(FORTUNE Magazine) – EVIDENCE IS BUILDING that the international debt crisis is over. Gone is the nerve-jangling prospect that the world banking system might suddenly collapse as large Latin American countries proved unable or unwilling to honor their external debts. The largest debtor countries, notably Mexico and Brazil, have made stunning economic progress in the past year, posting strong real (inflation-adjusted) growth and surprisingly large trade surpluses. Obstreperous debtors, such as Argentina, have been muscled into accepting austere financial programs. And with Mexico leading the way, the debtor countries and their lenders are working out realistic long-term schedules for repaying the huge loans. Says Rimmer de Vries, chief international economist at Morgan Guaranty Trust Co., ''The progress in the debt crisis is coming about three times as fast as we thought possible.'' The improvement shows up most dramatically in the international financial accounts of the borrowers. In 1981, the year before the debt problem swelled to nightmarish proportions, the current account deficit of the 16 largest Third World borrowers totaled $55 billion. Morgan Guaranty estimates that last year the deficit shrank to just $12 billion. And while in 1982 the trade surplus of the six largest Latin American debtors covered just 5% of their interest bill, by 1984 the surplus equaled 87% of total interest payments (see chart on page 50). That's still not enough for these countries to begin paying down their debts, but it's impressive progress. A feeling of hard times, to be sure, still pervades the major Latin American countries. Their economic feats, mainly in international trade, haven't brought similar gains throughout their economies. These countries are plagued by excess capacity in industries that produce for domestic markets, as well as high unemployment and declining real wages. The slums of Mexico City and Rio de Janeiro still attract thousands of the agrarian poor each day. Although the middle classes crowd swank shopping avenues in cities like Buenos Aires and Sao Paulo, in private they complain that their real incomes have plunged, in some cases to as little as 30% of what they were just five years ago. Clouding all these countries' futures is the still-stupendous task of servicing their foreign debt--a total of some $520 billion for the 16 largest Third World debtors, with interest payments amounting to about $55 billion a year. A spike in interest rates, a drop in commodity prices, or a sudden slowdown in the world economy could bring fresh setbacks on the long journey back to creditworthiness. But while a year ago it seemed the problems of a single large country might spark an international financial calamity, the danger now appears remote. Officials at banks, international agencies, and government finance ministries are confident they can anticipate and avert new crises. And confidence is growing in the debt-restructuring process, the infuriatingly slow and untidy effort that puts debtor nations on the International Monetary Fund's stringent diet of hard-nosed monetary policy, curtailed government spending, and fewer imports. At the end of 1983 there was little reason to believe the IMF programs would work. Although Mexico had become the darling of the international financial community by cutting its rate of inflation from 100% in 1982 to 80% in 1983 and posting a $13.7-billion trade surplus, the problems of Brazil, Argentina, and dozens of smaller borrowers appeared insoluble. Bankers doubted whether Brazil could ever live up to its agreements with the IMF and wondered whether Argentina might simply refuse to pay its debt, thereby disrupting the whole international restructuring effort. Long-term solutions--beyond the frenzied short-term debt reschedulings that seemed necessary almost annually--appeared out of reach. But 1984 surprised even the most optimistic bankers and financial policymakers. Brazil's economic resurgence probably did the most to bolster confidence that measures prescribed by the IMF would work. Early last year experts inside and outside Brazil were predicting that 1984 would be dismal. The country had bumbled along for two years, missing targets set by the IMF and then signing new letters of understanding--some seven separate agreements in 22 months to date. Economists expected the country to remain in a slump and to generate a trade surplus of $7 billion at most--far short of the IMF's target of $9 billion. But the Brazilian government set out with a vengeance to boost exports. It kept the cruzeiro undervalued against the dollar, adjusting the currency almost weekly. As the U.S. economic boom roared along, so did Brazilian sales of soybeans, coffee, grain, steel, and a host of manufactured goods. Brazil missed critical IMF targets, most notably on inflation. But it shaved the government deficit by reining in spending, and its program got the economy moving again. Real gross domestic product grew at least 4% in 1984, and Brazil's trade surplus zoomed to a record $13 billion. Mexico's performance proved nearly as impressive. By tightening expenditures and increasing the prices charged by companies in the public sector, the government whittled its budget deficit from 8.7% of gross domestic product in 1983 to 6.5% or so last year. Despite the tighter fiscal policy, the economy began to expand, with GDP increasing by more than 2% after a decline of 4.7% in 1983. The government brought the inflation rate down further, to about 60% in 1984, missing the IMF's goal of 40% but pushing this important indicator in the right direction. To fight inflation, the Mexican central bank, in an approach diametrically opposite to that of Brazil, let the peso rise modestly relative to the dollar during 1984. This took pressure off domestic prices but also brought a slowdown in non-oil exports during the second half of the year. Oil sales, which represent 70% of Mexican exports, remained strong. The country's trade surplus was a healthy $13 billion, down only slightly from 1983. International reserves swelled to $8.5 billion, emboldening Mexico to prepay $250 million of principal early in January and to announce plans to reduce its short-term trade credits by $1 billion. ARGENTINA, IN CONTRAST, suffered through a difficult year. Inflation roared out of control, hitting an annual rate of 1,500% during one week in September. It hardly helped that the government of President Raul Alfonsin, which had won the election on a promise to keep real wages from falling, spent much of the year trying to honor that promise. But Alfonsin attacked government spending, halving the deficit. And early in the fourth quarter Argentina embraced an IMF austerity program, slamming the brakes on money supply growth and slowing inflation to a triple-digit level. Argentina's real GDP grew at an annual rate of 3.5% during the first nine months but declined sharply in the last quarter, possibly because of the government's initial zeal in carrying out the IMF measures. Despite raging inflation, exports of agricultural products continued to buoy the trade balance, and the country wound up with a $3.7-billion surplus for the year. Few developments have done more to dispel bankers' anxieties about Third World debt than those that brought Argentina to swallow the IMF's medicine last year. They showed how much pressure can be brought to keep a country from becoming an outcast of the international financial community. Of all the major debtors caught up in the crisis, Argentina was the most likely to default. It is self-sufficient in food and energy and, as the Falkland Islands war proved, unpredictable. But when Argentina took a tough stance with its bankers early in 1984 and refused to pay interest, it found itself virtually isolated. Four Latin American countries came to Argentina's aid with portions of a stopgap loan--not because they sympathized but because they wanted to keep Argentina involved in the debt-restructuring process. Latin American finance ministers, economists from the IMF and commercial banks, and officials from major industrialized countries dropped by to remind the government of the consequences of defying the lenders. The U.S. Treasury came up with another bit of persuasion: a list of items that would become scarce in various major debtor countries if they defaulted and imports came to a virtual standstill. R. T. McNamar, Deputy Treasury Secretary, emphasizes that the list did not single out Argentina. But he says it raised such interesting questions as: ''Have you ever contemplated what would happen to the president of a country if the government couldn't get insulin for its diabetics?'' Further persuasion came from the Argentine economy. When the government saw inflation skyrocketing last September, it finally signed an agreement with the IMF. Then Alfonsin resolved to come to terms with the lenders. He requested a meeting with major bankers in New York, arranged by Henry Kissinger, whose role was confined to host and matchmaker. The bankers had an unambiguous message: Argentina would have to pay past-due interest and stick to the IMF program. ''It was the first time Alfonsin had met with the bankers,'' says a senior executive vice president of a leading bank. ''From then on we made extremely rapid progress in our negotiations.'' Speeding progress was a change in Argentina's negotiating team. Enrique Garcia Vazquez, governor of the central bank, replaced the abrasive economics minister, Bernardo Grinspun, as the principal negotiator. While Argentina bowed to the international financial community, Mexico wrung concessions. In mid-1984 Mexico and its banks agreed on a 14-year debt restructuring that broke banking industry precedents and established a model that other debtor countries are hastening to follow. Some bankers complain that the package was developed by the U.S. Federal Reserve Board and ''shoved down our throats.'' But the package was actually designed and marketed by the Mexicans. The architect was Angel Gurria, the bearded, 34-year-old director of the country's public credit. A man of explosive enthusiasm and the stamina to negotiate nonstop for days, Gurria is considered a singular force in Latin American financial circles. ''There is no one else like him,'' says an admiring banker, who also remembers enduring Gurria's wrath for once refusing to join a Mexican loan syndicate. ''I've never been yelled at for a half-hour by anyone else,'' the banker says. Articulate, and with a sense of the dramatic, Gurria masterminded Mexico's bargaining strategy. During a recent three-hour interview in his spartan, dimly lit office on the first floor of the old Palacio Nacional in Mexico City's central square, Gurria glowingly described his handiwork as ''state of the art.'' By early 1984 he was quietly discussing a restructuring plan with sympathetic U.S. bankers. In early June, Fed Chairman Paul Volcker publicly weighed in behind the concept at a Philadelphia bankers' conference. GURRIA PUSHED for the longest possible repayment schedule. Previous reschedulings had postponed $23 billion of payments to a four-year period from 1987 through 1990. Those payments came atop $20 billion of principal already due in those years, creating towering annual bills of up to $15 billion, not counting interest. One of those payments would have come in 1988, the year of Mexico's next presidential election. Gurria wanted to level this Everest by pushing most of the principal payments out beyond 1990, to a period when little repayment was originally called for. Aiding him was a nagging fear among bankers that a debtors' cartel, banding together against the banks, might emerge from a June meeting of Latin American governments at the Colombian resort of Cartagena. Although prospects for a cartel looked remote, bankers were anxious to complete the Mexican agreement before that gathering.

The restructuring allows time for the debt to shrink considerably in relation to Mexico's growing economy. If the economy expands more or less steadily at a reasonably healthy rate, total foreign debt will drop from 52% of GDP in 1984 to 32% in 1990. If everything works, Mexico should be able to tap the capital markets within the next few years. But the assumptions underlying Gurria's projections are critical. ''Our bottom line is that this can be done if GDP grows steadily at 5% or 6% a year,'' he says. ''If we can't do that, then all this is useless.'' The other debtor countries have been fashioning their own versions of Mexico's solution. Venezuela has already agreed in principle to a long-term restructuring. Brazil is in the midst of negotiations on a similar package. Argentina hopes to start talks on a long-term agreement in mid-1985. The 5% to 6% growth rates on which the restructurings are based look attainable to many economists. During the 1970s, the largest debtor countries hit growth rates of 7% to 10% a year. A lot depends on what happens in the industrialized countries that make up the Organization for Economic Cooperation and Development. If these countries post an average growth rate of 3% a year for the next five years, if interest rates don't soar, and if commodity prices remain relatively stable, the less developed countries can make their growth targets. ''Given the good performance of 1984,'' says Henry C. Wallich, a governor of the Federal Reserve, ''even if OECD growth drops to 2.5%, that should provide enough strength to pull us out of this problem.'' It still won't be easy. The debtor countries will have to stick with the tough economic programs imposed by the IMF. And they will have to sustain high levels of real growth without being able to borrow as heavily as they did in the heady days prior to 1982. NO ONE EXPECTS the debtor countries to stop borrowing entirely. Gurria's projections for Mexico assume a gradual increase in total foreign debt through 1990. But this needn't mean an increase in the risks faced by bankers. . Economists argue that it is possible for the debtor countries to show economic growth of 5% to 6% a year while increasing bank borrowing by well under 5% a year. If the capital of U.S. banks grows by 12% a year, as it has been doing, these banks can make more loans and still gradually reduce their exposure in the Third World as a percentage of their total portfolios. In each of the largest Latin American debtor countries, 1985 will be a pivotal year, testing political leaders' determination to follow the IMF regimen. Brazil's most daunting problem is inflation, which topped 200% in both 1983 and 1984. Businessmen are assuming that inflation will exceed 250% this year, well above the IMF target of 150%. The task of battling inflation now falls to Tancredo Neves, a 74-year-old professional politician who has just become Brazil's first elected civilian president since 1964. A consummate builder of coalitions, Neves has brought together extremely liberal economists and some equally conservative businessmen. Economists argue that the indexation of wages, interest rates, and government programs perpetuates inflation. The betting is that Neves won't tamper significantly with indexation, but that Brazil's healthy growth will continue. Mexico needs to broaden its export base beyond oil, especially now that prices are falling. Every $1-a-barrel drop in the price of crude reduces the country's export income by $560 million a year. Given Mexico's proximity to the U.S. and its bountiful supply of cheap labor, new sources of foreign exchange shouldn't be all that hard to find. The administration of President Miguel de la Madrid Hurtado has been saying the right things about attracting private foreign capital, which could boost Mexico's current account surplus. But direct investment in Mexico fell to $29 million in last year's first six months from more than $2.5 billion in all of 1981. And the government has just rejected IBM's proposal to build a wholly owned personal computer plant, dooming the plan unless the computer company accepts Mexican participation. ''If IBM finally does not invest,'' cautions Manuel Zubiria, deputy president of Banco Nacional de Mexico, ''that will send an obvious negative signal to other potential investors.'' Political analysts worry about middle-class discontent with Mexico's austerity measures. One disturbing sign is a recent surge in capital flight after a slowdown during much of 1983. As much as $20 million a day may be < moving out of Mexico again. Another sign of disaffection is the growing support for opposition political parties. Businessmen worry that in order to bolster its political position, the PRI, Mexico's ruling party, will resort to lavish government spending. But most U.S. bankers are confident that de la Madrid's tough-minded financial advisers will prevail, and that he will avoid such excesses. DESPITE THE CHAOS in Argentina's economy, Raul Alfonsin's government appears politically secure. The military has been discredited by the Falklands debacle, and the Peronist party, much like the Democrats in the U.S., is divided and impotent. That gives Alfonsin the freedom to stick closely to the IMF program, at least for now. His commitment to that program has been almost fanatical. After the government slammed the brakes on money supply growth last fall, real interest rates--the rate paid above Argentina's rate of inflation--soared to an unbelievable 20% a month. ''The country is coming to a standstill,'' complains Rodolfo C. Clutterbuck, a director of Alpargatas SAIC, a diversified manufacturer of inexpensive canvas shoes and other consumer goods. Companies have stopped paying each other, he says, and instead are sticking all available cash in local savings institutions where they can earn sky-high interest. During the fourth quarter Alpargatas slipped sharply into the red. Argentina's central bank is aware of the pain such interest rates inflict, but it considers them necessary to get inflation under control. The government has already been forced to shape rescue plans for a few large companies faced with bankruptcy, and it stands ready to pick up the tab for others. ''We are developing policies to avoid a wave of bankruptcies, but we can't save everyone,'' says Leopoldo Portnoy, vice president of the Argentine central bank. It is too early to predict how Alfonsin will fare in this and other battles. He will have to confront the unions' opposition to any erosion in real wages. Strikes and slowdowns are possible, such as a postal slowdown that left most Christmas cards in Buenos Aires undelivered for weeks. But if Alfonsin's policies succeed, inflation and interest rates should come down and economic growth should resume. As all three countries show, the economic agony goes on even though the specter of an international financial collapse has receded. The IMF's harsh medicine works, but with painful side effects. The challenge for the industrial countries is to pursue sound economic policies themselves, fostering economic growth both at home and in the hard-pressed debtor countries.

CHART: TEXT NOT AVAILABLE Working Their Way Out Tight IMF economic programs stopped the free spending on goods and services fro abroad, excluding interest, and these countries' trade surpluses have been cove ing a growing proportion of the interest on their foreign debt.