Third World Debt

May 29, 1987

Report Outline
Special Focus


Citicorp, the nation's biggest bank holding company, recently stunned the financial world by announcing its decision to add $3 billion to its loan-loss reserves. That will bring to $5 billion the money Citicorp has set aside to protect itself from unsustainable losses in case its major borrowers, mostly Third World nations, fail to repay their loans.

Citicorp's action came just three months after Brazil—the biggest Third World debtor—abruptly suspended interest payments on its $67 billion debt to foreign commercial banks. Brazil is also Citicorp's biggest debtor: Of the bank's $13 billion in developing-country loans, $4.6 billion—representing more than a third of the bank's capital—is owed by Brazil.

These two developments in the ongoing foreign-debt drama reflect growing frustration over the inability of all parties—commercial-bank creditors, Third World borrowers, industrial-world governments and multilateral institutions—to come to grips with the seemingly endless problem. When Mexico precipitated a debt crisis five years ago by nearly defaulting on its $80 billion in foreign loans, its commercial-bank creditors, the U.S. government and the International Monetary Fund (IMF), all rushed to the rescue. The fear then was collapse of the world financial system, and that dire scenario was averted. The same air of crisis has not surrounded Brazil's moratorium, even though the country's $108 billion foreign-debt burden is far greater than Mexico's. But, while the crisis of the early 1980s may have passed, the problem of developing-country debt remains. If anything, it appears to be more intractable than ever.

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