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Banks Led Way in Easing Crisis on Mexico Debt

January 10, 1988|TOM REDBURN | Times Staff Writer

NEW YORK — For all the Reagan Administration's efforts to resolve the Third World debt crisis, the longstanding rivalry between two big banking firms here--venerable J. P. Morgan and brash Citicorp--played a far bigger role in creating last month's dramatic breakthrough on Mexico's foreign debt payments.

Last May, while Treasury Secretary James A. Baker III was formally opposing any acknowledgment that Third World nations would not be able to fully repay their huge debts, Citicorp Chairman John S. Reed set the stage for a new understanding by abruptly announcing that he would set aside $3 billion to absorb potential losses on the bank's Latin American loans.

The move stunned and infuriated many bankers and government officials because it was unilateral and came without warning. But, with the young and relatively new Citicorp chairman receiving widespread acclaim outside the industry for finally admitting the obvious about Third World debt, Morgan's chairman, Lewis T. Preston, wanted to recapture the initiative, industry officials say.

Within weeks, Morgan officials presented Mexico with their own innovative approach. Baker was brought into the planning only a couple months ago, when Mexico asked the U.S. government for help in putting together the final pieces of the puzzle.

The result was a complex plan, involving up to $10 billion in Mexican bonds backed by a new issue of U.S. Treasury securities that would allow Mexico to retire between $5 billion and $10 billion of the $78 billion it owes to international banks with a relatively modest cash outlay. The banks, in return for accepting less than face value on current unsecured loans trapped in their portfolios, would receive from Mexico a more secure bond that would be freely tradable on the open market.

"Nothing beats revenge as the mother of invention," one senior banker at a major regional firm said. "Citicorp may have forced everyone to start dealing with reality, but Morgan has now established a new framework for a positive approach to the problem."

Banks Lead the Way

And Morgan officials, while praising the Treasury for its support, acknowledge that they could have put together a similar deal without official U.S. government help simply by purchasing the Treasury bonds, which will be used as collateral on the open market and not cost the government anything.

"After five years, you had creditor fatigue and you had debtor fatigue," Dennis Weatherstone, Morgan's president, explained. "The timing was right for a different kind of solution."

The jockeying between Morgan and Citicorp over Third World debt is only one of many recent cases in which the major banks are dragging government officials along in key economic policy arenas. Now, Morgan is helping to lead the assault on the Depression-era Glass-Steagall Act, which prevents banks from entering the securities business and keeps banks and securities firms from competing against each other.

"We have been preparing for these new opportunities for some time and have been disappointed at the rate of progress," Weatherstone said. "The world has changed. Our customers' needs have changed because we're in a global marketplace. . . . By necessity, it's time to open up these markets to improve their efficiency."

For Morgan, such activity is particularly intriguing. Morgan Guaranty, J. P. Morgan's commercial bank, has long been one of the stodgiest and most private of the nation's major banks. Despite having the strongest capital of the big U.S. banks, it was the slowest to follow Citicorp last year in boosting its reserves against potential Third World debt losses. But, buoyed by its recent success, Morgan has been coming out of its shell.

The Mexico-Morgan proposal marks a major turning point in the struggle to ease some of the burden that is holding down the world's deeply indebted countries, mostly in Latin America but also including the Philippines. Although Mexico--with much more foreign exchange in its coffers than most other debtor nations and with a record of improved economic performance--is uniquely situated to buy up its own debts, other countries should be able to take advantage of similar plans.

"Each one may have to be tailor-made for other debtor countries," Weatherstone said, "but if this deal is successful, we think there will be opportunities for other countries fairly promptly."

Already, Venezuela, Latin America's fourth-largest debtor, is looking at a similar plan to buy back part of its $33 billion of foreign debt at a discount, using a new issue of bonds as payment. Other countries lacking substantial reserves may look to Japan, West Germany, and the World Bank as potential sources of credit and guarantees for different kinds of debt payoff arrangements.

Indeed, "everyone will be clamoring to do similar financial engineering deals," said Alan Stoga, senior economist for Kissinger Associates here. "It's a way of rewarding debtors for playing the game by the right rules."

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