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The Dynamics of the Two-Level Bargaining Game: The 1988 Brazilian Debt Negotiations

Published online by Cambridge University Press:  13 June 2011

Howard P. Lehman  and
Jennifer L. McCoy
Howard P. Lehman
Affiliation:
University of Utah
Jennifer L. McCoy
Affiliation:
Georgia State University
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Abstract

This study examines the case of the Brazilian debt rescheduling agreement of 1988 as a two-level game in which each of the two main negotiators—the Brazilian state and the international bank advisory committee—must satisfy its own constituents while trying to negotiate an international agreement. It is argued that the interaction between the domestic and international levels must be understood in order to explain the outcomes of international debt negotiations. This article draws on Robert Putnam's concept of the two-level game in international politics and on a wider literature concerning the influence of domestic political considerations in international negotiations to demonstrate that such an analysis can explain the process and outcome of the 1988 agreement, where a unitary negotiating level fails to predict the final result. The two-level model explains how domestic constraints and opportunities affect international outcomes, and it highlights the importance of the ratification process.

Type
Research Article
Information
World Politics , Volume 44 , Issue 4 , July 1992 , pp. 600 - 644
Copyright
Copyright © Trustees of Princeton University 1992

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References

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10 As Putnam notes, “A more adequate account of the domestic determinants of foreign policy and international relations must stress politics: parties, social classes, interest groups (both economic and noneconomic), legislators, and even public opinion and elections, not simply executive officials and institutional arrangements” (fn. 2), 432.

11 Ibid., 454.

12 Ibid., 456–59.

13 A more extensive argument is found in Howard P. Lehman, “The International Lending Regime: Strategic Priorities and Policy Moves in the 1980s” (Unpublished manuscript).

14 Lipson (fn. 1) provides an analysis of the internal decision-making process of “large” and “small” banks. However, the absolute size of a bank's assets is less critical than the proportion of exposed loans to problematic borrowers.

15 See Devlin (fn. 4), 227–29, for a discussion of the cracks in the creditor cartel resulting from conflicts between small and large lenders, between U.S. and European banks, between banks and the U.S. government, and between banks and the IMF.

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17 Haggard and Kaufman (fn. 1).

18 Putnam (fn. 2), 440.

19 The continuity of appointments in the federal bureaucracy was striking. One study showed that during Sarney's first year in office, only 15% of some 4,500 federal appointments were first-time officials without prior ties to the military. See Eul-Soo Pang, “Debt, Adjustment, and Democratic Cacophony in Brazil,” in Stallings and Kaufman (fn. 1), 131.

20 Sylvia Maxfield, “National Business, Debt-led Growth, and Political Transition in Latin America,” in Stallings and Kaufman (fn. 1), 84—85.

21 Frieden, Jeffry, “Classes, Sectors, and the International Financial Relations of Mexico, Brazil, Argentina, and Chile,” Comparative Politics 21 (October 1988)Google Scholar.

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25 Latin American Times, September 18, 1985, p. 15.

26 Ibid., 16.

27 Jeffry Frieden (fn. 21) notes that the industrialists joined the anti-austerity civilian opposition (PMDB-PFL) when the military rejected their demands and, in the first years of the Sarney administration, got much of what they asked for.

28 Latin American Weekly Report, August 7, 1986, p. 7.

29 Ibid., October 4, 1985, p. 8.

30 See Pereira, Luiz Bresser and Nakano, Yoskiaki, The Theory of Inertial Inflation: The Foundation of Economic Reform in Brazil and Argentina (Boulder, Colo.: Westview Press, 1987)Google Scholar.

31 Baer, Werner and Beckerman, Paul, “The Decline and Fall of Brazil's Cruzado,” Latin American Research Review 24, no. 1 (1989)Google Scholar; Werner Baer, Dan Biller, and Curtis McDonald, “Austerity under Different Political Regimes? The Case of Brazil,” in Handelman and Baer (fn. 1), 36.

32 Economist, April 25, 1987, pp. 9–11.

33 World Financial Markets, August 1986, cited in Latin American Times, March 30, 1987, p. 13.

34 Baer and Beckerman (fn. 31), 53.

35 Pang (fn. 19), 134; Baer, Biller, and McDonald (fn. 31), 36.

36 Paul Singer, “Democracy and Inflation in the Light of the Brazilian Experience,” in Canak(fn. 1), 34.

37 Latin American Regional Report, January 8, 1987, p. 2.

38 Latin American Weekly Report, February 12, 1987, p. 12; Economist, April 25, 1987, pp. 9–11.

39 Economist, April 25, 1987, pp. 9–11; Smith (fn. 23), 56; Latin American Weekly Report, January 22, 1987, p. 10, and February 19, 1987, p. 10.

40 Economist, April 25, 1987, p. 10.

41 Latin American Weekly Report, January 29, 1987, p. 8, and February 19, 1987, p. 4.

42 Latin American Weekly Report, February 26, 1987, p. 11, and March 5, 1987, p. 1.

43 Economist, April 25, 1987, pp. 11–13.

44 Latin American Weekly Report, January 8, 1987, p. 6.

45 Alan Riding, “Brazil Talking to Nations, Not Banks, on Debt,” New York Times, February 2, 1987; M. S. Mendelsohn, “Wrong Way to Tackle Debt,” Banker (March 1987), 30.

46 Alan Riding, “Brazil, Fearing Reprisal, Seeking Debt Accords,” New York Times, February 23, 1987, p. 23.

47 Atlanta Journal and Constitution, February 2, 1987.

48 Pang (fn. 19), 136; Latin American Times, March 30, 1987, p. 10.

49 Pang (fn. 19), 137.

50 O'Donnell (fn. 1) argues that the rational interest of creditors is not so much to “maximize what they can collect from debtors, but to prolong the imbalance of forces entailed by the fact that, while debtors are locked in a ‘prisoner's dilemma’ [perpetuated by their inability to act collectively], the creditors themselves are cartelized” (p. 1159).

51 The Inter-agency Country Exposure Risk Committee (ICERC) is composed of the head of the Federal Deposit Insurance Corporation, the comptroller of the Currency, and the Federal Reserve chairman.

52 In the first year following such a requirement, the ATRR has to cover 10% of loans; in subsequent years, 15%. Although “specific provisions” force banks to set aside capital, creditors are able to negotiate some tax reductions against these provisions. See Bird, Graham, Commercial Bank Lending and Third World Debt (New York: St. Martin's Press, 1989)CrossRefGoogle Scholar.

53 An ICERC position paper defines the value-impaired category as applying when a country has protracted arrearages, as indicated by more than one of the following: (1) the country has not fully paid its interest for six months; (2) the country has not complied with IMP programs and there is no immediate prospect for compliance; (3) the country has not met rescheduling terms for one year; or (4) the country shows no definite prospects for an orderly restoration of debt service in the near future. See Inter-agency Country Exposure Risk Committee, “Inter-agency Statement on Examination Treatment of International Loans” (Washington, D.C., December 15, 1983).

54 “The Pied Piper of Citicorp,” Financial Report, August 20, 1987, p. 2.

55 Interview with a U.S. Department of Treasury economist, November 1987. Howard P. Lehman conducted the interviews referred to in this paper during trips to New York, Washington, D.C., and London between 1985 and 1989.

56 Author's interview with a senior vice president of an American bank, June 1988.

57 Huizinga, Harry, “The Commercial Bank Claims on Developing Countries: How Have Banks Been Affected?” in Husain, Ishrat and Diwan, Ishac, eds., Dealing with the Debt Crisis (Washington, D.C.: World Bank, 1989), 134Google Scholar.

58 Guttentag, Jack M. and Herring, Richard, “Accounting for Losses on Sovereign Debt: Implications for New Lending,” Essays in International Finance, no. 172 (Princeton: Princeton University, International Finance Section, 1989), 30Google Scholar. Cataquet defines the secondary debt market as a “forum where a bank who no longer wants to hold a loan can sell the asset to another bank in exchange for cash, or conversely.” See Cataquet, Harold, “Country Risk Management: How to Juggle with Your Arms in a Straitjacket?” in Singer, H. W. and Sharma, Soumitra, eds., Economic Development and World Debt (New York: St. Martin's Press, 1989), 339Google Scholar.

59 O'Donnell (fn. 1), 1160.

60 Interest income recorded only when actually received.

61 Latin American Weekly Report, April 16, 1987, p. 7. The classification “substandard” is a step before the more serious “value-impaired” classification. The substandard category applies when (1) a country is not complying with its external service obligations, as evidenced by arrearages, forced restructuring, or rollovers; (2) the country is not in the process of adopting an IMF or other suitable economic adjustment program, or is not adequately adhering to such a program; or (3) the country and its bank creditors have not negotiated a viable rescheduling program and are unlikely to do so in the near future. See Inter-agency Country Exposure Risk Committee (fn. 53).

62 Latin American Weekly Report, March 12, 1987, pp. 6–7.

63 O'Cleireacain, Seamus, Third World Debt and International Public Policy (New York: Praeger, 1990), 189Google Scholar. It is important to note the distinction between writing down a loan and establishing a provision for a loan. The former refers to a reduction in the book value of the asset in the creditor's balance sheet to a level that reflects the asset's real net present value. Creditors make “provision against loans by putting aside reserves in low-earning but risk-free assets in order to cover the possibility that repayments of principal or payments of interest might not be made.” See Bird (fn. 52), 51. If a default occurs, the bad debt is charged against the previously established reserves rather than against the banks' income or capital base. So long as the banks estimate these losses adequately through the reserve account, current earnings are unaffected. However, banks incur indirect costs in forgone additional loans and potential income. Indirect costs may mount because, according to most national bank regulations, provisions must be maintained for at least five years after the most recent rescheduling agreement or episode of payment arrears.

64 Smith (fn. 23), 39–74; Riding (fn. 46), 23; Baer and Beckerman (fn. 31), 35–64.

65 Economist, April 25, 1987, p. 12.

66 Ibid. According to Latin American Weekly Report, September 11, 1986, p. 4, political support for a reduction in debt servicing was made explicit as early as September 1986 when, at its first national congress, the PMDB approved a proposal for an immediate and substantial reduction in net transfers abroad, which Sarney promised to uphold.

67 Economist, April 25, 1987, p. 15.

68 Smith (fn. 23), 57; Pang (fn. 19), 136.

69 Latin American Weekly Report, March 12, 1987, p. 4.

70 Ibid., March 5, 1987, p. 4; New York Times, April 27, 1987, p. 23.

71 Latin American Weekly Report, April 9, 1987, p. 10, and April 23, 1987, p. 8; New York Times, April 27, 1987, p. 23. According to the Latin American Weekly Report (July 9, 1987, p. 2), when labor groups demonstrated against the government's austerity program, the military warned that “as defenders of the institutions, the armed forces ‘will not allow these groups to continue their disturbance and aggression.’ ” Sarney's sensitivity to the military's views seems to be reflected in a report on the meetings of the president: the two ministers most often consulted by Sarney in his first two years in office were the head of the SNI (the powerful military intelligence) and the head of the president's military household (Latin American Weekly Report, April 23, 1987, p. 8).

72 Fleischer, David, “The Constituent Assembly and the Transformation Strategy,” in Graham, Lawrence S. and Wilson, Robert H., eds., The Political Economy of Brazil: Public Policies in an Era of Transition (Austin: University of Texas Press, 1990), 250–51Google Scholar.

73 Pang (fn. 19), 137.

74 Alan Riding, “New Brazil Minister Reviving Austerity,” New York Times, May 4, 1987, p. 38.

75 Carlos, LuisPereira, Bresser, “A Brazilian Approach to External Debt Negotiation,” LASA Forum 19 (Winter 1989), 6Google Scholar.

76 Pang (fn. 19) reports that nearly five hundred companies in Sao Paulo went bankrupt in April 1987 (p. 137).

77 Pang (fn. 19), 138.

78 Luke, Paul, The Latin American Debt Problem: An Evaluation (London: Libra Bank, 1988), 31Google Scholar.

79 O'Cleireacain (fn. 63), 6.

80 “Debt Crisis,” Latin American Markets, September 21, 1987, p. 2.

81 U.S. Treasury, “Proposal with Respect to Certain Brazilian External Debt Held by Commercial Banks,” September 25, 1987, p. 2.

82 Internal memo, July 21, 1987.

83 William R. Rhodes, “An Insider's Reflection on the Brazilian Debt Package,” Wall Street Journal, October 14, 1988, p. 13.

84 Author's interview, November 1987.

85 Author's interview with a senior vice president of an American bank, June 1988.

86 Bresser Pereira (fn. 75), 7.

87 Ibid.

88 Ibid.

89 Katherine Sieh, “New Debt Agreement Reached,” Infobrazil, November 1987; “Deal with Banks Ends Moratorium,” Latin American Regional Reports: Brazil, November 26, 1987, p. 6.

90 Bresser Pereira (fn. 75), 7.

91 In early 1987, European loan-loss provisions averaged between 30 and 70% of all debtor loans, while the provisions of British, Japanese, and American banks averaged only 5%; see O'Cleireacain (fn. 63), p. 207. A partial equalization of tax and accounting indicators took place by 1989 because of the Basle accord. Banks also are subject to national regulatory, tax, and accounting diversity that serves to intensify further bank competition. See Bird (fn. 52); and Huizinga (fn. 57).

92 Bird (fn. 52), 66, 71.

93 Author's interview, November 1987.

94 Author's interview, June 1988.

95 Devlin (fn. 4), 228.

96 Putnam (fn. 2), 458.

97 Bresser Pereira (fn. 75), 7.

98 Ibid., 7.

99 Latin American Regional Report: Brazil, February 11, 1988, p. 3.

100 Latin American Weekly Report: Brazil, January 21, 1988, p. 2; Latin American Weekly Report, February 18, 1988, pp. 4–5.

101 Latin American Regional Report: Brazil, February 11, 1988, p. 3.

102 Ibid., July 7, 1988, p. 5.

103 Author's interview with a British bank economist, June 1988.

104 Bresser Pereira was aware of the impact of this regulatory classification when he remarked in October 1987 that “I am interested in getting out of the moratorium, but the banks are even more interested than I am.” See “New Plan Suggests Thorny Debt Talks,” Latin American Regional Report: Brazil, October 22, 1987, p. 6.

105 Latin American Weekly Report, March 17, 1988, p. 9.

106 Pang (fn. 19), 139.

107 Latin American Weekly Report, April 21, 1988, pp. 10–11, and June 16, 1988, p. 7.

108 Lamdany, Ruben, “The Market-Based Menu Approach in Action: The 1988 Brazil Financing Package,” Discussion Papers 52 (Washington, D.C.: World Bank, 1989), 4Google Scholar.

109 Stephen Fidler, “Banks Agree on 'Innovative' Approach,” Financial Times, June 23, 1988; “Brazil to Sign Debt Pack with Foreign Banks Today,” Wall Street Journal, September 22, 1988, p. 4.

110 “Debt Rescheduling Accord Ready,” Gazeta Mercantil, June 27, 1988, p. 3.

111 Author's interview with a British bank economist, June 1988.

112 Author's interview with economists of a British bank, July 1988.

113 Latin American Weekly Report, July 23, 1988, p. 10.

114 Fidler (fn. 109), 3. Some economists argued that the reduction in interest rates spreads achieved after a year of negotiations had in September 1988 already been wiped out by the rise in the LIBOR. Latin American Regional Report: Brazil, October 20, 1988, p. 2.

115 Ibid., 5.

116 “Debt Rescheduling Accord Ready” (fn. 110), 3.

117 First, Brazil issued $5 billion in exit bonds carrying a 6% interest rate over twenty-five years. Banks can exchange a loan for bonds issued by Brazil, but at a lower interest rate. Banks can then reduce their loan exposure and Brazil can reduce its indebtedness. Over one hundred banks have subscribed to the exit bonds, as compared with only two banks under the 1987 Argentine accord. For a complete discussion of exit bonds, see Lamdany (fn. 108), 6. The second option is the debt-equity conversion, in which a bank may exchange a loan at market (discounted) rates for local currency that it can use to invest in the debtor nation. A recent report by the advisory committee comprising the leading commercial banks with exposure in Brazil urged the government to expand its debt-equity program. See Peter Truell, “Brazil Could Cut Foreign Bank Debt by $19 Billion by 1994, Study Says,” Wall Street Journal, August 23, 1988, p. 6. Although Brazil made $6 billion of debt-equity swaps in 1988, Nobrega recently stated that the program would be cut back in 1989 because of its inflationary consequences. See Peter Kilborn, “Debt Reduction: Ways to Do It,” New York Times, April 6, 1989, p. 27. Finally, as an incentive to obtain the required 90% of Brazil's seven hundred creditor banks, the Brazilian government agreed to pay 3/8%, and 1/8% commissions, respectively, to banks that adhered by August 5 and September 2, 1988.

118 Lamdany (fn. 108), 6.

119 Author's interview, June 1988.

120 Author's interview, Washington, D.C., June 1988.

121 Author's interview with an adviser to an American bank, June 1988.

122 Fidler (fn. 109), 3.

123 Author's interviews with economists at two British banks, July 1988.

124 Author's interviews with economists at British and American banks, June 1988.

125 Author's interview with Brazilian embassy officials in Washington, D.C., June 1988; Latin American Regional Report: Brazil, July 7, 1988, p. 5.

126 Latin American Weekly Report, June 30, 1988, p. 7.

127 Latin American Regional Report: Brazil, August 10, 1989, October 19, 1989, and February 15, 1990.

128 Schelling, Thomas, The Strategy of Conflict (Cambridge: Harvard University Press, 1960)Google Scholar; Axelrod, Robert, The Evolution of Cooperation (New York: Basic Books, 1984)Google Scholar; Axelrod, Robert and Keohane, Robert O., “Achieving Cooperation under Anarchy,” in Oye, Kenneth A., ed., Cooperation under Anarchy (Princeton: Princeton University Press, 1986)Google Scholar; Duncan Snidal, “The Game Theory of International Politics,” in Oye.

129 Putnam (fn. 2), 460.

130 Aggarwal (fn. 1), 64.

131 Kaufman (fn. 1), 114.

132 Lamdany (fn. 108).

133 This point derives in part from Putnam (fn. 2). He writes that “international pressures ‘reverberate’ within domestic politics, tipping the domestic balance and thus influencing the international negotiations” (p. 454).

134 Ibid., 457.

135 See the country case studies in Sachs (fn. 1).

136 For an elaboration of the menu of options, see Michel H. Bouchet and Jonathan Hay, “The Rise of the Market-Based 'Menu' Approach,” in Husain and Diwan (fn. 57); Williamson, John, Voluntary Approaches to Debt Relief (Washington, D.C.: Institute for International Economics, 1988)Google Scholar.

137 For differing examples of the IDF, see Peter Kenen, “A Bailout for the Banks,” New York Times, March 6, 1983; Felix Rohatyn, “A Plan for Stretching Out Global Debt,” Business Week, February 28, 1983; Richard S. Weinert, “Swapping Third World Debt,” Foreign Policy (Winter 1986–87); James D. Robinson III, “A Comprehensive Agenda for LDC Debt and World Trade Growth,” The AMEX Bank Review Special Papers, no. 13 (March 1988); W. Max Corden, “An International Debt Facility?” IMF Wording Paper, February 1988.