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EXTERNAL DEBT AND ___ DEVELOPING COUNTRIES Warren C. Hutchins The text ofthis article originated in the form ofremarks made by Mr. Hutchins on March 4, 1981, as a speaker in the annual Christian A. Herter Lecture Series at SAIS. It is now possible to use, if not clearly to imagine, the number of $500 billion as the level of external debt of Third World countries. A decade ago, the figure was well under $100 billion. Today, the nine largest U.S. banks have amounts equal to nearly twice their entire capital on loan to non-oil-producing developing countries ($38.6 billion in loans against $21.9 billion ofcapital). At least one major New York bank has substantially more than its capital in Brazilian exposure alone. In 1980, the 12 largest Third World borrowers required 16 percent oftheir total export earnings just to service interest payments on their external debt, and some analysts think this figure could reach 20 percent for the present year: It was 6 percent a decade ago. From end 1974 to end 1979, credit outstanding from commercial banks to the 12 principal developing country borrowers rose an average 33 percent per year to nearly $100 billion. The aggregate current account deficits ofall non-OPEC developing countries for 1981 is projected at $85 billion, a $10 billion increase over 1980. These few statistics provide at least a hint as to the magnitude of the problem, if it is a problem, that is the subject of this discussion. Anything that has grown so fast and to such a high level must raise certain questions. Warren C. Hutchins has been an international banker for25 years, and is currently Agent and General Manager ofthe Banco Rio de la Plata, S.A., New York Agency. He has also heldposts with Citibank and Merrill Lynch in the United States, Europe, and Latin America. 155 156 SAIS REVIEW Perhaps the most immediately obvious implication of what the Wall Street Journal recently called the new mountain on our planet— the towering mound of Third World debt—is that the developed world has had its level of consciousness raised to unprecedented levels with respect to the underdeveloped world. Parts of the world which, except for a few major institutions, were largely ignored by the broad international financial community up to, say, 15 years ago, now are the focus of concentrated attention. Today, it is an unusual institution whose chairman or president has not made at least a token swing through Latin America, for example, to foster the interests of his organization and to see for himself what his bank is getting into. Board meetings ofmajor U.S. banks are now occasionally held on site in developing country capitals, both in order to impress upon the local government and business leaders how important that particular bank considers that particular country and in order to give its own directors a first-hand exposure to the area and a better understanding of the risks underlying the bank's exposure. In the process of constructing this debt mountain, relationships with the developing world have become inextricably woven into the fabric ofnearly every major international financial institution. In addition to loans to developing country governments and their agencies, much ofthe lending has been to the local subsidiaries ofmultinational corporations. These funds often are in lieu of capital transfers from the parent where, for various reasons, the parent prefers the debt obligation to the capital investment. Brazil is an outstanding example of this in that about 25 percent of its total external debt is not really Brazil's per se, but that of foreign-owned companies operating there. Often such lending is in aid of a particular export sale by a foreign company. For example, the largest single loan ever undertaken by Yugoslavia—$518 million—was to build a nuclear power plant with the reactor supplied by Westinghouse. Exactly the same project was repeated—with the same supplier, Westinghouse—for over $1 billion in the Philippines. Algeria, in 1973, borrowed over a billion dollars in the course of three to four months for a liquefied natural gas plant and special tankers to transport the gas to U.S. markets. These are...

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