Commentary: Brazil spoils the Latin debt party

Ten years ago last week, the head of Citicorp's international business in York reacted with blustering disbelief when told that members of the Mexican cabinet were briefing the press that default was imminent.

Citicorp had been telling the world that sovereign nations did not default, and seemed actually to believe it. The top brass were having trouble adjusting their mind-sets.

That particular bank has more than made up for the way it sailed so complacently into the biggest foreign debt crisis since the 1930s. It has led the bank committees in most of the successful debt renegotiations, through a decade that has shown the problem to be not so much a crisis, in the medical sense, as a chronic condition.

As the anniversary of that hot August weekend passes, is a cure in sight? Yes, but not everywhere, and certainly not in the biggest debtor, Brazil.

This week, the best news came from Chile, which became the first Latin American borrower to have its long-term bonds returned to an investment grade by the US rating agency Standard & Poor's. They are rated triple B. Assuming political stability, Chile's future seems assured. It was never a victim of hyperinflation - the rate peaked at 27.3 per cent in 1990 - and the last year the economy shrank was 1983.

Mexico's success is highlighted by its inclusion in the proposed North American free trade area. 'It is pretty definitely on the road to recovery, though there are still a few question marks over whether it can sustain its current account deficit or is doing enough to get inflation down,' said Richard Fox, senior international economist at Midland Bank.

Argentina has staggered everybody, by slashing inflation to an annual rate of 19.6 per cent only three years after it reached 4,923 per cent. An aggressive pegging of the peso to the dollar seems to have worked, though there are some strains showing on the exchange rate.

But Brazil is letting the side down, because of the threat of political instability if President Fernando Collor de Mello is impeached in a corruption scandal. Analysts say it probably will not come to that. But the markets are worried that the government will buy popular support with spending handouts that will stop it meeting IMF targets. That in turn could wreck a debt reduction agreement with commercial banks. There are linkages between Latin American markets, as between New York and London, so Brazil's problems have sparked a sharp fall throughout the region since mid-summer. With a debt servicing to export ratio better than both Mexico and Argentina, Brazil should be on the mend by now, but looks set for at least one more crisis.