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Heavy Debt Payments Stifle Growth, Making Repayment More Difficult : Latin American Nations Want Out of Catch 22 Situation

September 28, 1986|JUAN de ONIS | Times Staff Writer and RIO DE JANEIRO

The seaside city of Salvador, once the colonial capital of Brazil, is so rich in ancient churches and tradition that it is classified by the United Nations as "a heritage of humanity." But poverty and urban decay are eroding the quality of life and pastel beauty of the 17th Century city.

"When I visit the people in the shantytowns, they talk to me about the children who have died of dysentery for lack of clean water," Mario Kertesz, 42, the mayor of Salvador, said not long ago in an interview. "All I can say is, 'Don't lose hope'--because I don't have a solution."

The rich cultural inheritance of Salvador is not matched by any financial legacy. The city of 1.4 million people is run on a municipal budget of $25 million, nearly all of which goes to pay the city's day-to-day bills.

For money to spend on any longer-term projects such as sewers and water works, Salvador had to turn to foreign banks. In that, it was not alone. A number of other cities in Brazil, similarly lacking a tax base, also borrow from abroad. Now these cities have to pay a total of $160 million a year to service their foreign debt--and many do not have the money.

Holds Back Growth

That is the situation through most of the Third World. Like a blood clot, the $830-billion debt of the developing countries is blocking circulation of fresh financial blood. And this is holding back the economic growth that is needed to enable the debtors to repay what they owe.

Leaders of the borrowing nations say that this is their dilemma: Without growth they cannot repay existing loans; without new loans they cannot pay for growth. Lenders see the problem but are reluctant to commit new money when the borrowers are already struggling to pay what they owe.

Four years into the current Third World debt crisis, there is still no international solution to this vicious circle. And in the debtor countries, there is mounting political discontent as citizens demand from foreign banks and governments sacrifices to match those suffered in the debtor nations.

Mayor Kertesz, for instance, leads a movement of 20 big city mayors who are putting pressure on Brazil's federal government to postpone foreign debt payments and use the money to cover local urban needs.

"If a democracy doesn't face the problems of the cities, it will be political suicide," Kertesz said.

And 3,500 miles across the South American continent, Kertesz' social judgment is echoed by Msgr. German Schmidt, an auxiliary bishop of Lima, Peru. Schmidt is responsible for Villa de Salvador, a sprawling shantytown on the outskirts of the capital city, and other surrounding "new towns" where 300,000 people live in poverty.

Economic Violence

"It is not possible to pay off the foreign debt as quickly as the banks would like without endangering the lives of our people," Schmidt told a reporter. "This is a form of economic violence."

The mayor and the bishop represent widely held political sentiments in Latin America. Many here attribute a host of economic and social ills to the burden of debt repayment.

Major Latin American debtors say they are being drained of financial resources. They are being forced to pay off on debts at a faster rate than their export earnings can sustain. What they need, they say, is more time and new money.

The private international banks who are owed all those billions of dollars have been forced to give them time, but they strenuously resist any increase in lending.

"If the banks have to assume the risk, there will never be new money voluntarily again," said Roy Scott, the Latin American regional chief for Bank of Nova Scotia.

This, as many international economic observers see it, has created an impasse that is dangerously unstable.

In Peru, which owes $14 billion, the populist president, Alan Garcia, decided to put growth before debt repayment. He unilaterally ordered that Peru's debt payments in any year not exceed 10% of its export earnings. As a result, Peru has been shunned by the world banking community and was declared ineligible for new loans by the International Monetary Fund.

Serve People First

So far, there has been no major debtor nation has followed Peru's example. But British economic analysts Lord Lever and Christopher Huhne warned in their recent book, "Debt and Danger," that "If pushed to make a choice between servicing the banks' debts and serving their people, few if any of Latin America's leaders are likely to fail to serve their people."

If that happens, many international banks could be endangered. A default, for instance, by Brazil, Mexico and Argentina, with a collective debt of $250 billion, could bring about the insolvency of nine major American banks involved in Latin America: Citibank, Manufacturers Hanover, Bank of America, Chase Manhattan, Morgan Guaranty, Bankers Trust, Chemical, Continental Illinois and First National of Chicago.

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