Newspaper article THE JOURNAL RECORD

Reduction Focus of Brady's Third World Debt Formula

Newspaper article THE JOURNAL RECORD

Reduction Focus of Brady's Third World Debt Formula

Article excerpt

``We can't tell if the glass is half full or half empty,'' Sen. Paul Sarbanes told a reporter from Congressional Quarterly. ``But there is water in the glass.''

The senator's cautious response to Treasury Secretary Nicholas Brady's ``reassessment'' of the Third World debt problem, is understandable.

Many analysts feel they were suckered by Brady's predecessor at the Treasury, James Baker, whose widely hailed fix for debt in 1985 proved to be only a strategy for muddling through to November 1988.

There is really no need, though, to wait for details to conclude that the Brady plan is a dramatic break with past policies, one driven by the new realities of America's diminished economic clout.

By focusing on debt reduction, Brady is implicitly admitting that commercial banks - or rather, American banks - no longer have the resources to risk multibillion-dollar investments in the Third World.

By looking to Japan to prime the engine of growth in Latin America, he is acknowledging that Washington's own budget deficits have sharply limited Washington's economic reach.

With hindsight, the Baker plan looks more like hubris than deceit. Cynics, Baker suggested, might use the debts as an excuse to walk away from the problems of the developing world.

America would take its global responsibilities seriously, encouraging middle-income debtors (most of them Latin American) to honor their obligations. Those who did would be rewarded with capital to grow their way out of trouble.

Prodded by the Treasury and its allies at the international lending agencies, most debtors did choose to reschedule rather than default.

Most did accept a sharp decline in living standards, redirecting production toward exports. American banks (and their regulators) were thus spared the embarrassment of writing off huge sums. And the Reagan administration was able to duck the consequences of both a banking crisis and a confrontation with Latin American allies.

But Baker could not deliver on his part of the bargain. The World Bank and the International Monetary Fund had limited funds to lend, and hard-pressed banks were not about to risk more of their own money without government guarantees. …

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