Word: citicorp
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...cost could have been much greater. The bank's anticipated $2.5 billion loss in the second quarter is expected to be offset by three profitable quarters, to bring the year-end loss back to $1 billion. The company aims to return to profitability next year. And within three years, Citicorp plans to reduce its Third World debt portfolio by about one third, or $5 billion. The bank intends to sell some of the loans at a discount and transform others through so-called debt-for-equity swaps, in which the loan becomes an investment in the borrower country...
...Citicorp's bolstered reserves give the bank a cushion against a default by any of its Third World debtors. That alone, predicts the head of a U.S. banking office in Brazil, "will change the renegotiating process forever." Says he: "The idea that a debtor can threaten the international financial system with collapse and get whatever it wants just won't work anymore...
...Citicorp's decision could also bring an eventual clampdown on additional lending to Latin America and other developing regions. Certainly the Reagan Administration has reason to be concerned at that eventuality. The Administration's Baker Initiative calls for $20 billion in private loans to be issued to the Third World over the next three years in order to foster growth. The program has been slow to get rolling. Said one Manhattan economic consultant: "Some bankers believe Reed has killed the Baker Initiative...
...measure will force other holders of Third World loans, most notably such profit-parched institutions as BankAmerica ($7 billion in Third World loans) and Manufacturers Hanover ($7.5 billion), to agonize over whether to match it. Not all the big banks are in the same relatively good shape as Citicorp, and thus they are less able to take such action. Says one top New York City banker: "Reed is being really selfish. The stakes are much higher than the future of a single bank." Reed felt sensitive enough to the issue that he called BankAmerica Chairman A.W. ("Tom") Clausen and Manufacturers...
Someone liable to be just as irked at Citicorp's move is Fed Chairman Volcker. Some stories have it that he called Reed personally to complain about the write-off. Why? If banks rush to follow Citicorp's lead, the industry might be so weakened by losses that the Fed would eventually feel obliged to help out by putting downward pressure on interest rates. But that would run counter to the Fed's efforts to buoy up the weak U.S. dollar. Says Timothy Scala, money-market manager for Buffalo-based Manufacturers and Traders Trust: "This demonstrates just how grave...