic problems by encouraging austerity measures will leave
Washington vulnerable to charges of meddling in these countries' internal
affairs. The Federal Reserve reports that US banks-excluding foreign
subsidiaries-had same $70 billion in credits extended to Latin borrowers at
the end of first-quarter 1982. With suck a large exposure, US financial
institutions could be whipsawed by rumors, unanticipated shocks, and the
failure to arrange orderly debt reschedulings. In the event of a banking crisis
massive Central Bank intervention would be required, and LDC access to
private credit would suffer.
This article is Confidential.
Approved For Release 2009/04/01: CIA-RDP84B00049RO01102640010-6