The economy
Life on the brink
Jock Bruce-Gardyne
Fr he world banking system is not the sort of machine in which that distinguished merchant banker, Mr Roy Jenkins, would wish to fly just now. 'If you were told there was 30 per cent risk of an aeroplane you were getting into crashing, I don't think any of us would get into it'. Maybe not. But then most of us would steer pretty clear of an aircraft if we were told that there was a 5 per cent risk that it would pitch us into the sea; and over 18 months have passed since Sir Jeremy Morse, a banker with perhaps a wider experience of this particular type of aeronautics than Mr Jenkins, sent a chill around the world markets by putting that more modest figure on the likelihood of disaster. And we're still airborne — so far.
By the time these words appear we may know more clearly whether the latest exer- cise in brinkmanship is going to end in tears or not. Everybody is being very stern about the Argentinians. 'What we hope', Nigel Lawson told the House of Commons last week, 'is that the Argentine government will reach agreement with the IMF, on the basis of which the Argentine government will take measures to put its house in order. If it does not, it will clearly not qualify for assistance from the IMF'. So far President Alfonsin has shown no inclination to come to heel, and so the International Monetary Fund has declined to proffer its seal of good housekeeping, without which — in theory at least — the central and commer- cial banks will not agree to pay themselves the interest on their outstanding loans to Argentine, and as a result, under American banking rules, the US banks will have to declare those loans 'non-performing' next weekend.
The reasons for the nail-biting over Argentina are plain enough. Other Latin American debtors — notably Mexico and Brazil — have done the decent thing and put their names to 'letters of intent' negotiated with the brokers' men from Washington. That they have honoured their undertakings more often in the breach than the observance matters not: appearances have been preserved.
Argentina has persisted in declining to do the decent thing, writing its own 'letter of intent' instead. And if Argentina is allowed to get away with it (as it was, in effect, allowed to get away with it in March when the previous deadline for the US banks occurred and they contrived to pay themselves their interest without clearance from the IMF), others are liable to copy their example and tell the Fund to get lost. Admittedly Bolivia has already abandoned the pretence of paying interest on its loans, and nobody has uttered the dread word 'default'; but then Bolivia's debts are chickenfeed compared with those of Argen- tina, and besides Bolivia continues to pro- mise good behaviour, but not yet. Moreover — and this is perhaps President Alfonsin's worst offence in the eyes of the international bankers — Argentina, unlike her neighbours, is actually piling up a hand- some trade surplus and accumulating reserves which could be put towards the ser- vicing of debts (but aren't).
Which is, of course, precisely why the Argentinians reckon they can put the bankers in their place. For countries like Brazil or Chile a formal declaration of default would make the world a pretty lonely place. Without credit they could not buy essential imports. Argentina, and Argentina virtually alone, with self- sufficiency in fuel and large surpluses in beef and grain for which there would still be eager markets, could rub along.
It may also be true that if, through bloody-mindedness or miscalculation, appearances are not preserved when the 30 June deadline for US banks' Argentinian loans performance is passed, then, in Chancellor Lawson's words at the end of the London summit, 'the resources of the governments, central banks and the com- mercial banks will be adequate to meet any new task that arises.' In other words, a rescue operation could be mounted which would contain and reverse a run on banks whose balance sheets had been holed below
the waterline by the need to write 011 Argentinian loans. But it could be an Oen' ended operation, • involving credit-creatioa on a scale calculated to make a fair 0, nonsense of the US Federal Reserve's tempts to contain inflation. There is a lot of brave talk about 'putting the Argentinians on ice' and giving loans °,11 which interest is months overdue their pry per name, coupled with assertions that even the most exposed banks such as Manufac; turers Hanover can take it on the chin need be. But if one reflects on the panic tions signalled around the globe when CO tinental Illinois ran into trouble, the asser., tions that there will be no more internationo' cash for Buenos Aires unless the Alfons° government agrees to make a gesture to tile IMF ring a little hollow. Maybe the evilda)t' will just be put off for another quarter. Put. with each deferment the likelihood repetition grows. And meantime Ille freedom of the US Fed to let American
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interest rates rise to the extent nee“-",
t correct prospective inflation (a freed which the schemes of Lord Lever ans others to pass the buck for sovereign deb,t5 from commercial banks to governtne111;. would rapidly restore) will be held in checernt Which is, after all, what everyone — occ the Fed — wants anyway. Unfortunately the Argentinian c.1 r hanger is not the only one which our ovi'' domestic markets look like having to tOP with. There is also the little matter of ne'si week's Euro-summit. After the la,„ acrimonious and abortive affair back March the general impression was that tbl'e, next one would do the trick. The ga,Ph,t, tween the smallest budget rebate Mrs ,rri,e cher was prepared to settle for anu;to largest that our partners were prePare''rhe offer us, looked tantalisingly narrow. their agriculture ministers had taken courage in both hands and devisedte, package which must promise sonic p?rig ab3n. ment of the growth of farm support O diture if the fury of the farmers is arlYttn,d to go by. A formula for future grwof housekeeping appeared to be emergifigher the and severity to satisfy Mrs Thatc he and of sufficient vagueness to satis French, Irish and Italians.
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sn With a week to go things do not Ion, reassuring. In the interval President have rand and Chancellor Kohl appear to flattie reached a common front against us, and „s, pledge of future self-denial looks inctea,,s ingly flimsy. In the end a settlement of snel'ir will be patched up, much as with the Ailst tinians, on a basis which Will guarantee another row, in this case intv`:74 three years' time, when the additional "or extended to finance the CommunitY's ding as part of this year's settlement tile once more have proved inadequate. Bntwiii odds are that next week's Euro-summit first break up in acrimony. Add to all this the antics of Mr Scarg re new model army, and strong nerv.es_.,aifi A going to be at something of a premmt",t the next few weeks. But, like the u Sieyes, we shall survive.
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