Latin American Debt

Two major developments have changed the outlook for the international debt problem in recent months. Both suggest that creditor banks do not plan much new lending to Latin America. First, negotiations with Mexico under the Brady plan left creditor banks three options. They could reduce principal by exchanging outstanding loans for bonds valued at 65% of the face value of the loans, or reduce interest rates by exchanging loans for bonds bearing a 6.25% interest rate, or agree to make new loans. The Mexican government has announced the response from holders of 60% of the nearly $53 billion of medium- and long-term debt covered by the agreement. Only 10% of the banks decided to offer additional loans; 50% chose to reduce principal and 40% to reduce interest rates. Based on these proportions, Mexico's debt service will fall by $900 million, and outstanding debt will fall by $8 billion. Second, major banks in the U.S. and U.K. increased their reserves against medium- and long-term loans to heavily indebted countries. On average, eleven U.S. banks with significant exposure now have a 60% reserve against medium and long-term debt. Reserves at major U.K. banks run between 50% and 70%, and reserves of other European banks are approximately 50% of their medium- and long-term loans.