Created: 12/17/1987

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International Financial Situation Report (fatt

Issue 71

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International Financial Situation77


The )omt communique issued by the presidents of eight Latin American eountrlea following thoir summit moating In Mexicoovembernified position on debt, but did not Indicate any radical Joint debt actions would be taken. More noteworthy, than thaaa If were the behind-the-scenes debates that led to the Joint declaration. Peru, Brazil, and Argentina reportedly pushed for radical debt initiatives. Including limitations on Interest payments. In other developments:

o Many International banks are girdinguspension of payments on Argentina's fornlim debt, which they believe is Inevitable and could occur as early as this month,

reserves to1 billion and shouldoratorium this month. To avert radical debt actionowever. Buenoe Aires will require at6 billion in yetncgotlated new money coupled with quiescence from the IMP. Meanwhile, President Alfoneina economic team appears to be losing control over the economy and has discussed resigning; en masse- fn January or February.

o5 billion bridge loan to7 Interest obligations was signed onecern her and the5 billion tranche will be made in three disbursements within the next month. Negotiations beganecember on the term aheetebt rescheduling end new money package but, so far, little progress has been made. The Brazilian delegation returned to the bargaining table with essentially the same proposals it brougbt when negotiations began oneptember, which the banks rejected as unrealistic and vague. The negotiating atmosohere will likely become even more contentious in Januaryis likely-rBrasllla does not resume scheduled Interest payments.

The Mexican Government announced oneeember new economic measures Onigned to fight record Inflation over the longer term snd lower the bloated federal budget deficit, while Increasing workers' wages to nolo counter rapidly rising consumer prices. The move apparently stops short of the strong medicine needed to ligniflcently reduce inflation, but some slowing is likely. Nonetheless, the austere nature of many of tha new measures mayolitical liability for the government during the runup to next summer's presidential election.







The Latin American Sum mil Mealing

The Joint communique issued by the presidents of eight Latin Americantheir summit meeting In Aenpulcoovember Included aon debt, but did not suggest any radical Joint debt actions. According tothe presidents essentially appealed for more creditor cooperation toustsolution to the Latin American debt problem and proposedfor achieving that objective. More noteworthy than the communiquethe behind-the-scenes debates that led to the Joint declaration..'ifficult ant

Peru, Brazil, and Argentinnretwioaiy pushed for radical debt Initiatives, including limitations on interest payments. By contrast, Colombia and Uruguay apparentlyoint declaration thatardline debt position because of the potential damage It could Inflict on their own relatively favorable negotiating positions with hanks.

Mexico effectively played the role of moderator and influenced the phrasing of the final declaration, which confined the most radicalas ceilings on Interest rates, devaluation of debt through secondary marketr linking debt servicing to export market"pre-posabr" and emphasized that all auch steos were subject to negotiation with ct editors.



international banks are girdinguspension of payments on Argentina's jebt, which they believe is inevitable and could occur as early as this month,

Weid0 million loan from

TrueraaTIbnaiillArgentine reserves to1 billion and shouldoratorium thb month. To avert radical debt actionowever, Buenos Aires will require at8 billion Innew money coupled with quiescence from the IMP. Both commercial banks end the Fund, however, are becoming increasingly disillusioned with the slow pace of economic reform and are iH-disposed to increase lending to Buenosjaaaaafsntsa

President Alfonaln'a economic team appears to be losing control overIts Octoberax package designedthe fiscal deficit, Is languishing Infailed to regain thethe Argentine public. Treasury Secretary Brodersohn admitted that the team hasplans, and that Its only long-term goals are those that the IMF haa""duee government

spending^rv^na^rs^^Prrrwl Bank's recent decision toillion australes to fund unanticipated Treasury expenditures will merely accelerate Inflation, whlehercent during the firstonths

Exasperated by their inability to stem Argentina's economic decline, the President's economic advisors have dheussed resigning en masse In January or February,

The press reports that Foreign Minister Caputo and

former Interior Minister Tfoccoli are frontrunners to replace Economy Minister Sourroullle. Aa politicians rather than economists, we believe that both men would concentrate on selling Alfonsin's economic policies to theaputo- or Troeeoli-



led team might he tempted to announce radical debt actionew economic clan simultaneously, In the hopeoratorium woukl deflect domestic criticism from the austerity measures.


8 billion bridge loan to7 Interest obligations was signed onecember and the5 billion tranche will be made In three disbursements within the next month. The remainingillion will be disbursed In June provided:

o erm sheetebt rescheduling and new money package ia negotiated with the Bank Advisory Committee by

o ass"ercent of the moreanks with loans to Brazil-sign onto the agreement by

o The agreement becomes effective by

Negotiations beganecember for *he term sheet but, so for, little progress has beenhc Brazilian delegation returned to tha bargaining table *rthe*sentlaJryTnes8jne proposals it brought when negotiations began oneptember, which tbe banks rejected as unrealistic end vague. Although Brasilia agreed to seek an IMP program. It Is not expected Io begin negotiations with the Fund before next year, and It refuses to link economic performance targets to commercial bank disbursements. Moreover, it Insists on an interest capitalization scheme and new money equivalent to about half of Its Interest obligations. With less than one month before lheonuary deadline nnd the two sides far apart on the most basic Issues, the deadline will llkelv be pushed back. The negotiating; atmosphere will likely become even more contentious In Januaryts llkelv-Brasllla does not resume scheduled interest payments. Bankers contend that Brasilia promised during negotiations for the bridge loan to resume payments, but Finance Minister Bresser has said Brasilia win only do so when It Is assured of receiving the concessions it is seeking from bonks, we expect the moratorium to drag on well in- Sfjfjfjfjfj-

Meanwhile, the economy continues Its downward slide. Consumer demand remains weak despite recent large wage Increases, and Investment Is expected to drop to onlyercent of QDP this year. Economic growth will foil to 2fromercent per yearnd well belowercent needed annually to employ new entrants to the labor force. Inflation ln November was nearlyercent and It expected to exceedpercent this month to7ecordpercent. The Finance Ministry hasiscal package, but President Sarney already has overruled certain tax hikes and Congress ts likely lo oppose major tax increases.Sarney haa consistently failed to implement promised spending cuts, personally authorizing billions of dollars for pet projects.iscal program may be announced soon,residential election almost certain next year, It la unlikely that Brasilia will follow through with any plan to reduce the public sector's borrowing requirements, which will exceedercent of GDPs inflation continues to spiral, Brasilia probably will resort to another price freeze early next year.


The Mexican Government announced onw economic measures designed to fight record inflation over the longer term and lower the bloated federal budget deficit, while increasing workers' wages to help counter rapldlv rislmt consumer




prices. The program includes cuts in government programmable expenditures,tariff* to foster competition, and .nereased prices onThe government also negotiated wltn the private sector to grantercent wage increase and anotherecant Increase on 1Mexictinsoar

higher this montllanowiextTul^eTievathey can almost halve this year's expected annual rate of about ISO percent byhe Bank of Mexico devalued the controlledaccounts for about two-thirds ofercent to bring it in line witi the free market rate, pj^pjpj

The move by Mexico City apparently stops short of the strong medicine needed to significantly reduce Inflation, but seme slowing Ls likely. The provision increasliv workers' wages was welcomed by organised labor and averted the general strike planned forecember. Nonetheless, the austere nature of many of the new measures may bepolitical UsbiUty for the government during the runup to next summer's presidential election. |

Other Latin American Countries

Thc Government of Peru devalued its currency onncnrnber while Panamanian banks are again suffering serious liquidity problems.


Peru devalued the official exchange rateercent against the dollar Monday In an effort to stem foreign exchange losses, but rising inflationtagnant economy continue to undermine President Carole's sagging popularity. Lima had devalued the official rate byercent in late Octobera,Icd ton illeek reserve loss that continued into November. Onlyercent of Lima's inhabitants approved of Garcia's overall performanceoll conducted in November.

The devaluation, whloh ahould boost exports and slow both imports and capital flight, will ease pressure* on Peru's reserves. Higher import costs, however, will add toercent Inflation, fueling greater labor dlseontont. Tho stagnating economy, which Is plagued by lagging private Investment and rapidly growing government borrowing, la likely toajor problem forjpj


A senior government ranking official stated In early December that, followingof slow improvement, Panamanian banks are again suffering seriouscausedeavy seasonal withdrawal of deooatls. The official stated thatthe national Bank ofInpositions and some fear that the failure of even one bank could trigger a

Meanwhile, the government estimates thatfrom January to September-willlltton7 orGDP,o

worsen next year, with the National Bank of Pnnnmn estimating it could grow0 million if the government decides to resume debtn an attempt to finance and reduce this deficit, Panama probably will askcommercial creditors0 million in new money and Is0 percent acrcss-the-board spending reduction, including salary cutsiring freeze. Rccause foreign bonks are unlikely


Colombia.'* tl billion loan has been fullyxpect loan will be signedDecember. *

Costa Rican Central Bank President Lizano stated that the foreign exchange tamet for Its IMP arrangement will not be met becausehortfall in capital Inflows and increase Inan Jose has yet to reach agreement with commercial banks butommitment to have accord in place

New legislation has been proposed for Honduran debt-equityayment Is to be made In long-term, non-guaranteed government bonds ins'.efld of localroposal unacceptable to foreign Investors andongress failed to vote on legislationecember recess. |

Venezuela disappointed by slow investor response to Its debt-equity swap program thai was approved lasttudy inn ways to ease foreign exchange controls and restrictions on profit repatriation. "


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