Peru makes peace with IMF -- for now. Last-minute compromise only postpones day of reckoning

President Alan Garc'ia P'erez of Peru has taken a more conciliatory approach toward the International Monetary Fund -- at least for now. At his inauguration last July 28, President Garc'ia shook the financial world by declaring that, for one year, Peru would pay foreign creditors no more than 10 percent of its export earnings -- and that his administration would have nothing to do with the IMF or its ``imperialist'' economic prescriptions.

Earlier this month, while the IMF's representative to Peru was in Washington, the Garc'ia government ordered the fund to close its Lima office.

``We don't accept financial commissars of any kind,'' said Prime Minister Luis Alva Castro at that time.

But in a showdown with the fund, which bails out nations in trouble with trade balances, the often tough-speaking President shifted tactics. He put confrontational rhetoric aside and worked out a last-minute deal to avoid a potentially costly fight over some $140 million in overdue interest -- owed on money borrowed from the IMF before the Garc'ia government took office. The fund had given Peru until April 14 to pay. Nonpayment, the fund said, could result in Peru's being declared ineligible for further IMF credits.

The ineligible rating, which has so far been assigned to only a handful of virtually bankrupt countries, could have led Peru to a near-total break with the international financial system.

Financial sources say Peru would have lost new credits from multilateral lenders, such as the World Bank and the Inter-American Development Bank, and possibly short-term private trade credits from commercial banks as well. The country also might have faced trade embargoes and attempts by creditors to make claims against the country's assets abroad.

But just hours before the deadline, Garc'ia announced that Peru had offered to pay the fund $35 million of what it owed. Sources here say that wasn't everything hard-line countries in the IMF wanted, including the US, but it was enough to get negotiations rolling.

The IMF accepted the $35 million and gave Peru a new deadline: May 5. By that date Peru must come up with a plan for paying the $180 million it will owe the fund on Aug. 15. Conveniently for Garc'ia, Aug. 15 falls just 18 days after the end of the year during which Garc'ia said Peru would pay only 10 percent of its export earnings to foreign creditors. Thus it gives the Peruvian leader a chance to meet his obligations to the IMF without breaking his 10 percent pledge.

In an almost unheard-of display of warmth by a Peruvian official toward the IMF, Prime Minister Alva Castro said that ``the fund and above all [IMF Managing Director Jacques de Larosi`ere de Champfeu] have made a show of flexibility which we appreciate.'' Alva Castro also sent thank-you telexes to members of the IMF executive board who supported the compromise.

Analysts here say Peru was forced to buy time, because -- with the nation's economy shaky and little evidence that other Latin countries are prepared to follow Garc'ia's maverick approach -- officials feared losing what little foreign credit Peru still has.

For its part, the IMF bent its rules to avoid looking intransigent, even if this may mean setting a bad precedent by letting a borrower temporarily escape its financial obligations.

``It was a brilliant decision by the fund,'' says one foreign analyst. ``They can say, `Hey, we're trying to be flexible.' It blunts Garc'ia's offensive.''

Peru has also begun to seek better relations with private bank creditors. Foreign bankers here say that Peru recently offered to make a ``goodwill gesture'' payment to banks by the end of April. Peru also made its first payment in eight months on its debt to the US -- more than $7 million on overdue military loans and more than $8 million to the US Agency for International Development.

Analysts point out, however, that the deal with the IMF only postpones the day of reckoning. ``It doesn't necessarily mean that at some point down the road Peru won't go back to being radical,'' says a source close to the government. ``They may decide they can't pay $180 million in August. It's a huge amount.''

Largely because of Garc'ia's unilateral limit on debt payments, Peru has accumulated $1.5 billion in foreign currency reserves. Financial analysts here agree that, if Peru is declared ineligible for IMF credits, this war chest would be enough to pay the country's import bills for at least a year. ``In a worst-case scenario a total break would cost Peru $700 million over the next two years,'' says the former central bank president, Richard Webb Duarte. ``That's large, but bearable. And the cost may disappear in 1988 or 1989 as foreign retaliation dies down.''

Other observers warn, however, that Garc'ia's expansionary economic policies have already begun to eat into those reserves. ``If Peru gets foreign credits cut off it might eventually face the same series of problems that Chile had under Allende,'' says a foreign banker. ``Chile couldn't control them and the whole thing blew up.''