Putting Off the Reckoning Day

By John Greenwald

Bolivia announces it will suspend payment of its foreign debt

For more than two years American bankers have been concerned that a Latin American nation would default on its loans. Pedro-Pablo Kuczynski, president of First Boston International and former Minister of Energy and Mines in Peru, has warned, "One of the smaller Latin American countries defaulting could set off a chain reaction." Last week Bolivia, though a mere mouse of a debtor by international standards, looked as if it could be the mouse that roared. The economically ailing country said that it will temporarily suspend repayment of its $3.4 billion in foreign loans, including some $680 million owed to Western banks. In announcing that move, however, Bolivia stressed that it intends to renegotiate rather than walk away from its debt.

While the Andean country's borrowings are dwarfed by those of such neighbors as Brazil ($96 billion) and Argentina ($43.6 billion), the Bolivian action nonetheless shook moneymen. Phone calls from anxious foreigners flooded embassies, newspapers and government agencies in the capital city of La Paz. On Wall Street, prices slid further on a bond market still edgy over last month's near collapse of Chicago's Continental Illinois.

In Bolivia, the government move drew an angry response from former Finance Minister Flavio Machicado, who two weeks ago quit the Cabinet of President Hernan Siles Zuazo. Machicado charged that the President had caved in to pressure from the powerful Bolivian Cen tral Labor Union, which led an April gen eral strike to protest belt-tightening mea sures demanded by the International Monetary Fund. Said Machicado: "This renegotiation idea is absurd."

Although bankers claimed to be unruffled by Bolivia's action, some experts believed that it could signal the start of new problems for lenders. Said George Soros, president of Soros Fund Management and a specialist on Latin debt: "The tables are beginning to turn. So far, the banks have had the upper hand in negotiations with the borrowers. But after the loss in confidence triggered by the rescue of Continental Illinois, the debtor countries are in a much better position to get the concessions they demand."

Last week's announcement from La Paz was part of a flurry of Latin American debt developments. In another key action, the U.S. agreed to extend a $300 million loan commitment to Argentina until mid-June. The credit will go into effect once Argentina reaches agreement on an economic austerity program with the IMF. Argentina will use the U.S. cash to repay loans from four other Latin countries that enabled it to meet March 30 interest payments to its banks.

In neighboring Brazil, government leaders found themselves painfully squeezed between the IMF and its sister agency, the World Bank. The bank wants to lend Brazil $1.4 billion for major devel opment projects, but the credit has been held up because it would swell Brazil's money supply beyond limits set by the IMF as a condition for its aid.

Meanwhile, Chicago's Continental Illinois last week continued the efforts to find a buyer that it has been making since the $7.5 billion, Government-led rescue of the troubled bank. However, Chairman David Taylor conceded that some form of additional federal guarantee will probably be needed to persuade a prospective merger partner to come forward with an offer. Said Taylor: "We are working as hard as we can on a private solution, but that honestly looks as if it may not be feasible."

Any further Government aid would be costly to Continental's shareholders. A federally assisted merger could mean the write-off of Continental's $2.3 billion in bad loans and a sharp drop in the value of its stock. Mindful of that possibility, investors last week continued dumping Continental shares, which stood at 25 just nine months ago. The stock dropped a total of 2 5/8 last Wednesday and Thursday, to a record low of 5 1/2, before closing the week at 5 7/8.

-- By John Greenwald. Reported by Jorge Canelas/La Paz and Frederick Ungeheuer/New York

With reporting by Jorge Canelas, Frederick Ungeheuer