The Debt-Bomb Threat

COVER STORY

After a decade of go-go lending, second thoughts about the risks

Never in history have so many nations owed so much money with so little promise of repayment. At stake is a gargantuan debt, a $706 billion lien held by banks, governments and international financial institutions around the world against a group of deeply troubled developing and East bloc countries. It is a sum nearly the size of the annual U.S. budget and more than three times that of Japan's; it is $154 for every man, woman and child on earth. It has mushroomed from about $ 100 billion only twelve years ago, keeping borrowers in bondage and lenders in growing suspense. Much of it may never be paid off, and a major default somewhere, somehow, could trigger far-reaching political and economic reactions everywhere. The global economy is sitting on a debt bomb.

The risks, according to U.S. Federal Reserve Chairman Paul Volcker, are "without precedent in the postwar world." Says British Financier Lord Lever: "The banking system of the Western world is now dangerously overexposed. If lending abruptly contracts, there will be an avalanche of large-scale defaults that will inflict damage on world trade and on the political and economic stability of both borrowing and lending countries." The financial community, says Rimmer de Vries, chief international economist of New York's Morgan Guaranty Trust Co., is "in a historic period. There is a lot of worry that things could get out of hand."

In their calmer moments, those involved insist that no such grim scenario will ever come to pass, that the unthinkable will not be allowed to happen, that the debt bomb cannot explode. But it is a fact that for the past 21 months, particularly through a nerve-racking autumn and winter, the bomb's fuse has been sputtering, forcing almost overnight major changes in international lending. Ever since March 1981, when Poland, with a debt of $27 billion, declared that it simply did not have the $2.5 billion due its creditors that year, the danger signals have been flying. Last August, Mexico announced that it could not come up with the interest on its debt of $80 billion; soon thereafter Brazil declared that it was unable to meet payments on its $87 billion borrowings. Last week Brazil told its foreign creditors that it would not make $446 million in payments on principal due in January, but denied that this amounted to a moratorium. Argentina, too, was in the headlines: about five months behind in interest payments on its debt of more than $40 billion, it encountered a delay in securing a crucial $1.1 billion bailout loan from international banks.

The shock of such big borrowers' falling on hard times over so brief a period has been sobering. Though Western banks and governments are rallying with patchwork rescues for Poland, Mexico and Brazil, their efforts are merely short-term answers to long-term problems. More important, each crisis has made it more difficult for other borrowers to raise funds and keep up with payments, hardly a reassuring prospect for a parade of more than two dozen debtor countries in Latin America, Asia, Africa and the Soviet bloc.

The International Monetary Fund (IMF) reports that 32 countries were in arrears on their debts in 1981, compared with 15 in 1975. Yugoslavia ($19 billion) is meeting its obligations, but is