The MacNeil/Lehrer Report; Reagan and the Latin American Debt

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ROBERT MacNEIL [voice-over]: President Reagan's visit to Brazil and the inauguration of a new president of Mexico highlight economic crisis in Latin America.

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MacNEIL: Good evening. President Reagan today promised Brazil a loan, short-term, of $1.2 billion to help the huge Latin American nation meet its colossal foreign debt. The U.S. loan was announced as Mr. Reagan began a five-day Latin American tour with talks in Brasilia, the capital of Brazil. Brazil has a foreign debt estimated at $85 billion, and is seeking help from the International Monetary Fund.So is Mexico, which today installed a new president, Miguel de la Madrid, who proclaimed stiff austerity measures to save the Mexican economy. Mexico owes foreign banks some $81 billion. Brazil and Mexico lead a parade of Latin American nations staggering under huge debts aggravated by the worldwide recession and trade slump and oil prices. The United States is deeply involved because U.S. banks hold a major part of the outstanding loans. A default by any of these large nations might trigger a worldwide banking crisis. Tonight, economic crisis to the south -- how the U.S. is affected and how it can help. Jim Lehrer is off; Charlayne Hunter-Gault is in Washington. Charlayne?

CHARLAYNE HUNTER-GAULT: Robin, Brazil, the largest nation in South America, has long been considered an emerging superpower and an important key to U.S. foreign policy in South America. Relations between the two nations, however, have been strained since the Carter administration over such issues as human rights, nuclear energy and trade policy. But they have eased somewhat as the military has moved towards establishing a democracy. As part of its opening to democracy, or abertura, the Brazilian government held an election for provincial governors and a congress two weeks ago, but that opening is partially clouded by the huge debt as well as an inflation rate of 88.5%. Such grim economic statistics underscore the urgency of President Reagan's visit. Robin?

MacNEIL: To assess the meaning of President Reagan's visit in this climate of economic crisis, we have Riordan Roett, director of Latin American studies at the Johns Hopkins School of Advanced International Studies, and director of the university's Center of Brazilian Studies. Mr. Roett, first of all, how important is it that Mr. Reagan's gone there?

RIORDAN ROETT: I think very important. Brazil is an extremely important country to the United States. It is the fifth largest country in the world, and now the eighth largest economy in the world, an important trading partner for the United States, and a very important actor in the Third World.

MacNEIL: What does it say to the rest of Latin America that he's gone there?

Mr. ROETT: I think beginning to start the trip in Brazil means that we are now beginning to recognize that how Brazil deals with the debt problem, how it deals with democracy, how it deals with a whole set of other relations is important in the hemisphere and very important to the United States in the hemisphere.

MacNEIL: How strong is this opening to democracy that Charlayne spoke of?

Mr. ROETT: I think it's very strong. I think what happened on November 15 is very significant. A very important voter turnout -- 59, 60 million people voting, a restoration of federalism, a restoration of direct vote, and, finally, I think, what it did was demonstrate that the fourth largest democracy in the world can resolve its issues through voting and peaceful competition for power.

MacNEIL: How is that return towards democracy going to affect the government's ability and the country's ability to solve this economic crisis?

Mr. ROETT: Not directly, but I think indirectly in a very important way. I think that the Brazilian government now has a very important bargaining chip in dealing with the IMF and the world's private banks by saying, "If we don't receive support and relief, what will happen to our democracy?" And democracy is an important value for the United States in dealing with the Third World.

MacNEIL: I was wondering whether it will make it harder for the government to impose whatever austerity or disciplines are necessary and required by the IMF in order to meet the conditions for loans and things. Is it harder to do that with this resurgent democracy than it would be if the military government were still in power?

Mr. ROETT: That's a usual argument made by some people. I just don't buy it. I think that this will make it somewhat easier to impose the kinds of measures the government will need to impose, because there is some understanding on the part of the opposition and now on the part of the government of how hard that road is going to be in 1983. I don't think that Brazil will go as far as some are now predicting in imposing the kinds of measures that are required, but it will certainly do its part in fulfilling whatever bargaining and negotiations are forthcoming with the IMF.

MacNEIL: It was widely predicted when Mr. Reagan set out that he wasn't going to be carrying any sort of economic package, but today he made two gestures. He eased U.S. sugar quotas, and he offered a very short-term loan of $1.2 billion.What do you make of those gestures?

Mr. ROETT: I think they're very significant. Washington was protesting too much before the President left that nothing would happen in Brasilia; therefore, we all assumed that something would happen in Brasilia, and it did. What it did do, I think, is indicate that Mr. Reagan and his Cabinet now understand the importance of working with Brazil. I don't think we should say saving Brazil or bailing Brazil out, but working with Brazil to resolve these issues. It also meas that there is new flexibility on the part of the Reagan administration with regard to economic trade and commercial questions, and those are intimately tied to Brazil's ability to repay its debt after 1982.

MacNEIL: How confident are you that Brazil can solve its economic crisis and honor its foreign indebtedness?

Mr. ROETT: Quite confident. I think Brazil has, among the Third World countries, among the most competent economic team. They plan well, they implement well, and they have the resources, both human and otherwise, to put together, I think, a package of recovery with sufficient international support over the next two or three years that should indeed see them through the mid-1980s.

MacNEIL: Well, thank you. Charlayne?

HUNTER-GAULT: For another look at the economic problems facing Brazil, we turn now to Albert Fishlow, a professor of economics at Yale University, and a visiting professor at the University of California at Berkeley. Professor Fishlow has written extensively on the Brazilian economy. From your perspective, Professor, just how serious are Brazil's economic problems?

ALBERT FISHLOW: Well, to put them in perspective, I think it's important to realize that Brazil is now facing the worst crisis economically since the Great Depression. Last year income fell in Brazil for the first time since the early 1930s, and this year it will continue to stagnate, and certainly next year, with all the austerity measures, it will get worse.

HUNTER-GAULT: Just how did Brazil get into this crisis?

Prof. FISHLOW: Well, to some extent it's derivative from the petroleum crisis in the early 1970s -- '73, '74 --

HUNTER-GAULT: The worldwide --

Prof. FISHLOW: Yes. Brazil is the largest Third World importer of petroleum, and so its import bill went up enormously when the price of petroleum rose. In 1979, it was caught in a double bind.Interest rates rose very sharply -- real interest rates -- and the price of petroleum went up as well. The Brazilian economy continued to expand in 1980; the consequence was an enormous accumulation of debt, and now a debt-service ratio in which they're paying out principal and interest of about 80% or so of their export proceeds.

HUNTER-GAULT: So a lot of it had to do with external factors beyond their control?

Prof. FISHLOW: Well, quite so, and the Brazilians are very keen to emphasize this. It's the combination of slowing world trades, slowing growth in the industrial countries, and high interest rates.

HUNTER-GAULT: What kind of help do they need from the IMF?

Prof. FISHLOW: Well, I think they need more help than they can in fact get. The IMF is in fact limited because of the limitation and quotas that are available. What Brazil can draw upon for the next three years is something of an order of around $4 to $5 billion from the IMF.

HUNTER-GAULT: What do you mean by the limitation and quotas?

Prof. FISHLOW: Well, the IMF simply doesn't have enough money to make available, and therefore the IMF increasingly has to bring in the private commercial banks, as it did in the case of Mexico. There's no way that the IMF can finance the required capital flows that Brazil will need next year or the years following.

HUNTER-GAULT: But what can it do?

Prof. FISHLOW: Well, I think what it will do is make available, under its regular extended facility, a loan of somewhere around $4 1/2 billion, which it will begin to pay out during 1983. And these bridging loans that we've been talking about are really designed to enable Brazil to get to the end of this year and then to start out 1983 with the hope that more capital will be coming from the private banking sector.

HUNTER-GAULT: Will that loan by the IMF stimulate, do you think, that capital from the private lending sector?

Prof. FISHLOW: Oh, I think very much so, and I think the demonstration by the banking community is a clear one that they want to make Brazil a very positive case, to show that they can behave responsibly in the crisis.

HUNTER-GAULT: What kind of conditions do you think the IMF is likely to impose on Brazil with this loan?

Prof. FISHLOW: Well, to some extent I think Brazil has pre-empted the IMF. They've already announced an austerity program for next year which is very severe. A very sharp cut in imports, some modest expansion in exports, a reduction in the public sector deficit, and implicitly, therefore, a very slow rate of growth. So I don't think it's a case of the IMF imposing more. I think really it's question of whether Brazil can take an extended period of austerity. Next year will be the third year in a row, and then the year after that, likely a fourth, and if the world economy doesn't begin to improve significantly, it's not obvious that there won't be a consensus in Brazil to try to find a different way of dealing with the problem.

HUNTER-GAULT: I see. All right, we'll come back. Robin?

MacNEIL: While President Reagan was meeting Brazil's leaders today, some 5,000 miles to the northwest, Mexico installed a new president, the 47-year-old, Harvard-trained economist, Miguel de la Madrid. In his inaugural address he said, "Mexico is undergoing a grave crisis. This is an emergency. The situation is intolerable." De la Madrid announced a 10-point program to combat recession, combat inflation running at 100% or better, and widespread official corruption. For a look at Mexico's crisis and its importance for the United States, we have George Grayson, professor of Latin American politics at the College of William and Mary. Mr. Grayson, how bad is the economic situation de la Madrid faces? Is it worse than Brazil's?

GEORGE GRAYSON: Everything we say about Brazil we can say "me, too" with respect to Mexico. In fact, I think it's the worst crisis since the 1910 revolution exploded. And you've already mentioned the inflation; you've mentioned the corruption. Unemployment probably affects some one half of the work force, and it's growing larger every day. The peso is quite shaky. Mexico has virtually run out of foreign reserves; they have the highest debt in the Third World.And I think, quite apart from these economic indicators, there's a severe psychological dimension to the problem. I had the pleasure of being in Mexico six years ago when Lopez Portillo was inaugurated, and there was an optimism that bordered on euphoria that he was going to take office and somehow Lopez Portillo plus billions of barrels of oil were going to lead to self-sustained growth and prosperity. Well, there were about three years of growth, but times have become hard now, and I find cynicism and alienation suffusing the population of Mexico. And it's a population that really has to be helped by de la Madrid, who, first of all, has to pull the country from the brink of bankruptcy, and, secondly, give impetus to sustained economic growth, and, thirdly, try to infuse confidence into people who believe that the governing system is corrupt and completely self-serving.

MacNEIL: Is he the man to do all this?

Mr. GRAYSON: Well, we'd probably need a combination of Franklin Roosevelt and Superman to do all of this, but he does have some things going for him. First of all, he gets along well with Americans. He speaks English; was educated in Harvard, and as a result has a good rapport with our ambassador, John Gavin, who is doing quite a good job in Mexico City. And he'll have to work closely with Americans during the course of this crisis. And, secondly, he knows the oil industry, and that's rate for a Mexican president. He spent two years as its director of finance, knows its weaknesses, and also knows the liabilities of the state monopoly. And those liabilities include gross featherbedding and low productivity and massive corruption.And, thirdly, he is not allergic to the private sector. He believes in competition and the free-enterprise system, and certainly that sector needs to be encouraged in Mexico. And last of all, he's a technocrat. He really has no debts to any of the major sectors within the Revolutionary Party, and therefore, since labor is one of the leading sectors, he can perhaps be a little bit more stringent in trying to curtail requests for sky-high salary increases.

MacNEIL: The program he outlined today he said would call for austerity to be shared by everyone. What kind of strains are the measures necessary to fight the crisis going to place on Mexican society and the political system?

Mr. GRAYSON: Well, it's a political system that's been able to adjust quite well over the years, but I think it was important that he did emphasize shared sacrifices. He also talked in specific terms about corruption. Everybody talks in general about corruption, just as everyone talks in general about the weather, but he was quite specific and said that the police force in Mexico City would have to clean up its act or else. And I think what we're going to find is there's no chance for a revolution in Mexico because revolutions need to have leaders and ideologies and organizations and armies that are either split or incompetent, and none of those factors obtain there. What we will see is a good deal of unrest within the middle class, and we'll also see a good deal of unrest by non-unionized workers, those who don't have a safety net under them to protect them during harsh conditions.

MacNEIL: How is the U.S. -- we've already seen and have done programs on the impact on our border states of the Mexican crisis. How is the U.S. going to feel further the impact of all these measures?

Mr. GRAYSON: We're going to feel it in dozens of ways. You've alluded to one, and that's going to be an increase in illegal immigration. But I think we're going to also see Mexico probably willing to sell more oil to the United States, and furthermore, within perhaps about 18 months, we could see a doubling of natural gas sales here. Furthermore, I think the Mexicans aregoing to view it as imperative to develop a bilateral trade agreement, something that's lacking now, because they really need to stimulate their exports, and I think the U.S. has to be forthcoming with regard to admitting Mexican goods into our market, even sometimes on concessionary terms, provided that we're not bankrupting our own businesses or putting workers out of business. And, finally, I would expect that with regard to Central America, that Mexico won't change the substance of its policy, that is, being supportive of the Sandinistas and the left in El Salvador, and being supportive of Cuba. But I think they'll probably change the rhetoric and be more accommodationist with the United States and less likely to engage in confrontations.

MacNEIL: One little thing intrigued me. Why didn't they invite President Reagan to the inauguration?

Mr. GRAYSON: Well, it's an interesting thing. In the United States being close to Mexico is a bonus for an American president because of the Hispanic vote in this country, a vote that's increasingly important in electorally rich states. Just the contrast occurs in Mexico. For a Mexican president to be too close to the United States gives him an image of perhaps being a tool or a pawn or an instrument of Uncle Sam, and therefore, to have had President Reagan at the inauguration would have boded ill, I think, for the de la Madrid administration, and caused a real rumpus, especially in the left in Mexico.

MacNEIL: Well, thank you. Charlayne?

HUNTER-GAULT: As Robin said earlier, American banks have made massive loans to Mexico and Brazil, as well as many other nations in the developing world. These huge debts have strained the international banking system, which is the area of expertise of our next guest, Richard Dale. A guest scholar at The Brookings Institution, Mr. Dale was formerly with the Rothschild Bank in London.Mr. Dale, are U.S. banks in trouble because of these loans?

RICHARD DALE: Well, they would be in trouble if there should be a series of defaults in these countries, but so would other banking systems and other banks -- the Japaneses banks are also in there very heavily -- and it would be a problem for the whole world, not a problem just for the American banks or the American banking system. So it is an international financial problem, given the levels of indebtedness we're talking about.

HUNTER-GAULT: Exactly how worried are these banks?

Mr. DALE: Well, they're worried, and of course there is a great deal going on now. There's an orchestration. The free market in international lending in a sense came to an end this summer, and there is an enormous, but discreet, official bail-out operation going on right now. And the banks are talking to each other, they're talking to the authorities here: they're talking to the IMF. And the whole thing is being orchestrated, as it needs to be given the very critical situation we have.

HUNTER-GAULT: Well, what kind of options do they have at this point other than this orchestration?

Mr. DALE: Well, I think Brazil has a central role to play here because if we have another situation like Mexico, where a major Latin American borrower de facto defaults before it gets into ordinary rescheduling negotiations, then confidence, which is the key, really, could be shattered. So what is going on is that the authorities are desperately trying to nurse banks into making further lending to Brazil.The great paradox of this situation is that banks, having lent too much in the past, must now be persuaded to go on lending. The international --

HUNTER-GAULT: But do they have any choice?

Mr. DALE: The big banks have very little choice, but the smaller banks, the peripheral lenders, do have some choice.And the great problem is there is no mechanism for ensuring that those lesser banks stay in there and keep lending. And this is one of the major problems. But the key thing, as I say, that the international lending balloon has got to be deflated slowly. It must not be allowed to burst. And that is why Brazil is so critical, because a disorganized of [unintelligible] rescheduling would be extremely -- have very grave implications, whereas an orderly refinancing, perhaps even avoiding of rescheduling, which is what the authorities, it seems to me, are trying to do, could have a very beneficial impact on confidence, and therefore international financial markets generally.

HUNTER-GAULT: What kind of impact do you think an IMF agreement would have on the confidence of these banks to continue lending?

Mr. DALE: Well, this is the critical role of the International Monetary Fund.It is not so much to provide money. That is needed, but it is to act in a kind of catalytic role whereby its seal of approval on the country-borrowed encourages commercial banks -- who have the key role -- to go on lending. So it's very important that the IMF should reach an agreement with Brazil which encourages further lending from the private sector.

HUNTER-GAULT: Is there any other role that you see the IMF playing?

Mr. DALE: I think it has one further important role, but I said there was no mechanism for keeping banks together. The IMF, in carrying out its discussions and negotiations with the country-borrower, can simultaneously talk to the leading banks, and in doing so can, in a sense, get them to commit themselves on future lending. So that in a sense you have trilateral negotiations rather than simply bilateral discussions.

HUNTER-GAULT: Very briefly, how have these banking crises in all of these countries changed the nature of international banking?

Mr. DALE: Well, I think it's demonstrated the extraordinary fragility of cross-border international lending. Just as banks tend to rush in there in excess when things look good, they tend to back out -- understandably -- when things look bad. And that creates a kind of bubble which can burst, as I say, and you have the possibility of a collapse in confidence leading to a sudden abrupt cutback in lending, and therefore countries being put in the position where they can no longer pay their debts.That is the danger, and that is what has been revealed. But this thing is prone to a sudden financial collapse in a way that no one really foresaw, I think, or very few people foresaw.

HUNTER-GAULT: And do you see steps being taken now to correct that?

Mr. DALE: Well, once we have got out of this, assuming we do, then some thought has to be given to a reordering of international lending, to making it safer and reducing this propensity to sudden collapse, which, as I say, is so dangerous.

HUNTER-GAULT: But at the moment you're just responding to the crisis and not --

Mr. DALE: For the moment those kinds of issues are further along the road. We have to deal with the present crisis.

HUNTER-GAULT: Right. All right, Robin?

MacNEIL: Yes, Mr. Roett, in the area of your expertise, how real a danger is there, do you think, of Brazil defaulting on its loans, being unable to meet the payments on its loans?

Mr. ROETT: That depends a great deal, I think, on the state of the world economy in 1983 and 1984. Brazil must export to pay its bills, and the protectionism wave that is certainly present in the United States and in Western Europe is a real danger. The inability of the Western European economies to recover and the U.S. economy to recover means that there is not much demand for Brazilian exports, and that's very, very important. So trade and finance are intimately tied to Brazil's future in this case.

MacNEIL: Mr. Fishlow, what's your estimate of how likely or how much real danger there is of a Brazilian default?

Prof. FISHLOW: Well, I think the danger is rather minimal, and I think the danger is rather minimal because the world is committed to bailing Brazil out. They have been selected precisely for the reason of their importance, and so therefore I expect that nothing will happen. On the other hand, if within the next two years the international economy doesn't recover, I would imagine Brazil along with a number of other countries would begin to look inward and would really decide to opt out of the international system more broadly.

MacNEIL: Mr. Grayson, what about Mexico? We've had, as was pointed out, a sort of de facto default last summer, but then that was picked up on, and the loan, as I understand it, was rolled over to a degree -- the time was extended for the Mexicans to pay. How real is the danger of Mexico not being able to meet its commitments?

Mr. GRAYSON: Well, there are a number of bankers who are extraordinarily worried in Mexico, and the joke there is that when a banker checks into a hotel, does he want a room for sleeping or for jumping? But the difficulty is that they have to undertake a number of severe austerity measures, and the President must hit the ground running, to use a cliche. And this seems to be what de la Madrid has done, and he's talked about phasing out subsidies, and he's talked about promoting competition, doing away with the multiple exchange rate, and freezing government hiring. And I think these are all good signs, and therefore I believe that the international bankers will, perforce, go along with Mexico, will continue to work to restructure a major portion of the debt to make sure that the default does not really occur in a legalistic sense.

MacNEIL: Mr. Dale, what's your assessment of the relative dangers in those two countries defaulting, and do you agree with what's been said, that it will very much depend on how the world economy and trade recover in the next couple of years?

Mr. DALE: Yes. I think it depends on how all the key players involved play their part. For one thing, the borrowing country has to meet the IMF conditions. In the case of Brazil there may be some very delicate matters there involving the increasing wages, which are enshrined in law and may have to be changed by the Brazilian congress. So that is one area where things could become problematical. Another area is that the IMF, of course, must impose conditions which are harsh enough to ensure a reasonable adjustment, but not so harsh as to breach the limits of what is politically tolerable. The third set of players are the banks of course, and as I say, they must be persuaded to go on lending. Otherwise, the external debt simply cannot be serviced. And, finally, and I think very importantly, the Federal Reserve here and other central banks around the world have an extremely important role to play in trying to revive industrial activity in the major developed economies. Because if we have 2% growth in the USA and zero growth in Germany and 2% growth in Japan, as is currently projected for 1983, we reallyare going to put the developing countries, and the Latin American countries in particular, in a very, very difficult situation in requiring them to meet their debt obligations.

MacNEIL: Well, let's go around on this one, then. How much is it, in turn, dependent on the U.S. economy recovering?

Mr. ROETT: A great deal on the U.S. economy and a great deal on Western Europe, and therefore the Brazilians are very concerned about continued high interest rates and continued protectionist influence and the downturn in our economy.

MacNEIL: So, in other words, the American recovery, Mr. Fishlow, is directly implicated in the ability of these countries to meet these huge loans, part of which they own to American banks?

Prof. FISHLOW: Quite so. And I think the decision, in fact, by Mr. Volcker to increase the money supply --

MacNEIL: He's the chairman of the Federal Reserve Board.

Prof. FISHLOW: -- was precisely in response, not merely to domestic unemployment, but also to the international circumstances. It's clear that at current high interest rates it's not merely domestic activity which is affected, but also the possibility of these countries to repay their loans.

MacNEIL: Is the United States, in your view, Mr. Grayson, doing everything it can, both privately and in government, to assist these countries in its own self-interest?

Mr. GRAYSON: It's hard to know, but it's my impression that that's the case -- that the Federal Reserve and also the Treasury has been working hard both with the private banks, and also the international lending agencies, to try to make sure that there are bridging loans and then longer-term loans made available. And there has also been a great deal of help with regard to prepaying a billion dollars to buy petroleum for the U.S. strategic oil reserve; furthermore, there's been a billion dollars made available for commodity credits to Mexico. And I really think the Reagan administration is turning heaven and earth to try to ensure that Mexico doesn't go belly up.

MacNEIL: Do you agree with that, Mr. Dale, briefly?

Mr. DALE: Yes. Of course, these are short-term bridging financing operations, and they cannot resolve the longer-term problem which is, as I say, and it deserves repeating, which is to get the banks in there lending because only they can finance the kinds of deficits that exist in these countries.

MacNEIL: We have to leave it there. Sorry to interrupt you. Mr. Dale, Mr. Fishlow, and Mr. Grayson, thank you for joining us in Washington; Mr. Roett, in New York. Good night, Charlayne.

HUNTER-GAULT: Good night. Robin.

MacNEIL: That's all for tonight. We will be back tomorrow night. I'm Robert MacNeil. Good night.