The economy
The show goes on
Jock Bruce-Gardyne
The dogs bark, and the caravan moves on. The annual general meeting of Bankers to the World, Inc, Washington DC seems to have been a cheerful affair. The Managing Director, M Jacques de Larosiere, ' reckoned that the subsidiary businesses around the globe were in a better shape than for a long time past, with more competitive pricing and markets ex- panding in excess of his expectations. As for any problems over doubtful debts, these were responding well to-the 'case by case approach' favoured by Head Office. As usual there were grumbles about 'com- placency' in the boardroom, and predic- tions of rebellion by poor clients driven below the breadline. But the Board was able to call in evidence the satisfactory conclusion to its prolonged negotiation with its most recalcitrant customer, Argen- tina, and the receipt of the most encourag- ing 'letter of intent' (the sixth to date) from the weightiest traveller in its lifeboat, Brazil. So the barking of the dogs could be ignored.
Unfortunately the barking does not only come from those who have been promising us the imminent collapse of the interna- tional banking system for three years past unless governments assume responsibility for its dud loans. Down in the engine-room there is a chorus of grumbling about the terms on which the commercial banks are expected to finance the 'repayment' of their loans, notably to the Latin Amer- icans.
They have a point. The International Monetary Fund has been insistent hitherto that before it would stick its 'good house- keeping' seal of approval on proposals for rolling-over the accumulated debts of sovereign borrowers they must come up with commitments to trim their domestic rates of inflation from the horrendous to the mildly disastrous, and to point their domestic budget deficits in the right direc- tion. In a rational world it might be argued that the essential concern for the IMF would be the prospect that a member
country could service and eventually repay the loans it contracted; and that this was liable to be related over time to its trading performance rather than to domestic infla- tion rates and the scale of dome.stic deficit financing. But the IMF has made inflation and the scale of deficit budgeting its yardsticks; and by these yardsticks the professed intentions of the Argentinians and Brazilians look decidedly wobbly.
The Argentinians have crossed their hearts and hope to die on a pledge to cut their inflation rate from a forecast 650 per cent this year to a genteel 300 per cent in 1985. Given the latest going rate of 2,200 per cent per annum in the month of September, and the government's profes- sed intention to 'decree' catch-up wage increases in both the public and the private sectors of the economy to provide 'a measure of protection for real wages', the scepticism of the commercial bank credi- tors about the IMF's endorsement is, shall we say, forgivable. In the case of the Brazilians, who have so far cheerfully4 breached the terms of all their previous 'letters of intent' to the IMF, the latest 'most encouraging' communication men- tions by way of a postscript that this year's budget deficit is being revised from a promised 11-13 per cent of domestic output to a 'more realistic' 171/2 per cent. If all goes well, that is.
But the show must go on. The commer- cial bankers may complain that the IMF has gone soft; but since they have repeat- edly demonstrated their preparedness to pay themselves the interest on their loans even in the absence of an agreed IMF diet, rather than have to write off the loans as duds, they are in no position to insist that the diet sheets the Fund has now negotiated are a farce. They will cough up, and appearances will be maintained.
Any doubts on that score should have been finally set at rest by the wondrous spectacle of the Bankers' Quadrille now proceeding in the land where the llamas come from. Peru has not got round to
paying interest on its debts in recent months, and is currently not minded to do so until the banks come up with the cash. The banks point out that Peru has plenty of reserves from which to pay their interest. To which the wily Peruvians reply that to do that would inflate their domestic money supply — a wickedness which they have solemnly promised the IMF they wouldn't contemplate. Blow that for a lark, say the bankers, since Peru's undertakings to the IMF are already — to coin a phrase — non-performing. Peru's answer to that is 'Get thee behind me, Satan'. Which is no doubt in the end what the lender banks Will do — with the extra cash required. Meanwhile, as President Reagan has once again reminded us, the debtor coun- tries are more than making good the extra cost of their debts resulting from the appreciation of the dollar with the enor- mously enhanced value of their exports to the United States. This sort of talk goes down like a lead balloon with the aid lobby. As a Mrs Krueger of the World Bank sharply pointed out, increasing ex- ports to meet debt charges costs develoP- ing countries 'real resources'. The spect. cle of Brazilians recruited into factories to make fashion shoes for wealthy Yankee ladies when they might be enjoying a life of idleness in the countryside sustained by food parcels provided by the World Bank is deeply offensive to specialists in third world economics. Perhaps it is time Mrs Krueger came to London to tell us to stoP fretting about our shrinking share of world manufactured exports when we ought to be thankful for our ability to keep our 'real resources' safe at home. That would be a timely message of comfort for Mr Nigel Lawson. For the sombre warnings in this week's Bank °I England bulletin about faltering output and competitiveness evidently on this occa- sion (unlike some others in the past) mirror the anxieties in the Treasury at the other end of town. Hence the early start alreadY being made on Budget planning to improve, the 'supply side' and the flexibility 0! labour markets in particular. Hence also, I suppose, the trial balloons being floated to test responses to the idea of another substantial broadening of the VAT tax base to make room for lifting tax, thresholds and reducing insurance costs of recruiting labour.
Having had experience of trying to defend some of the more illogical frontiers. of VAT I am all for broadening its
dence. One particular minefield the Chan- cellor might be well advised to steer clear of, though, is VAT on books and newspaP" ers. Not because of the parrot cries about a, 'tax on knowledge' — from the Sun aria Daily Maxwell? — but because of the grow': ing challenge of the freesheets: 15 per cent VAT on a zero cover price is still zer°,; And the danger is that the Treasury woutu have to end up trying to introduced de- marcation lines between VATtable puIP and non-VATtable publications of educa- tional or cultural value. God forbid!
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