Bush Signals Strategy Change on Foreign Debt

President-elect George Bush signaled Monday that he plans to make overhauling the United States’ current Third World debt strategy a top priority of his Administration--a step that could have important implications for U.S. relations with Latin America.

At a news conference, Bush said he plans to conduct “a major review” of the U.S. debt policy, “not just (by) the Treasury, but (by) our national security people” as well. “We’ve got enormous problems, particularly in our own hemisphere, on Third World debt,” he said.

The statement, which comes amid growing demands by other countries for a new approach on the debt issue, virtually guarantees that the United States will be proposing some changes in the current debt strategy, possibly as early as next month or early February.

Finance ministers and central bankers of the United States and its major economic allies, known informally as the Group of Seven, are considering meeting here sometime in early February. If that pans out, Washington may want to unveil some new proposals then.

A high-level interagency task force already has been studying the possibility of changing regulatory and tax policies to enable banks to write off more of their debt voluntarily, but so far it has made no decisions. Bush’s statement is expected to speed that effort.

The current debt strategy, outlined in 1985 by James A. Baker III, then secretary of the Treasury, calls for sharp increases in new lending by commercial banks in return for stepped-up efforts by Third World governments to restructure and streamline their own economies.

Growth Stalled

The Baker Plan, as it is known, worked well initially to defuse political unrest among Third World debtors. But the banks, stung by a plunge in their stock prices as a result of their troubled loans, have since stopped lending to most Latin American debtor nations.

On Sunday, the World Bank warned that debtor countries are being so squeezed by the dry-up that they no longer are able to spur sufficient growth at home. And Latin American leaders themselves have raised the specter of further political unrest if help does not come soon.

The new presidents of Mexico and Venezuela have both called for immediate renegotiation of their outstanding debt. Brazil and Argentina already are in serious financial straits--a factor that is causing serious political problems in those fragile new democracies.

Until recently, the Treasury has declined to consider updating the Baker Plan, contending that it was still working adequately. But Treasury Secretary Nicholas F. Brady, who will remain in that post under Bush, said in November that he would review the issue, and studies are under way.

Baker, too, is said to be more willing now to accept some changes. Administration officials point out that the former Treasury secretary will be Bush’s new secretary of State--a job that is likely to make him far more concerned about the political situation in the hemisphere.

Monday, Bush publicly acknowledged that criticism of the Baker Plan is mounting, conceding that “there is concern that . . . the private institutions (the commercial banks) haven’t loaned as much as they might.”

At the same time, however, he appeared to suggest that any changes would be relatively small ones that would seek to build on the Baker strategy rather than overturn it by pressing banks to forgive outstanding loans, as some critics have suggested.

“You have to be careful of forgiveness of debt if you want future loans,” Bush said Monday. “I think we’ve got to find a more versatile answer than simply compelling private institutions to write off the debt. . . . I think that would dry up (new loans).”

Senior Bush advisers also are adamant against having governments--or taxpayer-financed organizations such as the International Monetary Fund and the World Bank--take on more of the burden of providing new money for debtor countries.

The total foreign debt owed by Third World countries is expected to surge to $1.3 trillion next year, up from $831 billion in 1982, when the global debt problem erupted after Mexico announced that it would be unable to meet its payments on outstanding loans.

Since then, the industrial nations have been pressuring banks to step up their lending to help Third World countries meet their payments, but the debt burden has only increased. Schemes for swapping some of the debt for equity shares have produced limited results.

The World Bank estimates that debtors are now repaying $43 billion more than they are taking in. The 151-country institution called Sunday for a “reworking” of the entire debt strategy, but did not provide any specific proposals for doing so.