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Never have international financiers had to minister to an economic casualty as large as Mexico. It is estimated that Mexico owes U.S. banks alone as much as $25.8 billion, but the country does not have the dollars to pay such a staggering amount. Three banking giants hold the biggest stake: Citibank, with about $2.5 billion; Bank of America, with $2.3 billion to $2.5 billion; and Chase Manhattan Bank, with $1.5 billion. Arranging the repayment of Mexican funds, according to Peter Kenen, a Princeton University international monetary expert, is "going to be very tough going." Mexico would have to put up 34% of its total earnings from exports just to meet its interest payments this year.
Moreover, standing right behind Mexico are several other debtors that may be unable to pay their bankers. Among them: Argentina, Peru, Costa Rica, the Sudan, Zaïre and Bolivia. Kenen and others fear that once Mexico has succeeded in refinancing its loans, Argentina and Brazil will demand to delay their repayments. Moneymen are calling this the "contagion" effect. The result would be that few, if any, banks would receive payments on billions of dollars in outstanding loans. If that were to happen, world lending could slow down very quickly.
Some experts fear that refinancing by only a handful of countries would also add more names to the list of U.S. banking failures, which have already reached 27 this year. Says Geoffrey Bell, a director of J. Henry Schroder Bank & Trust Co. in New York: "I can't believe that we can go from now until Christmas without a small or regional bank out West or even a number of banks having to close their doors." Bell and John Heimann, a former U.S. Comptroller of the Currency, have just completed an alarming report on world banking for a study group of 30 leading international monetary experts. The officials warned that the explosive growth of international banking has "increased the potential range of problems caused by bank failure."
Officials in Washington are trying to take a more sanguine view. Says Marc Leland, Assistant Secretary of the Treasury for International Affairs: "This isn't the 1930s; this is the 1980s. It may be a liquidity problem, but we can handle it." The officials point out that the actual dollar amounts of many countries' debts are too small to endanger the international financial system. At the World Bank, which keeps close watch on the creditworthiness of Third World countries, Helen Hughes, director of economic analysis and projections, notes that most big foreign borrowers have reserves of oil or solid growth records. Says she: "I don't see a banking collapse because of the developing country debt. I don't see a banking collapse, period."
The struggle being waged last week to get Mexico back on its feet showed how difficult it may be to resolve the international banking troubles. A 14-member advisory committee met until past midnight for several days in a 39th-floor dining room at the Park Avenue headquarters of Citibank in Manhattan. The financiers, from seven big U.S. banks plus such institutions as Britain's Lloyds Bank, West Germany's Deutsche Bank and Japan's Bank of Tokyo, were chosen to represent 115 of Mexico's largest lenders.