Philippines, Creditors In Accord On Debt Cut

The Philippines and its creditor banks announced Tuesday that they had reached a debt-reduction agreement affecting $5.3 billion of bank loans. The deal, however, faces political obstacles relating to the U.S. military presence in that country.

Jose Cuisia, governor of the Philippines' central bank, told news agencies that critical U.S. government financing to support the debt-reduction agreement would not be forthcoming if the Philippines Senate failed to renew the lease on the Subic Bay U.S. naval base.

Possibility Questioned

"It's probably unlikely we would get the resources required to close the deal if there's no ratification," Mr. Cuisia said.

The deal is the latest in a series of debt-reduction packages reached with developing countries under an initiative launched by U.S. Treasury Secretary Nicholas F. Brady two years ago.

Banks could convert loans to the Philippines into 15- and 25-year government bonds bearing reduced interest rates that will rise over several years from 4% to the London Interbank Offered Rate plus 13/16, and from 5% to 6.5%.

Principal or interest on the bonds will be collateralized by special financing, or "enhancements," provided by the United States, the International Monetary Fund, Japan's Export-Import Bank and the World Bank.

The U.S. financing would come as part of an aid package attached to lease payments for Subic Bay. The renewal has been a hot issue in the Philippines.

Senior bankers close to the talks in New York said the amount of financing needed to back the deal will depend upon how many banks participate, but could easily run into several hundred million dollars. Mr. Cuisia estimated that as much as $640 million will be needed.

In addition to the bond-conversion options, banks could participate in new lending to the Philippines together with the Asian Development Bank.

Manufacturers Hanover Corp., as head of the Philippines bank advisory committee, said in a statement Tuesday that the country is also considering directly buying back a portion of its debt from banks at an unspecified discount if enough financing is available.

U.S. Banks Hold $1.9 Billion

Of the $5.3 billion of medium-and long-term international bank loans covered by the agreement, U.S. banks hold about $1.9 billion. Money-center banks such as Citicorp and Manufacturers Hanover are among the biggest U.S. lenders.

Bankers expressed confidence that the deal would go through despite Mr. Cuisia's warning.

"It's a good deal for both the Philippine government and the banks and should allow them to put the debt crisis behind them," said William Rhodes, vice chairman at Citicorp.

Mr. Rhodes added that the successful completion of the deal would permit the Philippines to follow countries like Mexico, Chile, and Venezuela, which have reached similar agreements with banks and have been able to resume borrowing.

The deal is the second debt reduction package negotiated by the Philippines since January 1990, when the country bought back $1.3 billion.

In an added sign of confidence that the agreement will go through, bankers reported heavy buying of Philippine debt on the secondary market, where prices rose to 58 cents per dollar of face value, from 52 cents Friday.

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