The Fletcher Prouty Commentary - Sept
Third World Loans

Food for thought on Third World Debt

The surprise that I get from every article I read about bank loans to foreign countries, the World Bank, The International Monetary Fund and all the rest is, that every single loan made into to these foreign countries was made by a bank whose lending officer was lending money to a borrower. Not the country, to a borrower. This is important.

The objective of the loan was to produce something. A dam to produce hydro electric power, or a railroad to move iron ore from some mountain to the shore and then ship it to Japan. But for projects that were suppose to produce money.

Now how on earth could every one of those loans have gone bad? How could all those dollars have disappeared? At least without some of them becoming profitable, or you wouldn’t have made the loan in the first place.

This is the question that needs to be answered and when it does it is going be the biggest headline story of the year.

In May of 1987 Citicorp, the biggest loaning organization in the world, had placed its loans loss reserve over $300 billion dollars to prepare for “ possible non payment of some of its third world debt”. That’s an imaginative statement, “the possible non payment of its third world debt”. The real figure is around 1.2 trillion dollars.

Where did all this money go?

Say you were running a bank, and someone came in to borrow money to build a shopping center and they needed to borrow $30 million. A year later you found out that he never built the shopping center and the $30 million was gone. You’d have all the police you could find after him. But no one is looking into this third world loans and what happens to the money. Its many cases it a fraud of massive proportion on a world wide scale. These people who have learned how to “use” this system are still doing this today. Its up to us to look into this deeper.

Let me tell you the sides to some of these debts because you don't hear them discussed very often. I've been in the aviation field a good bit of my life and I happen to know a man whose specialty is building airfields. He got a contract through the International Monetary Fund or the World Bank, I don't remember which, but it was a contract to build and airfield in an African country.

The contract was for somewhere around 10 million dollars, it was enough money for him to do the job. He took bulldozers and all the rest of the equipment he needed to start building the airfield. No sooner had he gone about one third of the way into it and received some million and a half dollars for his work, then he asked for the rest of the money in the contract so he could finish the airfield, but the government told him the money had all been spent.

While he was there the President of that country had built a million dollar home and was in the process of building a cathedral that’s bigger than the Saint Peter's Cathedral in Rome. That’s where some of that airfield money went.

Now what happens when that kind of a loan is made is that the original entrepreneur, the civilian in that country who contracted with my friend to build the airfield., made the loan with the banks, the commercial banks.

The government of the country had to cosign the loan through their central bank. So that when the loan failed the government became responsible for the ten million dollars, not the original borrower. The original borrower got two or three million dollars himself. Two or three million was spent on the job itself and two or three million went to the head of the government that built that million dollar home and enormous cathedral.

You see how these countries get into that debt is that various entrepreneurs make the loans and the banks are eager to get in there because they are going to get that high interest rate, but then the entrepreneur has to have it counter signed by the Central Bank. Then when the loan fails, the Central Bank, in other words the Government is stuck with it.

A good bit of Brazils debt was incurred that way. One deal was to build an eleven hundred mile railroad way out into the back of the Amazon country, now I don't know how many millions have just disappeared in that railroad project, and then the country has to pay the loan. You will notice that much of that debt was incurred in what was that easy energy crisis money, the petroleum money . The money was available then, the Middle East countries that produced oil in 1973 got 15 billion dollars. In 1980 for the same oil, the same amount of oil they got $300 billion dollars.

That kind of a windfall in those countries led to enormous amounts of money being put in deposit in banks, so the banks would push it out in loans. A lot of those loan were real soft. That’s what does it, that’s what takes the whole thing down. The World Bank is independent of the United Nations.

The interesting thing about it is that many of the projections of the World Bank and the International Monetary Fund are extremely important they try to help these countries. But unfortunately many of the peripheral things that get developed just have no chance , like this eleven hundred mile railroad that was trying to get started down there and they ran out of money on that.

The poor countries, they are interested in the development so they get the Central Bank to cosign the loan. Over a trillion dollars are owed by these third world countries. As Henry Kissinger has been quoted, "That money is gone, its not going to come back!".

L. Fletcher Prouty