<p>Two major developments have changed the outlook for the international debt problem in recent months. Both suggest that creditor banks do not plan much new lending to Latin America.</p>
<p>First, negotiations with Mexico under the Brady plan left creditor banks three options. They could reduce principal by exchanging outstanding loans for bonds valued at 65% of the face value of the loans, or reduce interest rates by exchanging loans for bonds bearing a 6.25% interest rate, or agree to make new loans. The Mexican government has announced the response from holders of 60% of the nearly $53 billion of medium- and long-term debt covered by the agreement. Only 10% of the banks decided to offer additional loans; 50% chose to reduce principal and 40% to reduce interest rates. Based on these proportions, Mexico's debt service will fall by $900 million, and outstanding debt will fall by $8 billion.</p>
<p>Second, major banks in the U.S. and U.K. increased their reserves against medium- and long-term loans to heavily indebted countries. On average, eleven U.S. banks with significant exposure now have a 60% reserve against medium and long-term debt. Reserves at major U.K. banks run between 50% and 70%, and reserves of other European banks are approximately 50% of their medium- and long-term loans.</p>