But there are ways to stay alive​—on paper. Rescheduling the loans, stretching the debt over a longer period, is one means used and reused. Another is to list the loans at full value, though there may be little hope of having the principal paid in full. An oft used tactic is to lend the borrowers more money so that they can make their interest payments.

All these methods are currently being used by banks in regard to Third World debt, considered by many to be the greatest threat to the stability of the international banking system. According to a World Bank survey, the external debt of over a hundred developing nations reached a combined total of some $950 billion at the end of 1985, an increase of 4.6 percent over the previous year. Although already too large, it is expected to reach $1.01 trillion by the end of 1986. Why? Because many of those nations simply cannot repay and are pressing for more time and money. Taking into account the enormity of their loans, the banks have complied. As one person puts it: “If I owe you a dollar, I am in your power; but if I owe you a million, you are in my power.”

Always looming ahead is the possibility that some deeply indebted nations, tiring of the hardships of austerity programs, may just decide not to pay at all. The banks cannot force sovereign states to pay. “For banks, the meaning of the global debt crisis is simple,” states Savvy magazine. “They earn most of their profits by making loans, and if countries cannot repay their huge loans, banks’ profits, capital bases, and stock prices could fall precipitously. . . . Significant Third World defaults could stretch the financial system to the breaking point, possibly resulting in the collapse of major banks.”

A default by just four nations​—Mexico, Brazil, Argentina, and Venezuela—​could bring about the collapse of the nine largest U.S. banks, experts warn. “That actual defaults have not taken place is remarkable,” states The New York Times Magazine. “One could, of course, attribute it to semantics. Just as wars are no longer ‘declared,’ no one is now declared ‘legally’ in default.”

[Box on page 9]

The Banking Situation​—What Others Say

● “It is no overstatement to say that the governments of dozens of debt-ridden nations, the International Monetary Fund, the Federal Reserve Board, and hundreds of American and foreign banks together face the severest and broadest financial crisis since the 1930s.”​—New York magazine.

● “Present policies provide only a most precarious protection. The world’s financial safety is balanced on a knife-edge. The debt crisis threatens not only development in developing countries but also the stability of the banking system of industrial countries.”​—Report by a Commonwealth group of experts, The Guardian of London.

● “The immense debt owed to the banks of the United States by third-world nations is poised like a potential avalanche above the American banking system.”​—The New York Times Magazine.

● “The total global debt is so massive that it has laid the groundwork for a first-rate debt crisis in the international banking system.” “The supreme irony of the global debt crisis is that the banks are in so deep they can’t get out without bringing down the whole house of cards.”​—Savvy magazine.

● “The situation today is more critical and more dangerous than it was in the 1930s.”​—West German economist Kurt Richebächer, U.S.News & World Report.

[Chart on page 10]

Seventeen Heavily Indebted Developing Countries

Country Foreign Debt Percent Owed

($ in U.S. billions) Private Sourcesa

Argentina 50.8 86.8

Bolivia 4.0 39.3

Brazil 107.3 84.2

Chile 21.0 87.2

Colombia 11.3 57.5

Costa Rica 4.2 59.7

Ecuador 8.5 73.8

Ivory Coast 8.0 64.1

Jamaica 3.4 24.0

Mexico 99.0 89.1

Morocco 14.0 39.1

Nigeria 19.3 88.2

Peru 13.4 60.7

Philippines 24.8 67.8

Uruguay 3.6 82.1

Venezuela 33.6 99.5

Yugoslavia 19.6 64.0

Total 445.9 80.8

[Footnotes]

Source: World Debt Tables, 1985-86 edition, published by The World Bank, Washington, D.C.