U.S. URGES BANKS TO WEIGH PHILIPPINE DEBT PLAN The U.S. is urging reluctant commercial banks to seriously consider accepting a novel Philippine proposal for paying its interest bill and believes the innovation is fully consistent with its Third World debt strategy, a Reagan administration official said. The official's comments also suggest that debtors' pleas for interest rate concessions should be treated much more seriously by the commercial banks, in cases where developing nations are carrying out genuine economic reforms. In addition, he signaled that the banks might want to reconsider the idea of a "megabank," where Third World debt would be pooled, and suggested the administration would support such a plan, even though it was not formally proposing it. At the same time, however, the official expressed reservations that such a scheme would ever get off the ground. The Philippine proposal, together with Argentine suggestions that "exit bonds" be issued to end the troublesome role of small banks in the debt strategy, would help to underpin the flagging role of private banks within the plan, the official said in an interview with Reuters. "All of these things would fit within the definition of our initiative as we have asked it and we think any novel and unique approach such as those should be considered," said the official, who asked not to be named. In October 1985, Washington outlined a debt crisis strategy under which commercial banks and multilateral institutions such as the World Bank and the International Monetary Fund (IMF) were urged to step up lending to major debtors nations. In return, America called on the debtor countries to enact economic reforms promoting inflation-free economic growth. "The multilaterals have been performing well, the debtors have been performing well," said the official. But he admitted that the largest Third World debtor, Brazil, was clearly an exception. The official, who played a key role in developing the U.S. Debt strategy and is an administration economic policymaker, also said these new ideas would help commercial banks improve their role in resolving the Third World debt crisis. "We called at the very beginning for the bank syndications to find procedures or processes whereby they could operate more effectively," the official said. Among those ideas, the official said, were suggestions that commercial banks create a "megabank" which could swap Third World debt paper for so-called "exit bonds" for banks like regional American or European institutions. Such bonds in theory would rid these banks of the need to lend money to their former debtors every time a new money package was assembled, and has been suggested by Argentina in its current negotiations for a new loan of 2.15 billion dlrs. He emphasised that the "megabank" was not an administration plan but "something some people have suggested." Other U.S. Officials said Japanese commercial banks are examining the creation of a consortium bank to assume Third World debt. This plan, actively under consideration, would differ slightly from the one the official described. But the official expressed deep misgivings that such a plan would work in the United States. "If the banks thought that that was a suitable way to go, fine. I don't think they ever will." He pointed out that banks would swap their Third World loans for capital in the megabank and might then be reluctant to provide new money to debtors through the new institution. Meanwhile, the official praised the Philippine plan under which it would make interest payments on its debt in cash at no more than 5/8 pct above Libor. "The Philippine proposal is very interesting, it's quite unique and I don't think it's something that should be categorically rejected out of hand," the official said. Banks which found this level unacceptably low would be offered an alternative of Libor payments in cash and a margin above that of one pct in the form of Philippine Investment Notes. These tradeable, dollar-denominated notes would have a six-year life and if banks swapped them for cash before maturity, the country would guarantee a payment of 7/8 point over Libor. Until now, bankers have criticised these spreads as far too low. The talks, now in their second week, are aimed at stretching out repayments of 3.6 billion dlrs of debt and granting easier terms on 5.8 billion of already rescheduled debt. The country, which has enjoyed strong political support in Washington since Corazon Aquino came to power early last year, owes an overall 27.8 billion dlrs of debt. But the official denied the plan amounts to interest rate capitalisation, a development until now unacceptable to the banks. "It's no more interest rate capitalisation than if you have a write down in the spread over Libor from what existed before," the official said in comments suggesting some ought to be granted the rate concessions they seek. "Some people argue that (cutting the spread) is debt forgiveness... What it really is is narrowing the spread on new money," he added. He said the U.S. Debt strategy is sufficiently broad as an initiative to include plans like the Philippines'.