Editorial Brazil and the price of gold

Word that Brazil will postpone interest payments on its huge forei gn debts for an indefinite period has sent shock waves throughout the world’s financial districts. Especially hard hit were bank stocks, which tumbled sharply. Not surprisingly, though, the price of gold went up as nervous investors viewed the move as a crack in the house of cards on which so many of the world’s economies are built — and its possible domino effect.

Brazil, which has the largest foreign debt in the developing world , has borrowed $108 billion(US) of which $81 billion is owed to commercial banks. Of this, Canada’s six senior banks are on the hook for more than $7 billion, led by the Bank of Montreal’s $2 billion. (The opening of trading in Canadian bank stocks had to be delayed on Monday while the TSE sorted through a deluge of weekend sell orders that continue to pummel this group).

“We are prepared to negotiate on any formula that would avoid politi cal instability, recession, unemployment or social crisis,” said Brazilian President Sarney. That covers a lot of ground, doesn’t it. But let’s fa ce it. That country has reached an economic crisis. It simply can’t pay that debt. And quite likely it won’t.

And isn’t this just the tip of the iceberg? For Brazil’s is probably the best performing economy of all the developing or Third World nations. If it suspends payments, wouldn’t that give a signal to all the other struggling and heavily indebted countries like Argentina and Mexico, which are having equally serious problems, to follow suit?

Indeed Argentina, in a related development, has already said that it might suspend payments on its $53-billion foreign debt if the commercial banks reject its request for further immediate financial aid. “If the commercial banks don’t grant us the $2.15 billion we have asked for, priority will be given to growth of our own gross domestic product rather than meeting foreign debt payments,” warns that country’s treasury secretary. Brazil, too, is seeking further loans from its lending banks to pay the interest due them.

While it is the massive debts the likes of those for Brazil, Argenti na and Mexico that are so much in the news these days because they are close to home, that phenomenon is worldwide. Take the Philippines. With a foreign debt of more than $35 billion, it finds its economy in tatters. It is now the second poorest nation in Southeast Asia behind Indonesia, yet it was one of the richest nations before being robbed and bled white by its ex-president, Ferdinand Marcos.

Seeing these darkening economic clouds, Canada’s concerned Inspector-General of Banks has identified no less than 32 less developed countries as risky debtors, and has directed Canadian banks to increase their reserves to be set aside for contingencies such as this.

But who are we to be calling the kettle black? Isn’t our present-day prosperity — and that of the USA — being largely financed by borrowing? While excessive and economically unhealthy, much of this is internal borrowing, as are the massive interest payments we are being called upon to meet. But our foreign debts, too, are now growing by leaps and bounds as are those of Uncle Sam. It is this latter type of borrowing that is going to really cripple us, just as the Brazilians are finding out. It can’t happen here???

It is this massive and escalating worldwide debt structure, building up mountains of paper money growing more worthless day after day, that causes GOLD to shine. We simply have to continue liking it — more than ever.