Turkey, Peru Take Banks to Brink

Debts to the U.S. and Europe are falling due

The nightmare of international finance is that less-developed, non-oil-producing countries will start defaulting on the enormous debts they owe to private banks--$42 billion to U.S. banks alone. Zaire defaulted last year, but no panic followed, since the amounts were relatively small Now banks face a much worse threat: possible defaults soon by Turkey and Peru Says one prominent East Coast banker: "We are all worried. Were either Turkey or Peru to default, our exposure would make Zaire's total international debt of $800 million look like peanuts."

In Turkey, politicians for two years or more have been drafting expansionist economic programs with an eye to winning future elections. The finance minister of a short-lived government warned in June that the country was "on the brink of bankruptcy." Turkey has run up more than $3 billion in short-term debts of one kind or another. U.S. banks hold about half while West German and Swiss banks are also heavily committed. According to some reports, hotly denied in Turkey the Turks owe more than $1 billion for imports that have been received but not paid for. The remainder of the debt is the result of the Turkish Central Bank's borrowing more than $2 billion abroad--at high interest rates on twelve-to 18-month terms--and then relending the money within Turkey to domestic industrialists starved for credit. Again, U.S. banks hold about half the loans. They estimate that $500 million worth are coming up for repayment every three months--and the government has, in total, no more than $600 million or so in foreign currencies to meet all its international obligations. Official Turkish figures put a better light on the situation; they suggest that the country has reserves of $700 million to meet import debts of $300 million and deposit redemptions of $391 million over the next five months. Even by these calculations, the dangers are clear.

So far, most large U.S. banks insist that Turkey is somehow staying up to date in its repayments, but that apparently is because the nation is paying the biggest creditors while making others wait. There have been some delays of repayments admits Gerrit Venema, senior vice president of the Wells Fargo Bank. Other bankers bitterly, though privately, insist that some repayments are months behind. Turkey owes many millions to Citibank, Chase Manhattan, Morgan Guaranty and other big banks. If all the debts were owed to such giants, the situation would not be so menacing. They are able, and might well be willing, to wait for repayments until Turkish exports, largely of tobacco and wheat, rebuild foreign currency reserves in late fall. But smaller banks rushed to make loans to Turkey because they could charge "front-end" fees of 6% to 10% in addition to high regular interest rates of 1 3/4% over the base London Interbank rate that has averaged about 6%. Total returns may have exceeded 12% a year. Bankers may or may not have realized that front-end fees are illegal in Turkey. Now big banks are concerned that a smaller bank may panic, insist on collecting debts that cannot be repaid immediately, and touch off a string of defaults. That, says one New York banker, would "blow the whole house of cards down at a time when an International Monetary Fund team is about to go in to help the country restore its economic credibility."

Although Peru has not yet failed to make a debt payment on time, many U.S. bankers argue that its position is potentially much more serious--though less pressing--than Turkey's. Long-term U. S. bank loans to Peru, now estimated at close to $3 billion, account for the lion's share of the country's borrowings. Among other things, the loans helped fund the building of a $900 million Andes oil pipeline for which there is not enough oil, and a $150 million anchovy-fishing center that has few anchovies. Meanwhile, the country has been torn this summer by food riots and general strikes.

Like Turkey, Peru has been forced to drop its earlier opposition to IMF-designed austerity measures. The military government has cut back its budget and says it will formally seek an IMF loan this fall. What remains to be seen is whether or not the required economic hard-line policies can be put into effect without triggering new violence and possibly an overthrow of the government.

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