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413
Thepolitical
lending
ofinternational
geography
banks
byprivate
DONALD W. FRYER
Hall 445,2424Maile Way,Honolulu,
University
ofHawaiiat Manoa,Porteus
ofGeography,
Professor
Hawaii 96822,USA
1987
15January,
Revised
MS received
ABSTRACT
andfora LessDevelopedCountry
Banklending
haslongbeenanagentofforeign
toforeign
(LDC)a
policy,
governments
bankloansbecamethelargest
sourceoffinancial
After
1970private
bankloanconfers
international
respectability.
private
inbanklending
wasinparta recycling
ofthelarge
Thisgrowth
inflows
intoallsuchcountries,
excepttheverypoorest.
in oil pricesduringthedecade.More
of oil-exporting
thesharpincreases
countries
through
developing
surpluses
oftheUnitedStatesinmaintaining
ofthenontheeconomic
andpolitical
itarosefrom
exigencies
leadership
importantly,
buthaveincreasingly
beenchalworld.American
bankshavethusdominated
communist
foreign
lendingthroughout,
bankloanscloselyreflects
Thegeographical
distribution
ofprivate
andotherforeign
banks.
lengedbyEuropean,
Japanese,
loanshavegonemainly
toLatinAmerica
theeconomic
andgeopolitical
oftheir
domestic
American
interests
governments;
withhighannualgrowth
ratesofGNP.
countries
andto 'newlyindustrailizing
countries'
(NICs)inAsia,'middle-income'
a similar
havebyfarthelargest
debtservice
Rivalbankshavebroadly
so thatsuchborrowers
strategy,
obligations
pursued
andsomeareinseriousdangerofdefault.
banks
Nevertheless,
countries,
theloansofnon-American
amongdeveloping
andnewpatterns
tothepast.
showbothvestiges
ofoldercommercial
orimperial
unrelated
interests,
WestGermany,
UnitedStates,
KEYWORDS:Banks,
Loans,Oil prices,
Debt,LatinAmerica,
Japan
Whoholdtheworldbotholdandnewinpain
Or pleasure?
Whomakepolitics
runglibber-all?
TheshadeofBonaparte's
nobledaring?
andhisfellowChristian
JewRothschild
Baring!
(LordByron,DonJuanXII,5)
withhigh unemployment
and interestrates,falling
commoditypricesand the threatof renewedtariff
thata majordefaultcouldtrigger
wars,thepossibility
a worlddepressioncomparableto thatof the 1930s
was newsworthy.
Many bankersviewed thispublito accommodation
withreluccityas an impediment
tantdebtors.Buttheyhad thesolid supportof their
own governments,
and theylooked to theirnewfoundally,theInternational
MonetaryFund(IMF),to
administer
thefiscaland financial
medicineto debtors
to ensurethattheypaid up.
Yet therewas nothingnew in thetechnicaldefault
of a borrowingcountry,
althoughto have a loan declared 'non-performing'
cuts if offat once fromall
creditand compelscash-downpaymentsforimports.
Several LDCs had been in technicaldefaulton their
loans fromofficialcreditorssince the 1950s, some
such as Argentina,Indonesia,Turkeyand Pakistan
morethanonce,and whichhad necessitated
complex
and difficult
(Frankoand Seiber,1979;
'rescheduling'
Seiber,1982). Moreover,some of these borrowers
Printedin GreatBritain
414
DONALDW.FRYER
and financiers,
andwar'(Hobson,1938,pp. 46,
had defaultedon loansin thenineteenth
militarism
century,
thecrisesof 94). FromthisLeninarguedthat,'financecapitalism'
again in the 1930s. What differentiated
the 1980s was the enormoussize of debtors'obli- led inevitablyto struggleamongthePowersforthe
gationsto banksin relationto whathas traditionally politicaldivisionof theworldintocoloniesand colconstitutedthe basis of bank lending,i.e. share- ony owners,in whicheven apparentlyindependent
holders'equity,or capital,andcustomers'
deposits.In countriesbecame 'enmeshedin a networkof diplodependence'(Lenin,1934).Nearly
creatingan 'exposure'in whichdefaultby a single maticandfinancial
majorborrowercouldbringdowntheworld'slargest half a centurylater 'dependence'was implicitin
banks,commonsense
suggeststhatmanybankershad theattacksof PresidentNkrumahof Ghana on 'neobehavedwithgrossirresponsibility.
colonialism',in the almostidenticalnekolim
oratory
While Zaire, Peru,Turkeyand a stringof east ofIndonesia'sPresidentSukarno(Sievers,1974),and
became the
theoreticalunderpinnings
European countriescaused the bankers repeated with further
anxietybetween1982 and 1986,thefocusofgreatest 'dependency'theoryof Latin Americanacademics
concernshiftedfromMexico to Brazil,thenback to and officials(Prebisch,1949; Frank,1967; Furtado,
Mexico as fallingoil pricesinvalidatedall forecasts 1970). The Hobson-Leninmodel of financial
imperiof the country'sliquidityposition and reinforced alismstillhas advocates(Forbes,1983;Trainer,1985);
to plunge the however, Johnsonargues that with the possible
general economic mismanagement
a century. exceptionofJapan,themodelbearslittlerelevanceto
for
half
the
crisis
into
country
deepest
Yet despiterumblingsof intentionto repudiateits thedevelopmentofanyempire.His observationthat
ofEuropean
defaultby Mexico orby anyothermajor 'themostconsistent
singlecharacteristic
obligations,
thecolonialperiodwas ignordebtorat mid-1986stillseemed unlikely;in recent investorsthroughout
timesdefaulthas only occurredwithmajorpolitical ance,based on laziness'(Johnson,1983, pp. 153-5)
as in Cuba,Iran findsa strikingmodern parallel in the incredible
changeand ideologicalreorientation,
orIndonesia(Gisselquist,
1981,p. 187).Nevertheless, behaviourof Americanbankersin the 1984 collapse
LDC debt to foreignbankersis beyondredemption, of Penn Square, an obscure Oklahoma bank that
Illinoisand several
as the laws of mathematicsoperate inexorablyto nearlybroughtdown Continental
burdenbeyondeven themost other major banks (Dutcher,1985; Singer,1985).
acceleratetheinterest
is a political
loan or investment
optimisticassessmentof abilityto pay (Rohatyn, Everyinternational
but
bankers
act
of
the
no
clear
that
it
is
1979,
As
99),
pay most
1986).
p.
(Gisselquist,
government
rescue
when
seek
their
to
court
bank
to
a
allow
can
world
fail,
they
governments
major
developed
the real issue is how to apportionthe cost of a fromtheconsequencesoftheirfolly.
betweenborrower,
settlement
lendingbanks,and the
home
the
of
banks'
country(Economist,
taxpayers
1986b).
THE ORIGINS OF INTERNATIONAL BANK
LDC debthasnow acquiredan enormousliterature LENDING
and popularlevels.
at academic,official,
professional
Thispaperfocuseson thepoliticaland economicfac- 'Loans have been the stuffof international
politics
torsthatmotivatedbankersto initiateand develop fornearlyall recordedhistory'(Kelley,1978); the
theFuggersand
theirspatialpatternsoflending,how suchenormous Medicisand theDukes ofBurgundy,
and Bismarck
loans were made, and what they were used for. theHapsburgs,DisraeliandRothschild,
known
better
of
the
some
are
but
and
for
the
Bleichr6der,
driven
by
profit,
quest
primarily
Though
bankersthroughtheirlending practicesalso for- connectionsbetween major political figuresand
century
wardedthepoliticaland economicobjectivesoftheir bankers.In the latterhalfof the nineteenth
Financialpower has always privateloans to foreigngovernments
playeda vital
domesticgovernments.
as 'lending
capability role in the creationof rivalimperialisms
politicalpowerand military
supplemented
the
to
came
countries
coined
who
foreign
envisage
in the struggleforhegemony.Hobson,
gradually
of theircitizensnot as privatefinancial
the term'financialcapitalism',i.e. the bankingand investments
but as one of the instruments
as a conspiracy transactions
through
saw imperialism
brokingcommunity,
national
to
which
ofgovernment
destinywas to be achieved' (Feis,
ofcapitalists'to use themachinery
the bankers
and that 1930). This was 'portfolio'investment;
secureeconomicgainsoutsidethecountry,'
its necessaryconsequence 'was a large and ever largelyacted as agents in sellingbonds of foreign
to privateindividuals.If the
growingdomesticand foreignindebtednessto the state or undertakings
International
banklending
415
riskof defaultwas sometimeshigh,so was the rate GreatDepressionandtherepudiation
ofVersaillesby
of returnto the bondholdersand the fee to the Hitler.In effect,
privateloans raisedin theAmerican
marketfinancedvirtuallyall paymentsof war debt
managingbankers.
The geographicaldistribution
of foreignlending andreparations,
forthroughout
the1920stheFederal
before1914 showed a strongcoincidencewiththe Reserveviewedcheapmoneyand largeforeignloans
oftheworldeconomy.In
geopoliticalinterestsof the Powers. Britishinvest- as desirableforthestability
ment,thelargestand mostwidespread,was heavily additionto loans to Europe,a new fieldfor the
in theUnitedStates,in theDominions Americanbankers,large loans were also made to
concentrated
and dependencies,and in Argentina,where strong Latin America,-many of which were basically
interestin railroadsand exportindustries,
and sub- unsoundor thesubjectofmalfeasance.
In thegeneral
stantialBritishimmigration,
promotedan image of abandonmentof the gold standardin the financial
fallin
Argentinaas the 'SixthDominion'.Frenchlending collapseoftheearly1930sand thecatastrophic
in contrast,was less heavily orientedtowards its commodityprices,virtuallyall LatinAmericandebextensivecolonialpossessions.Easternand Southern torsdefaulted,and were promptlyfollowedby the
Europe,and in particular
ImperialRussia,dominated Europeandebtors.These however,were prompted
French loans, where they supported diplomatic not by inabilityto pay, but throughthe desire to
effortsto containthe risingpoliticaland economic createtheirown autarchictradeblocs withthe colstrengthof the GermanEmpire,throughbuilding lapse of the multilateral,
largelyfreetrade,world
up Russia's rail network and heavy industries economy(Gisselquist,1981,p. 42).
The bankersundoubtedly
1981,p. 42). Germanyinturnpursuedits
sharedresponsibility
for
(Gisselquist,
DrangnachOstenthroughloans focussedmainlyon the onset of the Great Depression,but as with all
the Balkans,and Turkey.United climacterics
ofmodernhistory,
itscausesweremultiAustria-Hungary,
Statesforeignlending,thoughsmallin comparison facetedand deep seated, and will probablynever
withthatof theEuropeanpowers,showed a strong be the subject of consensus (Galbraith,1972;
orientation
towardsthewesternhemisphere,
and to Kindleberger,
1973; Brunner,1981, Garraty,1986).
Mexico in particular.
The US governmentby its tacitapprovalof stock
The end of WorldWar I leftEuropewithtremen- market speculation throughinflationand cheap
dous inflation,
and conflicting
financial money,the Hawley-Smoottariff
indebtedness,
of 1930, France's
claimsas theAlliessoughtto collecton theirloansto deep-seatedfearof a Germanrevanche
whichdrove
each other,to recoupfromdefeatedGermany,
and to it to destroyGermany'scredit-worthiness
in 1931
restorethefixedexchangesofthegold standardthat (Gisselquist,
ofVersailles
1981,pp.67-70), thefailure
had characterized
theexpandingeconomyofthepre- and the League of Nations,all sharedin thedebacle.
ceding century.Ludendorff's
Germanyfoughtthe Butforthegreatestdisasterto befalltheUnitedStates
warthrougha 'statesocialism'derivedfromImperial since the Civil War the bankersincurredmaximum
Russia,and latercopied by Lenin,but theEuropean odium,and theirguilt seemed confirmedin mass
Allieshelpedfinancethewareffort
whichculminated
in thevirtualshut-downof
throughUS loans, failures
whichtransformed
thecountryfroma debtorto the the entirebankingsystemin early 1933. The new
world's largest creditor.OfficialAmericanloans Roosevelt administration
determinedto shiftthe
ceased withthecollapseof Wilsonism,and thenew locusoffinancial
powerfromWallSt.to Washington,
administration
insistedon repaymentof war debts. and to keep the bankers firmlyunder control
Thispolicyhad no chanceofsuccess.To collectfrom throughnew restrictions
and regulatoryagencies.
Germanyas the Allies hoped, would have necessi- The politicaland economicstandingof thebankers
tatedan enormousincreasein Germanexportswhich was destroyedformorethantwo decades.
no Ally was preparedto concede,while Germany
AfterWorldWar II theUnitedStateshad boththe
itselfresistedpaymentof reparations
whose magni- resourcesand the will to createa new multilateral
tuderemainedindeterminate,
itselfa consequenceof free-trade
economicorder,and underits hegemony.
mannerin which the Versailles Europe'srehabilitation
the unsatisfactory
throughthemassiveMarshall
settlementcame to be signed by the German Planset thepatternforthesubsequentuse offoreign
aid programmes
to further
1983,pp. 34-5, 109-10).
delegation(Johnson,
ideologicaland strategic
The questionofdebtsandreparations,
inflamed
by ends,and withcolonialdevolutiontheUnitedStates
an unsound polemic fromKeynes (Keynes, 1919; extendedits interestsin theformer
dependenciesof
Mantoux, 1946), bedevilledworldfinanceuntilthe its Allies. Unfortunately,
the farsightedpolicy of
416
DONALD W. FRYER
International
banklending
417
418
DONALDW FRYER
International
banklending
419
Settlements
(BIS) vary
Third,thebanks'overseasbranchesmadeloans in and theBankof International
to bothpublicandprivatesectors.For widelyin coverageand in definitions
localcurrencies
of thecategorthelargestAmericanbanks,whichby thelater1970s ies offinancial
flows,as eachproduceswhatbestsuits
derivedsome 20 percentor moreof theirtotalearn- its own purposes.Some LDCs stillmakeonly token
to collectand consolidatedata offoreignboringsfromLatinAmerica,themagnitudeofsuchloans efforts
meansthatthetotalindebtednessof rowing,as did the Philippines(Economist,
1984c).
unquestionably
Insofaras Banks themselves are traditionally secretive;
borrowersis stillgreatlyunderestimated.
Head Officeswishorareable to repatriate
theprofits 'Americanbanks have always claimedto be better
suchloans also generatea chargeon judges thantheirgovernments
of subsidiaries,
of what thenational
theborrower'sbalanceofpayments.
interest
mandatesshouldbe keptconcealed'(Sherrill,
forsuchprodigality
Retribution
was swift.Follow- 1983,p. 464). The centralbanksof theindustrialized
Iranian
of
the
revolution
LDCs suffered worldreportbankforeignlendingto theBIS,which
1978-79,
ing
a tripleblow fromgreatlyincreasedoil prices,froma theyown,and since1974,theBIS has publishedproon suchflows.
commodityslumpthatwithinfiveyearsdrovesome gressivelymoredetailedinformation
of theirexportpriceslowerin realtermsthanin the Of the BIS members,
however,only Britainand the
GreatDepression,and froma catastrophic
increasein United States regularlypublishdetailedfiguresof
theirdebtservicechanges.By 1983,virtually
all short theirprivatebanks' externallending.In 1986 the
estimatesofshort-term
term,and nearlyhalfthe medium(three-fiveyear WorldBankpublisheditsfirst
and
term
debt
of
at
LDCs
was
whose
omission
had
in a grossunderresulted
debt,
maturity) long
floating
rates,and as astronomicalAmericanbudgetaryand estimationof the gravityof LDCs' debt situation
balance of trade deficitsdrove the primerate to (Gisselquist,1981, pp. 179, Dennis, 1984, p. 206).
unprecedentedlevels, every percentagepoint in- Morgan Guaranty,a leading Americaninvestment
creaseraisedLDC serviceon mediumand long term bank,also publishesfromtimeto timeits own estidebtalone by some $1-2billion(IBRD, 1983,p. xiv). mates of bank foreign lending. Nevertheless,
The debt problemswhich had rumbledon for a althoughthereis now an enormousand bewildering
decadeas variousborrowers
underwent
thetraumatic amount of statisticalinformation
on international
underthe aegis of the IMF, lending,'itis difficult
to gaina clearand comprehenprocessof rescheduling
usually with accompanying'IMF riots',suddenly sive pictureof total financialflowsto a particular
became a major crisisthroughthe possible default country'(Dennis,1984,p. 319).
of a major borrower,or worse as Latin American
Since1981 privatebankshave cutbacksharplyon
countriesthreatenedin 1984 at a Cartagenaconfer- theirforeignlending,and new commitments
have
ence, by major borrowersin concert.The anxiety beenlargelyinconnectionwithrescheduling
existing
moreover,was essentiallyover the privatedebt,i.e. obligations,i.e. drawingout maturities,
oftenwitha
interestand amortizationpaymentson bank loans. graceperiodfortheresumption
ofrepayment
ofprinThis not only reflectedthe factthatLDCs debt to cipal. Until the mid 1970s such negotiationswere
of bankers'
privatecreditorsgreatlyexceeded thatto govern- usuallyhostedby the financeministries
ments and multilateralinstitutions.The bankers own governments,
such as the so-calledParis and
claimedpriorityin paymentand theirgovernments London'clubs',butincreasingly
thistaskhas fallento
and the IMF supported their claim. Times had the IMF, an organizationthatinitiallythe bankers
changedsincePresidentRoosevelton learningfrom bitterlyopposed. Reschedulingis arrangedthrough
Dr. Schacht in 1933 of Germany'sintentionto an applicant'sacceptanceof severe 'conditionality',
defaulthad remarked'Serve theWall Streetbankers essentiallydeflationary
policiesdesignedto reduce
right!'(Schacht,1955). Privateloans were again an importsand raise exportsin returnfor large IMF
adjunctto nationaleconomicand foreign assistance,upon whichthebanks,albeitreluctantly,
important
policy.
providenew funds(Carvounis,1984,pp. 63-80). But
The totalmagnitudeofforeignlendingby private how long thebankscan,or are prepared,to pay out
bankscan neverbe knownexactly.Shorttermdebt, good moneyafterbad is problematic
in theextreme.
the categorythat grew most quicklyin the later The bankingcommunity,
international
agencies,and
difficult
to assess,and itwas the governments
1970s,is particularly
oftheindustrialized
world,believethat
largestborrowersthatmade thegreatestuse of such LDCs areessentially
froma 'liquidity'
suffering
probinstruments.
Statisticskeptby multilateral
monitor- lem,and thatwhen the developed world's rate of
ing agencies,the World Bankand IMF, the OECD, economicgrowthpicks up to some 4 per cent or
420
DONALDW.FRYER
64.4
2A?0.
'1ii3.7.1
25.2
4.7
2.1
COLUMBIA
1.
ECUAO..35.3
2.3
N.
...1..3
KO
SOUT
ALG
MEXICO
COAST
3.2~
BRAZIL
.
0
.
0.5
6.7
.
4.
0iiiii.T
1.5
A..S
0.9
1.2
I.NIGERIA
ERU12.3
20.5
......
INDO
ERUMALAYSIA
Billionsof dollars
BIS REPORTING
BANKS
Nin
U.S. BANKS
FIGURE 1. Externaldebtowed to Banksby majorLDC Borrowers(mid1982, billionsof Dollars)
All
422
DONALD W FRYER
universalappeal; more than 500 foreigncreditors colonies, was the country'sfirstdecisive foreign
wererepresented
in thebankers'committee
whichin policy statement,and for more than a centuryit
September1984 reached outline agreementwith remaineda majorbarrierto Europeangovernments
Mexico on reschedulingsome $50 billionof loans seekingto compel paymenton obligationsdue to
due by 1990 (Economist,
1984b).The beliefthat bondholdersby defaultingLatin American borfalling
SouthAmericahasvastpotentialrichesis as old as the rowers.Militaryintervention
to compel payment
or to supportAmericancorlegendof El Dorado,and fromthetimeof theSouth on debtsto Americans,
Sea Bubble, it has repeatedlybedazzled foreign porationsagainst host governments,was another
investors, often with disastrous consequences matter.The Grenadainvasionof 1984 and thepresthe
ent conflictin Nicaragua notwithstanding,
1975,p. 38; Delamaide,1984,pp. 96-8).
(Galbraith,
The successofWestEuropeancountries
andJapan excesses of 'Dollar Diplomacy' and direct interinaccumulating
largebalanceofpaymentssurpluses, ventionhave probablypassed forgood, and a deciadvanced the rankingof theirlarger sivebreakintheDoctrinecamewiththeresolution
of
substantially
banks.The world's50 largestbanksaccountforabout theCuban crisisof 1962, in whichtheUnitedStates
of all lendingto LDCs, and withinthis tacitlyaccepteda USSR-orientedCuba. But it was
two-thirds
to preventtheexportofCastroismto the
select group in 1984 were 21 West Europeanand determined
Increasedaid to military
sixteenJapanesebanks,as againstonlysix American mainland.
regimesimpliedan
(Spindler,1984, p. 4; Banker,1984). Because of approval of governmentsthat many Americans
growingcompetitionfromthe large Europeanand detested;privatebank loans, presentedas purely
fromno suchpolitical
ventures,suffered
Japanesebanks in foreignlending,the share of commercial
Americanbanks in overall lendingto developing disadvantage.
in Latin
countrieshas fallensince the late 1970s. NevertheVirtuallyall large extractiveenterprises
less,Americanbanks'exposurein thosecountriesin Americaare now undernationalownership,but US
which the United States has long had a special strategicplanningnecessarilyinvolvessafeguarding
forAmerican
theresourcesof theentirehemisphere
remainshigh.
interest,
to thisaimis
Fundamental
For sovereignstates bank loans have the great use ina majoremergency.
advantageover ODA thattheycan be used forany the continuedavailabilityof petroleum.The close
purpose governmentwishes withoutexternalsur- associationof the fortunesof the oil industrywith
veillance.Moreover,all government
borrowingpro- nationaleconomicand foreignpolicyis ensuredby
to theelection
enormouscontributions
videsbudgetsupportin thatit can replacebudgeted theindustry's
hasalreadydecidedto campaignsof candidatesfornationaloffice,and by
thatgovernment
expenditures
make (Robichek,1980). Loans thus strengthena theactivitiesofitsWashingtonlobbyanditsbanking
The consonance of the bankingand
domesticstandingandfinancial
power, counterpart.
government's
and conveya measureof international
approvaland petroleumindustriesis seldom remarkedalthough
Bankersarguethattheirlendingpoli- Chase, one of the AmericanBig Three banks,is a
respectability.
bank and the familytrustsmay have a
cies are politicallyneutral,and thatany financially Rockefeller
in Exxon,Mobil and Socal (Blair,
interest
well-runcountrycan obtain a loan. Nevertheless, controlling
countriesfallingout ofpoliticalfavourareapt to lose 1976). Not only do the leading banks have stock
statusuntiltheyadopt a political interestslarge enough to give decisive influence
theircredit-worthy
of big overthetopUS energycompanies,buttheyareoften
orientationmoreacceptableto governments
also linkedthroughhavingthe same legal counsels
banklenders(Aronson,1977,p. 174).
1983,pp 492-3).
(Sherrill,
ThattheStateDepartment
American
banklending
approvedtheactivities
The Americanbankersearliestventuresintoforeign of thebankersin LatinAmericais beyondquestion,
bothshorttermeconomic
lendingwere to LatinAmerica.The Americancon- fortheywereforwarding
oftheUnitedStates.
interests
term
and
role
in
western
the
of
its
strategic
long
hemisphere
political
ception
and the numerous long-establishedactivitiesof Despite,orperhapsbecauseof,profoundsuspicionof
American corporations,particularlyin extractive the Americanoil companiesand theirWashington
nationaloil entitiesborrowedheavilyto
withinthe region,make the continued supporters,
industries,
dominanceof LatinAmericain US banklendingto financeexpansion;by 1982 Mexico's Pemexowed
LDCs inevitable(Fig. 2). The Monroe Doctrine, foreignbankssome $24 billion,and raisingdomestic
in some $10
enunciatedshortlyafterthe revoltof the Spanish productioninvolvedBrazil'sPetrobras
PO
LAND
,0.6
0.5
5
m=0.
0.4
YUGOSLA4t0
7.5
4.4
MEXICO
C2LU
0.9 0.5
13.3 14.1
ji60li
04
0.4
0.3 72
1.3 1.2
1.2
1.3
0.2
1.6
"
0.3
1.7
.4.2
5.1
2.8
13
3...
1,06
CHILE
0.8
1.21
22
9
... .9
133
3..
REGIONAL DISTRIBUTIONS
1.82.8
THAIL NO
2.0
74
1.6
KOREAA
8.3 I7.4
__._2.6
4.9
:.::
6.6
8.3
6.4
1.2
1.1 0.6
Z .2!!"
IGERIA
0.9
:::::
2.3
2.8:.:3
0.9
SOUTH
0.2
7.6
.6 0.8-1.5
0.3
ECUADOR
01.3
ISRAEL
.7
0.9
0.4 0.2
f 1.3 jiO.6
0.5
1.1
7 2.2..
2.1
-"0.7
1.4
0.4
2.5O 8.3
0.3
0.46 1.2
0.8
0.4
VENEZUELA
0.4
,9 3.
0.7
ARGENTINA
5.4
13.57.8
20.0
LEGEND
Private
Ovr
Public
1-5 Years
Banks
BORROWER
5 Years
All Others
''
Nine Largest
Year
er10.7
&Under
ans1
SIZE
MATURITY
A
SOver
Non-OPEC
LDCs,
22.3
S29.1
35.9
42.6
11.4
Non-O
31.2
31.2
20.5
0.4
0.6
1.9
3.6
8.5
6.9
424
DONALDW.FRYER
billionof debt between 1973 and 1985 (Hartland- economic liberalismin the inter-warperiod, and
and stateownership
Thunbergand Ebinger,1986, pp. 62, 141). Despite forceddraughtindustrialization
what Washington believed to be an excessive ofnaturalresourcesintensified
inthePer6nregime.In
Mexicansensitivity
innegotiations
overthepricefor consequenceArgentina,
in 1914 one of the world's
itsoil and gas exportsto theUnitedStates,theriseof mostaffluent
stateswithrealwages onlyexceededby
a new petroleumproducerpotentiallyof the first thosein theUnitedStatesand Britain,
had slippedto
on theUS southern
rankby 1985 (Fernandez,1985). Whileshort
borders,was clearlya fiftieth
magnitude,
termborrowingincreasedafterthe military
majorstrategic
gain.
coup of
a
of
in
to
ease
the
1976
balance
of
Despite higherdegree self-sufficiencypetpressing
paymentscrisis
increaedin inherited
fromthePeronadministration
roleum,Brazil'soil importsnevertheless
(Carvounis,
absolutemagnitudeoverthe1970s.Yet onlyabouta 1985,pp. 139-5 1; DiamondandNaszewski,1985),to
fifth
ofbanklendingwas used to meetthehighercost one authority
thedebtproblemofArgentinareflects
of energyimports.By farthe greaterpartwas dis- less the indiscretions
of the foreignbankersthan'a
bursedbyheavilyprotectedstateentitiespursuingan lackoffaithofArgentinaentrepreneurs
in a country
and subsidized-exports
import-substitution
develop- whereproperlyrightsare notgrantedby law butby
mentstrategy,
whichby the early1980s had made the will of a governmentbureaucracy'(Fernandez,
thepublicsectoroftheBrazilianeconomythelargest 1985).
outside the communistworld (Hartland-Thunberg The LatinAmericanindustrial
boom and itsafterand Ebinger,1986, pp. 105-7). Among the most mathofdebthadtwoimportant
consequencesforthe
fromEuropean
costly of these bloated state entitieswere those UnitedStates.Althoughcompetition
engaged in other energy projects to reduce the and Japanesebanksdrovedown theUS shareof prinationaldependenceon petroleumviz., a nuclear vate claimson LatinAmericafromsome60 percent
thatby 1984 had involvedsome in 1975 to 45 per cent in 1983, the UnitedStates
reactorprogramme
an overlyambitious nevertheless
its tradingpos$40 billionsof cost over-runs,
improvedsignificantly
hydro-electricity
plan whose excessive costs and ition vis-a-visits industrialrivals. By 1979, the
long gestationhave so farhad a negativeimpacton UnitedStateswas supplyingover40 percentofLatin
theeconomy,andthesynthesis
ofethanolfromsugar America'simports,two-thirds
of whichwentto the
cane, which was barely competitiveeven at the six most deeply indebted states,Brazil,Mexico,
heightof the oil crisisof the late 1970s (Ebinger, Argentina,Venezuela, Chile, and Peru. Excluding
theBrazilian'economicmiracle' trade with OPEC countries,the share of Latin
1986). In retrospect,
fromthe early 1960s seems merelyanotherin the AmericainUS tradeturnover
grewfroma littleover
country'slong series of speculativecycles; it col- 10 per cent in 1973 to nearly14 per cent in 1981
Markets,1984).
1984a, WorldFinancial
lapsedin thepost-1980worlddepressionas all such (Economist,
had
and
after
two
The
nearly
politicalconsequencewas unforeseen;Latin
collapsed,
previouscycles
decadesofopulence,Braziliansagainbegantalkingof America'smilitarygovernmentswere unable and
theexigenciesofthedebtcrisis
theircountryas part of the 'ThirdWorld' (James, unwillingto confront
withitsmandateddeflation,
1942,Sampson,1981,pp. 146-7, 240-1).
decliningGNPs, mountand severe social distress.By
The other large Latin American borrowers, ing unemployment
havefollowedbroadlysimilar 1985 Brazilhad joined Uruguay,Peru,Ecuador,and
Mexico andArgentina,
refusedto sign the Argentinain restoringelected democraticgovernstrategies;Mexico consistently
and Trade(GATT) to ments,and onlyChileof themajordebtorsremained
GeneralAgreementon Tariffs
protectitsheavilycossetedeconomyuntilforcedto undermilitaryrule.Anotherlong-acclaimedobjecdo so inmid-1986.As withNigeriaand Indonesia,its tive of US foreignpolicy for the hemispherehad
greatlyenhancedborrowingsin the 1970s restedon apparentlybeen realized, but appearances were
was discredited
the assumptionthathigh oil priceshad become a deceptive.In Argentinathemilitary
war and
permanentfeatureof the world economy. While by the disastrous1982 Falklands/Malvinas
the
forthethousandsofdesparecidos,
had forecastpricesof $80-$100 a by responsibility
some authorities
barrelforthelater1980s (Fesheraki,
1981),spotprices missingvictimsof thegenerals'ferociousonslaught
forNorthSea crudeby mid-1986had fallenbelow in the 1970s againsturbanleftistsand alleged supPeru and Brazilalike,the
$10, a fallfarsteeperthanthatof interestrates,and porters.But in Argentina,
unable
theMexicaneconomyand politywas in deep crisis. new civilianadministrations
appearedfragile,
had brokenwithitstraditional and unwillingto initiatebasic structural
changesin
Argentinain contrast,
International
banklending
425
theeconomyforfearofthereturn
ofthegenerals,and States,buteventuallyitgetsintothebankingsystem
to thedeflationary
stronglyresistant
pressuresofthe and is availableforfurther
lending.The proceedsalso
IMF. For Argentina,
whichhad borrowedlargelyto are distributedin a highly inegalitarianmanner;
meet balance of paymentsdeficitsratherthan for nevertheless,'the US huge importsof dope are
infrastructural
thispressurewas particu- people-to-people
assistanceofthemostdirectkindinvestment,
Colombia,Bolivia,andPeru... thousands,
larlyirksome.In resistingthe Fundand thebankers, inJamaica,
itsseparationfromthe ifnot millionsof farmers,
ruralpeople and entrepreArgentinawas againstressing
rest of LatinAmericaand acclaimingits European neurs are gettingincome fromthe drug business'
affinities.
Britain'sIMF creditof 1976 had involved (Stein,1984). Thereis thusa strongpresumption
that
no such 'conditionally(Gisselquist,1981, p. 223); policiesforsuppressing
drugsmugglingwillachieve
Argentinafeltitmeritedno lessfavourabletreatment minimalsuccessuntila comparablefinancialflowis
thanthataccordedto theprivilegedEuropeans.
substituted.
assistanceto the
Meanwhile,US military
Withinthe United States,increasingtrade and ambivalentgovernments
of Mexico, Colombia and
financial
connectionswithLatinAmericahave had a Bolivia in half-hearted
effortsto destroyplantings
remarkable
impacton southFloridawhereburgeon- and processing facilities,has brought renewed
withintheregion.
ing Miami is becoming'the northernmost
city of chargesof'Yankeeimperialism'
LatinAmerica'(Neil,1982, p. 3). Miami'stransform- InthesecondmajorareaofAmericanbanklending,
ationbeganduringthe1950swiththeimmigration
of East and South-EastAsia, US politicaland economic
skilledrefugeesfromCastro'sCuba, but by 1980 its interest
are also oflong-standing,
datingbackbefore
Hispanicpopulationincludedelementsfromall parts the1853 Perryexpeditionto Japan.Sincetheend of
ofLatinAmerica.The cityhas attracted
a substantial, WorldWarII theregion'sislandandpeninsular
states
and perhapsincreasing
oftheflight
forresisting
the
proportion
capital have playeda keyroleinUS strategy
of richLatinAmericans,
'thecowardiceofmoney'as spread of communismin Asia, and in particular,
in
PresidentPerononce calledit,whichhas repeatedly constraining
the large Russianair and naval forces
preventedthe regionfromcapturingthe maximum in the Pacific. Most such states have de jure
benefitsof periods of high prices for its export (South Korea, the Philippines),or de facto(Japan,
products. Unlike the poor immigrantsinto the Taiwan) alliances,or tacitunderstandings
(Thailand,
Southwest,Miami'swealthyand educatedHispanics Indonesia) with the United States for major US
maintaina multiplicity
of economic and political assistancein meetingexternalattack.The strategy
connectionswith theirhomelands.Throughthese necessarilyinvolves a heavy US commitmentto
linksMiami become an attractive
centreforlending economicdevelopment,
and sparkedoffby imposed
to Latin America,and has now become a major landreform
inthedefeatedJapaneseempireandlarge
focus of international
bankingin its own right,in officialaid, the contrastin economic performance
which virtuallyall the world's major banks are withthatof the faltering
communisteconomiesof
the mainlandhas been remarkable;followingthe
represented.
That this developmentis also related to the Japanese'economicmiracle'came the successof the
states (NICS), South Korea,
'laundering'by the banks of an annualinflowinto newly industrializing
southFloridaof some $7-10 billionfromdrugtraffic, Taiwan, and the two city states of Britishorigin,
is beyondquestion(Neil, 1982, p. 21). Floridahas a Hong Kong and Singapore.These fourhave constilong historyof lawlessness(Rothschild,1985); the tutedthelargestdestinationof US corporateinvestfactsof geographymake completesuppressionof ment in the developingworld,and the firsttwo,
drug smuggling impossible, however thorough togetherwiththePhilippinesand Thailand,a major
federalsurveillanceof the air, the coasts and the focus of Americanbank lending.This reachedits
banks.The wholesalevalue ofillegaldrugexportsto apogee in themid 1970s,whenUS banksheld over
theUnitedStatesfromJamaicaand Colombiaaloneis 80 per cent of total claims due to foreignbanks
estimatedrespectively
at morethan$2 billionannu- fromthefourstates.By 1982 thissharehad fallento
1984d); thatfromMexico mustbe 46 per cent, while that due to European banks
ally (Economist,
to some 34 per cent, and to
verymuchmore.Virtuallyall discussionof thedebt increasedthree-fold
burdenignorestheobvious,thattheannualearnings
banks
increased
ten-foldto 23 per cent
Japanese
of LatinAmericafromthe drugtradeare probably (Spindler,1984, p. 6, De Vries,1983); significantly,
largerthanpaymentsof its debt obligations.True, the decline was greatest in Thailand,where an
muchof these earningsremainswithinthe United Americandefencecommitment
is equivocal.
DONALDW.FRYER
The patternofbanklendingbyoriginto theregion farexceededthe27 percentforMexico or the16 per
thusnow broadlyresemblesthatto LatinAmerica,in centforBrazil.Paymentsto foreignbanksbecamein
thatbanksof a largenumberof countrieshave sub- virtualdefaultin October 1983, and lack of agreethePhilippinesapart,a mentwith the banks stillheld up in 1986 an IMF
stantialclaims.Nevertheless,
debtserviceproblemhasnotso fararisen.Loanshave 615 millionSpecialDrawingRights(SDR) stand-by
been used in supportof an alternative
development credit,forwhichsuchagreementwas a pre-requisite
1984f).
usuallytermed'export-led',
althoughboth (Economist,
strategy,
In lendinglargesumsto a countrywhose dismal
South Korea and Taiwan have large domesticmarof thevalue ofTaiwanese economicperformance
kets;onlyaboutone-third
appearsto makeita poorrisk,
is exported (Kuo, 1983). Industrial the bankerswere confidentthat in the last resort
manufactures
developmentreceived littleprotection,but it fol- Washington would always come to the rescue
of theSubicBay
reform
and a because of thesupremeimportance
lowed and did not precedeagricultural
to
be
seen whether
It
remains
Field
bases.
and
Clark
which
in
increase
provided
productivity,
great
whichcameto power
farmers
withtheincometo buynew products.MNC thenewAquinoadministration,
investment
andjointventureswithlocal privatecon- withdramaticsuddennessin early1986, can thwart
in whichcase
cernshelpedto ensurea highdegreeof competitive a communistrevolutionary
triumph,
fromthe start.True,the east Asian NICS debt repudiationwould follow,as withthe Russian,
efficiency
have enjoyed a somewhatprivilegedaccess to the Chinese,Cubanand Iranianrevolutions.
largeUS market.ButthefactremainsthattheNICS
are highlycompetitivein qualityas well as in price;
lenders
with few exceptions,Indian industrialexportsare Thenon-American
ofprivate
WestEuropeanstateshavea longtradition
neither.
The strikingexception to this success is the foreignlending,but Japanhas only become a large
whichin its developmentstrategyas in creditorsince 1960. The areal lendingof European
Philippines,
moreclosely and Japanese banks preserves traces of former
so muchofitssocio-economic
structure,
but thesefossilscoexistwithnew
resemblesLatinAmericathanits Asian neighbours. imperialinterests,
which
theabsenceofa colonialconnecfor
the
with
States
the
United
prob- positions,
grappled
Though
one lost long enoughto be
almostfrom tion,or morecorrectly,
lemsofa defectiveagrarianorganization
has
was
it
the commencementof its administration,
conveniently
forgotten, been advantageous.
In sharpcontrastto pre-WorldWar II practice,
unableat the end of WorldWar II to imposeon its
bank lendinghas been denominated
Allyandformer
possession,itspolicyforlandreform non-American
and not innationalcurrencies.
of largelyin Eurodollars,
intheJapaneseempire.Nor has anyadministration
the PhilippineRepublicmade any real commitment True,someloansarenow madeinDeutschemarkand
to
to the issue; all hoped that technologicalchange yen,but no countryis willingto allow foreigners
as nonewishes
could make such action unnecessary.Failure to acquirelargequantitiesofitscurrency
reasonforthe to riskthecostlyexperienceof Britainin operatinga
solve thelandproblemis theprimary
and major reserve(Strange,1971). Attemptsto create
economic
lacklustre
performance,
Philippine's
its consequenceshave been regionalinsurrections,new reserveunitssuchas theSDR orECU (European
Unit),a unitofaccountbetweenEEC memwidespreadurbanand ruraldiscontentarisingfrom Currency
reducedthe role of the
not significantly
have
and
intense
and
bers,
malnutrition,
underemployment
dissatisfactionwith the largely window-dressing dollar and the financialhegemonyof the United
the States,whichis buttressed
by thelocationofboththe
programmeof land reformwhichcharacterized
in
Bank
IMF
and
World
Marcos' regime(Kerkvliet,
former
1974).
Washington.
As theoldesthandsin thebusiness,Britishbanks
was at
The disunitedoppositionin thePhilippines
one in viewingtheloans madeby foreignbankersas have thewidestgeographicalrangein theirlending,
the and in total obligationsare second to those of the
buttressingthe Marcos regimeand furthering
extensionof its 'cronycapitalism',throughwhich UnitedStates.In 1984 some 45 percentof all loans
same
largechunksoftheeconomypassedto thePresident's outstandingwere to LatinAmerica,about the
Former
loans.
bank
American
of
as
that
close personalfriends.Debt servicein relationto proportion
howeverwas visiblein thecommitexportearningsis theequivalentofthatofthelargest imperialinterest,
thoseto Nigeria
countries,
Latin Americanborrowers,and the proportionof mentsto Commonwealth
shorttermto totaldebtin 1982-some 47 percent-- for whom Britishbanks were the largestlenders,
426
banklending
427
International
its
in
should
abandon
romanBonn's
concern
a
to
of
Poland,
view,
(World
magnitude give major
being
on economic
to freedom,
concentrate
FinancialMarkets,1985). In contrastwiththatof the ticattachment
andraiselivingstandardsto thoseofHungary
otherpopulousoil producersofmiddlerank,Mexico reform
and Indonesia,Nigeria's debt problemis of very or East Germany.It is a policymostPoles emphatirecentorigin,and both debt per capita and debt cally reject (Ash, 1985, pp. 38-9). Serious social
ofexportearningsareverylow discontentin Poland,triggeredby economicshortserviceas proportion
in comparisonwith those of other major debtors comings,compelsBonnto providelargecredits,and
(Nunnenkamp,1986). Nigeria's obligations arise ifnecessary,to pressureitsbanksto supportbeyond
mainlyfromprivateexportcreditsgrantedinconnec- theirown volition,as occurredin both the early
tion withthe grandiosenationaldevelopmentplan 1970s, and in 1979-80, when the Germanbanks
based on thehighoil pricesof the 1970s. In theory, supplied$500 millionto help Poland meeta major
crisis(Spindler,1984,p. 80).
Nigeria should to be able to pay its way without financial
But doing so exacerbates the
major difficulty.
Lending 'to a nation like Poland is to enter
lifeboaton
waterwithouttheconventional
immanent
divisionsamongits verydiversepeoples, uncharted
as the traumaof the suddendescentfromaffluence board' (Carvounis,1984, p. 151). But the bankers
to parsimonyand the bitterlegacy of colossal cor- believedthattheUSSR,whichdespiteitsrepudiation
through
ruptioneven at the highestlevels of government, of Imperialbonds became credit-worthy
ofkeyfiguresin theBuhari promptpaymentof its own bills,would rescueany
poison society.The flight
The 1976 defaultof
administration
and the oil industrycaused serious clientstatein seriousdifficulties.
and
of
with
whether
North
Korea
on
almost
difficulties
$2 billiondue
Britain,
obligations
diplomatic
Nigeriacould surviveat all appearedat mid 1986 a mainlyto Japan,Swedenand Finlandpuncturedthis
matterofsubstantial
doubt(Economist,
1986a).
optimism,but as few big Western banks were
show old and new involved, the danger signal went unheeded. The
Germanbankloans in contrast,
patterns.Freedom from the taint of colonialism USSR didindeedattemptto assistPolandin 1981,but
helped Germanbanks in enlargingbusiness with the claimsof othersatellitesforsimilarhelp and its
some developingcountries,
notablywiththe politi- own mountingfinancialproblemscompelledit to
cally highlysensitiveoil producers,Indonesiaand abandonPolandto itsown devices.Poland'seffective
Iran (Spindler,1984, p. 68). On the otherhand,in default, followed shortly by that of Romania
loans to Turkeyand to east Europeancountries,
the destroyedthe bankers'optimism;they were then
banksmirrored
theirimperialpredecessors.Lending owed some $80 billionby COMECON countries
to thecountriesof the Councilof MutualEconomic (Rohatyn,1983). Poland has sinceunilaterally
deterAssistance (COMECON/CEMA), which release minedwhatitwillpay,ifanything,
and progresswith
of theirnationalaccountsand most debt reschedulinghas been slow. While German
limitedstatistics
ofwhicharenotmembersoftheIMF,is fraught
with banks were the major sufferers
in these defaults,
risk,but such loans forwardBonn's Ostpolitikof some Americanbanksalso burnttheirfingers.Yet,
reconciliation
withstatesoccupiedby Germanydur- theGermansstillperceivetheUSSR itselfas a good
World
War,
and,thoughunderSoviethegemony, risk;Bonn mobilizedlarge creditsfor the Yamal
ing
avidforwesterncurrencies
fortheirnationaldevelop- gas pipelineagainststrongAmericanopposition,and
ment.Whilethismandatesaccommodationwiththe in mid-1986,the Deutsche Bankannounceda $250
USSR, its crux is relationswith Poland, the most million consortiumloan for acceleratingSoviet
1986).
populous of the Soviet satellites,and with the economicgrowth(WallStreetJournal,
and people.
ThatEastGermany,
withsome$12 billionofdebt,
sharpestcleavage betweengovernment
Poland commandsthe route to East Germany,the muchat shortterm,didnotbecomeanotherdefaulter
USSR's mostvaluable'colony',butitsinstability
and in 1982,probablyowes muchto thecovertsupportof
intractable
economicproblems,whicharisefromthe the West Germanbanks,actingwith Bonn's tacit
Poles' fiercepridein theirnationalidentity,
makeit approval(Delamaide,1984,pp. 94-5). EastGermany
not only a drainon the USSR but also a threatto can,ineffect,
applya financial
pressureon Bonnthatis
Bonn'sDeutschlandpolitik.
This set of understandings littleshortof blackmail.It enjoysa surrogatememand observancesbetweenthetwo Germaniesmakes bershipof theEEC as theFederalRepublictreatsits
daily life more comfortablefor both states, and exportsas 'German',and in manyotherways subsipreservesa common Germanidentitydespite the dizesitsneighbourso thatitenjoysthehighestliving
minimalprospectofpoliticalreunification.
standardsin theCOMECON bloc.Bonn'sgainfrom
428
DONALDW.FRYER
International
banklending
429
FortheUnitedStates,
greatersatelliteindependence.
a minorlenderto EastEurope,thecase forreserving
such lending to governmentis strong (Rohatyn,
1983). In West Germany,whose tradewithEastern
Europeis vital,such privatelendingin practicehas
always been largely directedand monitoredby
government.
theLDC debtproblemis butpartofa much
Finally,
wider problemof debt; in 1986 the United States
became the world'slargestdebtor,with a national
debt exceeding$1-3 trillion.It possessed nevertheless, an unlimitedsupplyof dollars,but it was clear
thatthisdebtmagnitude
was possibleonlyso longas
werepreparedto acceptthem,and to lend
foreigners
to ormakeinvestments
in,thecountry.
1982,theyear
oftheMexicancrisis,was also a yearofrecordbankruptciesin the developed world,and forthe 'cliffhanger'rescueof some of the largestMNCs. Nor
were West Germanyor Japanspared such trauma.
Simplyput,all of thesephenomenasharea common
to cut expendiorigin,an inabilityor unwillingness
tureto matchincome.Citizenshave long mistrusted
theirgovernments'
freedomto createmoney,and as
banksdo the same by 'a processso simplethatthe
mindis repelled'(Galbraith,
1975,p. 18),thevirtually
limitlessfreedomthatbankersenjoyedin therecent
creditcreationon an unprecepast forinternational
dentedscale,shouldgeneratean equallygreatpublic
mistrust.Supremethoughthe dollar stillis in the
world monetarysystem,it is abundantlyclear that
unlikein 1950-65, theUnitedStatesno longerpossesses thematerialresources,
northepoliticalwill,to
supporta world hegemony,and to carrysinglehanded responsibilityfor operatingthe principal
reserveofworldtradeand finance.True,thecountry
is betterequipped forsuch a taskthanwas Britain
in the early 1950s, but world monetaryreform
mandates greaterparticipationby Europe, Japan,
other 'emerging'developed countriesand eventuof
ally LDCs themselves,in creatinga framework
monetaryinstitutions
capable of providingfor an
The
intercourse.
expandingworldtradeand financial
such a restructuring
would
politicalreadjustments
entailarelikelyto be traumatic.
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