The Wobbly World of Banking

By Alexander L. Taylor III

Mexico's money woes shake the international financial system

If you owe your bank manager a thousand pounds, you are at his mercy; if you owe him a million pounds, he is at your mercy. --John Maynard Keynes

Many of Keynes' economic theories are today in eclipse, but his shrewd observation on the relationship between bankers and borrowers still rings true. In fact, some of the world's leading financial institutions are painfully learning the accuracy of this aphorism. After having extended $845 billion in loans to debtor nations over the past decade, the bankers now find themselves struggling to keep their borrowers solvent.

Last week, top international moneymen met in New York City, Washington, Paris and Basel to work out an agreement for the repayment of the $80 billion that Mexico owes banks, governments and international institutions. Such action is fast becoming a familiar exercise. During the past year many of the same bankers helped Poland and then Rumania through their credit crises. This time, however, the suddenness of Mexico's near default and the sheer magnitude of its indebtedness have created new worries. Experts feared that the interlocking credit network, on which many of the world's economies depend, might be in danger of crumbling.

As concerns grew about the wobbly state of world banking, federal regulators in the U.S. last week announced plans to broaden their efforts to keep track of banks that make bad loans. Beginning on Sept. 30, every one of the 14,000 federally insured banks in the U.S. will have to make comprehensive reports about their problem loans. Until now, only those banks that were federally chartered, about one-third of all such institutions, had been required to provide the loan information.

The origin of the current international banking troubles goes back to loose lending procedures adopted during the 1970s. Flush with oil revenues from the suddenly wealthy members of the Organization of the Petroleum Exporting Countries, moneymen eagerly sought borrowers so that they could reinvest their petrodeposits. The most obvious clients were developing countries, which needed the money to pay for their higher oil import bills and for modernization projects. Lending officers in three-piece suits prowled the capitals of Third World nations, their attache cases stuffed with loan applications. Bankers confidently told one another, as Citibank Chairman Walter Wriston is fond of saying, "Countries don't go bankrupt." Unlike corporations, nations do not disappear into liquidation if they cannot pay their bills. Moreover, even the poorest country can usually reduce its debts with dollars earned by exporting goods. Suddenly, however, those assumptions are no longer so comforting.

Never have international financiers had to minister to an economic casualty as large as Mexico. It is estimated that Mexico owes U.S. banks alone as much as $25.8 billion, but the country does not have the dollars to pay such a staggering amount. Three banking giants hold the biggest stake: Citibank, with about $2.5 billion; Bank of America, with $2.3 billion to $2.5 billion; and Chase Manhattan Bank, with $1.5 billion. Arranging the repayment of Mexican funds, according to Peter Kenen, a Princeton University international monetary expert, is "going to be very tough going." Mexico would have to put up 34% of its total earnings from exports just to meet its interest payments this year.

Moreover, standing right behind Mexico are several other debtors that may be unable to pay their bankers. Among them: Argentina, Peru, Costa Rica, the Sudan, Zaire and Bolivia. Kenen and others fear that once Mexico has succeeded in refinancing its loans, Argentina and Brazil will demand to delay their repayments. Moneymen are calling this the "contagion" effect. The result would be that few, if any, banks would receive payments on billions of dollars in outstanding loans. If that were to happen, world lending could slow down very quickly.

Some experts fear that refinancing by only a handful of countries would also add more names to the list of U.S. banking failures, which have already reached 27 this year. Says Geoffrey Bell, a director of J. Henry Schroder Bank & Trust Co. in New York: "I can't believe that we can go from now until Christmas without a small or regional bank out West or even a number of banks having to close their doors." Bell and John Heimann, a former U.S. Comptroller of the Currency, have just completed an alarming report on world banking for a study group of 30 leading international monetary experts. The officials warned that the explosive growth of international banking has "increased the potential range of problems caused by bank failure."

Officials in Washington are trying to take a more sanguine view. Says Marc Leland, Assistant Secretary of the Treasury for International Affairs: "This isn't the 1930s; this is the 1980s. It may be a liquidity problem, but we can handle it." The officials point out that the actual dollar amounts of many countries' debts are too small to endanger the international financial system. At the World Bank, which keeps close watch on the creditworthiness of Third World countries, Helen Hughes, director of economic analysis and projections, notes that most big foreign borrowers have reserves of oil or solid growth records. Says she: "I don't see a banking collapse because of the developing country debt. I don't see a banking collapse, period."

The struggle being waged last week to get Mexico back on its feet showed how difficult it may be to resolve the international banking troubles. A 14-member advisory committee met until past midnight for several days in a 39th-floor dining room at the Park Avenue headquarters of Citibank in Manhattan. The financiers, from seven big U.S. banks plus such institutions as Britain's Lloyds Bank, West Germany's Deutsche Bank and Japan's Bank of Tokyo, were chosen to represent 115 of Mexico's largest lenders.

Because of the way that international loan agreements are arranged, every one of Mexico's 850 lenders will need to go along with the new repayment plan being worked out if it is to succeed. The refusal of a single bank could jeopardize the en tire package. Said one participant at the meeting: "Our main concern is to keep anyone from trying to pull their money out. We are writing the book on how it's done on this one." As the talks wore on, members were in almost constant tele phone contact with Mexico's Finance Secretary Jesus Silva Herzog. During breaks, the financiers grabbed quick meals at a nearby 24-hour restaurant.

So far, there has been little opposition to Mexico's request to postpone the payment of $10 billion in principle on short-term loans. There is still no agreement, though, on Mexico's request for up to $1 billion to use as a stand-by loan.

World financial agencies are trying to ease some of the pressure. The International Monetary Fund is assembling emergency loans totaling about $4 billion during the next three years. In addition, the Bank for International Settlements in Basel has prepared an emergency credit line of $1.85 billion, with $925 million coming from the U.S. The entire package is expected to be wrapped up by the end of this month.

Mexico's refinancing troubles will undoubtedly result in some abrupt changes in global banking's freewheeling ways. Financiers, who within the past year have already become wary of making too many foreign loans, are now likely to become much more circumspect. Says Hans Wuttke, the executive vice president of the International Finance Corporation, a World Bank subsidiary: "The pace of lending has already slowed down."

Rimmer de Vries, the chief international economist of Morgan Guaranty Trust Co. of New York, maintains that global banking is quickly beginning to change. Says De Vries: "One thing is certain. The game of international lending is over. If it's going to continue, it will have to be carried on by entirely different rules." New and tougher rules can come none too soon.

--By Alexander L. Taylor III. Reported by Jay Branegan/Washington and Frederick Ungeheuer/New York

With reporting by Jay Branegan, Frederick Ungeheuer

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