Skills Learned in Latin America Help U.S. Banks in Asia Crisis

When Brazil signed the last of the big Latin American debt restructuring packages at the end of 1993, U.S. bankers breathed a sigh of relief. After 10 years of negotiations, many moved on to less frenzied pursuits.

Last month, as the Asia crisis reached a boil, the veterans were suddenly back in the fray. They convened in their Manhattan conference rooms to start work on a new multibillion-dollar rescue package-this time for South Korea.

In contrast to the 1980s, bankers proceeded with striking speed and assurance, emboldened by the lessons learned in Latin America. Within 30 days, U.S. banks had arranged a worldwide rollover of Korean short-term debt and advanced proposals for a long-term restructuring.

It was a powerful demonstration of U.S. bankers' new skills. Through the 1980s, U.S. banks mastered such moves as swapping loans into longer-term bonds or equity; offering a menu of options that banks and debtor nations can pick from; and collateralizing with government guarantees the new debt issued by distressed nations.

"Banks are using the same formulas they learned during the Latin American fiasco," said Allen Sinai, chief global economist at Primark Decision Economics Inc., an economic information and advisory firm.

The Latin debt crisis also taught bankers the importance of quickly agreeing among themselves on the best course of action.

Latin debt negotiations dragged on for years amid frequent and often acrimonious disputes among banks over what to do. This time around, bankers recognize that they first must agree among themselves on what needs to be done before entering into negotiations with debtor countries.

"Banks have built up experience bringing different institutions together to talk and come up with some concerted decision," said Peter Allen, managing director at BankBoston Securities Inc., the capital markets arm of BankBoston Corp., and a veteran of the Latin debt talks.

One reason formulas developed during the Latin crisis are now being so quickly applied to Asia is that U.S. banks, which engineered the Latin restructurings, have again taken the lead.

Indeed, many participants in the current talks sat around the same tables just a few years ago. Among them: Citicorp vice chairman William Rhodes, J.P. Morgan managing director Ernest Stern, and BankAmerica senior vice president Richard Bloom.

"U.S. banks took the lead throughout the debt crisis of the 1980s," Mr. Allen noted. "There is a sense that New York is the place to bring everyone together."

Observers said the leadership of U.S. banks and their readiness to apply Latin American-style formulas to the current Asian crises is not surprising.

Bankers and analysts asserted that U.S. banks have some advantages that the other major lenders to Asia-Japanese and European banks-lack: proximity to and close relations with the Washington-based International Monetary Fund and the U.S. administration.

What's more, observers said, Japanese banks are too distracted by capital shortages and deteriorating real estate portfolios at home to concentrate on the unfolding crisis in South Korea.

Even if lessons and expertise can be applied to South Korea's problems, bankers and analysts caution against thinking that the crises have too much in common.

"The Latin America debt situation and Asian debt situation have some very big differences," said Peter McPherson, president of Michigan State University, who played a key role in arranging several Latin debt deals this decade as an executive vice president at BankAmerica Corp. "People need to be very careful not to assume that what worked in Latin America will work here."

Analysts and bankers note that U.S. banks are far less exposed to South Korea and other financially troubled Asian countries than they were to Latin America in the 1980s.

"This is a regional economic crisis," said Chris Mahoney, head of the financial services group at Moody's Investors Service. "It is not a banking crisis."

Another difference: Much of the Asian debt is short-term debt that needs to be rolled over. Banks therefore have to move faster now than they did 10 years ago, when most of the debt was medium- and long-term. And up to one- third of the Latin American debt was simply written off because the U.S. administration did not believe Latin America countries could continue servicing their debt at high levels.

This time, there is no talk of debt reduction because most people still believe South Korea and other Asian nations could resume economic growth- and the ability to meet interest payments-once the current liquidity crisis ends.

But even if the current crisis appears more manageable than the Latin one, observers warn that success is by no means assured.

Unlike the public nature of the Latin American debt in the 1980s, most of the South Korean debt is privately held by banks and corporations. Thus, it is by no means sure that debt can be swapped without government guarantees. And it is unclear whether the South Korean government will provide such guarantees.

"The Latin formulas can be less readily applied because there is less sovereign debt," said Thomas Farmer, general counsel of the Washington- based Bankers Association for Foreign Trade. "And nothing's going to work until the Koreans sign off on it."

One way around that problem, some bankers suggested, might be to either nationalize the debt or for the South Korean government itself to issue bonds and then distribute the funds as it sees fit. Some bankers, however, are adamantly opposed to this proposal.

Unless banks reach an agreement directly with South Korean corporations and banks, they say, banks will be unable to demand that South Korean companies adopt business practices that would prevent a debt crisis from recurring.

Analysts also warn that any further deterioration in Asian economies could drag in other emerging markets like China, Russia, and Brazil, producing a worldwide credit crunch and throwing the current debt restructuring efforts into disarray.

"The wild card here is how bad the slide gets and how many times South Korea or South Korean companies and banks have to come back to the well," Mr. Sinai said.

If the worldwide economic growth continues to slacken, he and others said, South Korea and other Asian countries may again be unable to service their debts.

"The risk is that it takes too much time to reach a deal and something else happens in Korea or a neighboring country that undermines the momentum or common interest," Mr. Allen added.

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