Chicago bankers say they are looking at Treasury Secretary Nicholas Brady`s proposed plan for reducing Third World debt as ”an international Chapter 11.”
Some analysts believe it may be easier for the large regional banks in Chicago to accept the idea of voluntary debt reduction than for major New York banks that haven`t increased as sharply their reserves against loan losses.
There is little enthusiasm here, however, for new lending to less developed countries.
”The regionals, which generally have smaller (Third World) debt and higher reserves, are going to be able to get rid of the last of their Third World debt in one fell swoop through this plan,” said Robert Hormats, vice chairman of Goldman Sachs International.
”Obviously, we are in a better position to come out ahead,” said Thomas Theobald, chairman of Continental Bank Corp. Continental Bank has reserves of nearly 50 percent on its $1.9 billion of Third World debt.
”However, the majority of (such) debts are held by banks that have 25 or 30 percent reserves,” he added. ”I suspect there won`t be deals unless they are agreeable to the majority.”
The Brady plan, though only vaguely defined at this stage, seems to suggest that commercial banks voluntarily forgive some loans to less developed countries, in return for some form of guarantee through international funding agencies that the reduced debts will be paid on time.
Brady also expressed the hope, in his speech introducing the plan, that debt reduction would return debtor nations to creditworthiness and inspire new private lending.
Chicago area bankers say they are willing to treat troubled countries that are trying to improve their economic status as they would ”any valued corporate customer.”
”We have to look on this as a way of dealing with any borrower in trouble,” said William McDonough, vice chairman of First Chicago Corp. ”We often restructure loans for large corporate or individual customers, in preference to bankruptcy-but only for those who are trying to help
themselves.”
First National Bank`s outstanding Third World debt totaled $2.1 billion at the end of 1988, with about 48 percent reserves.
”But even in domestic proceedings, people don`t forgive debt without receiving something in return,” Theobald said. ”You have to have assurance that you are going to get reliable debt service on the new deals. That`s why we need a coalition of governments and supernational agencies to fashion something to achieve the same purpose as a Chapter 11.”
Yet executives of many major Chicago area banks, and many financial analysts, are leery of any new lending to troubled Latin American countries.
”Somehow, it seems doubtful that new lending and debt reduction are going to go hand in hand,” said Alan Stoga, an economist with Kissinger and Associates in New York. ”I can`t imagine banks taking large losses with part of their portfolio and putting new assets in with the other part.”
”I can`t believe the new focus is going to be heavily dependent on new lending,” Theobald said. ”That`s the thing that hasn`t worked all along. There may be some incidental new money in the packages, but it can`t be material, or we`re back where we started.”
”The kind of general lending of the 1970s can no longer be done,” added McDonough. ”Any new money will either be for specific short-term trade financing, or for specific projects.”
”It`s obvious these countries are going to need fresh capital,” said James McDermott, an analyst at Keefe Bruyette & Woods in New York.
”In order to keep banks interested, international agencies and creditor nations are going to have to develop some kind of protection program for new money as well,” he added.
”There is likely to be a very strong demand on the part of banks involved in these projects that international institutions like the World Bank be a co-lender,” McDonough added. ”The World Bank is good company to be in, even if there is no formal guarantee.”
”We are willing to participate in new lending, but we are going to need third-party guarantees on that side as well,” agreed B. Kenneth West, chairman of Harris Bankcorp. Harris has about $180 million in outstanding Third World debt, with about 40 percent in reserves. Northern Trust Corp. reported $108 million, with 62 percent in reserves.
West expressed another concern, that since the debt reduction plan is voluntary, there will be ”free riders.” He would like to see the Brady plan structured in a way that demands a high percentage of participation by the banks-”like about 100 percent.”
Although most observers call the Brady plan workable, some fear it falls short.
”Now official government policy supports the direction the market has been moving, and that`s a very good sign,” Theobald said. ”Informally, banks and debtor countries have done a number of swaps and restructuring of debts already.”
”The recognition that debt reduction is a key element of the next chapter is terribly important,” said economist Stoga. ”But the immediate need is for debt-service reduction. These countries need to pay less interest now, because that impacts their current cash flow. They need an awful lot of debt-service reduction as well as new money. This plan goes in the right direction, but not far enough.”
The World Bank will be holding meetings to look at making new loans to Mexico soon. Sources say that Venezuela and the Philippines are next on the list.
”The Brady plan is the skeleton,” said one international banking source. ”The clothes will be added gradually as the world financial community deals with each individual case.”
The structuring of the Mexican package will be considered a precedent for new strategies on Third World debt.
For example, a Mexican loan package from the World Bank might provide a certain amount of money, with 75 percent designated for trade financing and 25 percent directed to finance repurchase agreements, or some other combination that would achieve the same result: new money plus provisions for debt reduction.
It is assumed that most of the debt reduction will consist of new bonds issued by the debtor nation-presumably for a lesser total amount, at some negotiated interest rate-that will be used to repurchase the old loans. The new bonds would be backed by some kind of pool of money or some funding provisions in new lending packages from international agencies that would be available to cover interest payments.
However, some feel even this protection for ”old money” may not be enough.
”We are going to have to see both principal and interest enhanced to get banks to play in the magnitude needed,” Stoga said.
The World Bank, which is supported by contributions from member nations, is quite anxious that its role not be perceived as bailing out commercial banks, according to some sources.
”The role of the World Bank is to provide support to borrowing countries to broaden their scope,” a spokesman said.
”The World Bank has the responsibility to make these countries return to reasonable levels of growth; its purpose is not to bail out banks,” McDonough said. ”The idea is that the World Bank funding will induce creditors to reduce debt, so everybody benefits.”
According to Hormats, of Goldman Sachs, the plan will not be viewed so much as a bailout if banks get lower interest rates on the new packages.
”If they put in new money, it will be seen as even less of a bailout,”
he said.
Most bankers hold out little hope for the suggestion by William Seidman, chairman of the Federal Deposit Insurance Corp., that U.S. tax laws be changed to benefit banks that cooperate. They say that would smack too much of a taxpayer bailout at a time when taxpayers are smarting over the rescue of the Federal Savings and Loan Insurance Corp., the savings industry insurance fund.
One critical part of the Brady plan hearkens back to a previous plan, developed by Secretary of State James Baker when he was treasury secretary.
”We cannot lose sight of the need for economic reform; that has to be the basis for everything,” said the World Bank spokesman. ”It is a very, very critical element in any strategy.”
”The single variable is that the individual country has to manage its own affairs well; it has to deserve support,” McDonough concluded.
