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Third World Debt Problems Prompting Variety of Solutions

March 7, 1987

NEW YORK (AP) _ As creditors and developing nations grapple with the problems of heavy debt loads, many of them have been turning to the financial markets in their attempts to avoid fiscal disaster.

Deals ranging from the exchange of debt for equity to repayment of debts with commodities are being tested and used widely as means of cleaning bank ledgers of bad debts and spreading the risks of Third World financing.

The evolution of the markets for such deals comes as the developing world’s biggest debtors are negotiating for easier payment terms.

Top finance officials from Brazil spent this past week traveling to major creditor nations in advance of meetings with its bank lenders over a refinancing of its $108 billion foreign debt, the largest among developing nations.

In order to slow the rapid depletion of its foreign currency reserves, Brazil is seeking longer repayment terms and lower interest rates like those the banks gave to Venezuela. Venezuela refinanced its $20.5 billion in debt two weeks ago.

The market for securities backed by a variety of debt has been growing quickly for the past several years. Banks and non-financial companies now actively issue billions of dollars in securities backed by credit card receivables, auto loans and home mortgages.

But the recent flareup in Third World debt problems has prompted the banks to speed up development of alternatives to simply refinancing or lending more money.

That development might be hastened by growing discontent with plans to provide more money to the most indebted nations if they adopted growth- oriented economic policies.

Critics of the ″Baker Plan″ backed by the Reagan administration have said that more money was needed than provided by the plan and that many smaller commercial banks are reluctant to participate because of the risks of further lending to the Third World.

Venezuela said this past week it would be more flexible in allowing one alternative, the debt-equity swap, in dealing with its foreign debts.

In one version of the debt-equity swap, an investor buys foreign debt in the secondary market. The debt is redeemed into the local currency, which is used to purchase shares of a domestic business covered by the loan.

Creditors are able then to wipe the troubled loans off their books, while the debtors keep vital capital from flowing out of their borders to meet their payments. Troubled loans essentially are transformed into speculative stocks, where investors shoulder most of the risk of repayment.

Debt-equity swaps have been touted by the likes of Treasury Secretary James Baker and Federal Reserve Chairman Paul Volcker, who also caution they are just a partial solution.

Such swaps already have been used to some extent in Brazil, Chile, Mexico, Artentina and the Philippines, Morgan Guaranty Trust Co. reports.

″As yet, the debt-equity swap market remains in its infancy, mainly because the debtor governments have resisted removal of regulatory impediments,″ Rimmer de Vries, a Morgan senior vice president, noted in a recent commentary.

Another impediment has been the value of the loans themselves. While the banks account for many of the loans at book value, they trade in the secondary market at discounts of 30 percent to 40 percent. Loans to Brazil, for example, were trading at about 75 cents on the dollar in mid-1986.

As such, banks would have to sell them at a loss, which would depress profits.

Variations of the method include the establishment of a new international agency to purchase Third World debt at a discount and resell it in the secondary market. That proposal has run into opposition by a number of banks and politicians, however, who say the banks would have to take losses on the sales and taxpayers would have to finance the agency.

First Interstate Bank of California has pursued several different ways of getting repayment of debts to troubled developing nations.

The bank in the past year has led groups of creditor banks in converting hundreds of millions of dollars in frozen interbank deposits included in Mexico’s foreign debt into certificates of deposit. The conversion allows the banks to place the CDs with investors, while keeping the deposits in Mexico.

A First Interstate executive, who agreed to discuss the situation only if not quoted by name, said the bank was planning a similar program whereby banks would receive securities backed by zero-coupon U.S. Treasury bonds to cover some of their outstanding credit to a Mexican bank.

″You’re guaranteed payment; it will be quite a bit into the future, but certainly no longer than for rescheduled debt,″ the official said.

First Interstate also has been negotiating with the government of Peru to pay off part of the nation’s $100 million debt to the bank with a variety of Peruvian products. Negotiations are incomplete, but government officials have expressed approval of the concept.

In mid-1985, Peru unilaterally limited payments on its $14.2 billion foreign debt to 10 percent of its export earnings.

Under the First Interstate proposal, the bank and the government would split the cost of goods shipped from Peru to the bank’s trading company. In exchange, a certain amount of the nation’s debt with First Interstate would be written down.

First Interstate, which is acquiring the Peruvian operations of Sears World Trading Co., would get goods ranging from textiles to seafood under the plan.

″I don’t think it’s the ultimate solution to the debt problem, but it is advantageous,″ the First Interstate official said. ″If you can sell the commodities, which we obviously think we can,″ the program would work with less of a financial sacrifice to creditor or debtor.

In other business and economicnews of this past week:

-The Labor Department said the nation’s unemployment rate held at 6.7 percent in February - its third month at the lowest rate in nearly six years - as the economy created 370,000 jobs last month.

-The government’s main economic barometer fell 1 percent in January, the Commerce Department said, but many economists attributed the plunge to one- time factors stemming from the new tax law.

-Sales of new, single-family homes declined by a sharp 6.8 percent in January, the Commerce Department reported. Analysts said, however, that sales levels remained at a healthy pace. The government also said the median price of a new home rose to $100,700, the first time the price topped $100,000.

-The nation’s largest general retailers reported unexpectedly strong February sales to lift them from their winter doldrums, but analysts differed on whether the positive results signaled a strong first half for the stores.

-Construction spending rose 1 percent in January, boosted by a big jump in highway building, according to the Commerce Department. The rise was the biggest in nine months.

-Overall business productivity rose 0.7 of a percent in 1986, the first time in six years productivity failed to increase, the Labor Department said.

-Orders to U.S. factories plunged 4 percent in January, the biggest decline in almost seven years following a tax-related buying surge in December, the Commerce Department said.

-Domestic auto sales were up 6.7 percent in late February from the same period last year, spurred by a smorgasbord of buyer incentives, automakers reported.

-General Motors Corp. said it would buy back up to 20 percent of its common shares by 1990, purchases worth about $5.2 billion at current market prices.

-The General Accounting Office said a preliminary audit of the Federal Savings and Loan Insurance Corp. indicated the fund was technically bankrupt at the end of 1986. Legislation to recapitalize the fund, which insures deposits at 3,200 thrift institutions, is being considered by Congress.

-Viacom International Inc. agreed to be acquired by National Amusements Inc. for $3.4 billion. The agreement by the broadcasting concern ended a month-long bidding war between National and an investor group led by senior members of Viacom management.

-USAir Group Inc. rejected a $1.4 billion cash takeover bid from Trans World Airlines as inadequate and accused TWA Chairman Carl Icahn of attempting to sabotage USAir’s plans to buy Piedmont Aviation Inc. TWA announced it had acquired a 15 percent stake in USAir.

-American Airlines announced it had ordered 40 airliners from Airbus and Boeing in an innovative lease-purchase agreement valued at $2.5 billion.

-The former owner and two former officers of Home State Savings Bank were convicted of state charges stemming from the thrift’s failure, which touched off the 1985 Ohio savings and loan crisis.

-Two members of the ″Yuppie Five″ insider trading ring were sentenced in federal court. Former stockbroker Morton Shapiro was sentenced to two months in jail and fined, and Daniel Silverman was sentenced to three years’ probation and fined.

End Adv Weekend Editions March 7-8

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