The IMF's Dilemma on World Debt Gets Worse (BusinessWeek, July 25, 1983, pp.58-63)

Many Third World countries, mainly Brazil and several Latin American countries, are experiencing the effects of the pressure applied by the International Monetary Fund to pay off its debts. Latin America is responsible for nearly half of the Third World's total debt of $600 billion, while one country, Brazil, owes $90 billion to the IMF. The hundreds of billions of dollars owed to American and other banks may have to be written off with disastrous results for all countries involved.

The IMF is led to two choices in dealing with world debtors. Because the current conditions for repayment are unrealistic (due to social upheavals, unstable economy, etc.) "the IMF (either) eases off and loses credibility, or it insists and the debtor stops paying," notes a high-level White House official.

For such debtor nations, which choose the latter and ceases payments to the IMF, the penalty would be harsh. These countries would find themselves in the "worst recession they have ever seen," says an U.S. banker and the ships and aircraft of these countries would be susceptible to seizure by the banks. Simultaneously, American, European, and

Japanese banks would be in big trouble.

On the other hand, if the IMF is not firm with debtor countries, mainly Brazil, it will set a precedent for other debtor nations. Not wanting to risk political turmoil or declarations of default (moratoriums), a party proposal for longer terms and lower interest rates accompanied by a grace period was presented in Congress in August of 1983 concerning

Brazil's debt. One idea would be to declare a short-term moratorium, (brief 90-day halt in payment on principal) which American banks could deal with upon an orderly rescheduling of debt payments. The fear, in this case, is the rescuing of banks by the Federal Reserve, resulting in massive inflation in the U.S. The Unites States believes that its recovery and falling interest rates will rescue these Third World countries in two ways- by boosting demand for their exports and lowering their interest costs.

There are many arguments to such compromises. One senior Administration diplomat raises an important point that "sooner or later, Brazil will have to declare a moratorium. The only question is whether it will be long- or short-term." Others are concerned that the IMF needs to be more strict and do more to avert an explosive debt crisis. But, it must be understood, that debtor nations cannot sustain themselves under current conditions due to internal social conflicts (protests of unemployment, deindexing of wages, and extremely high inflation).