MEXICO, BRAZIL, ARGENTINA--THE INTERNATIONAL FINANCIAL CRISIS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84B00049R000300630006-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 12
• Document Creation Date: December 19, 2016
• Document Release Date: January 20, 2006
• Sequence Number: 6
• Publication Date: September 29, 1982
• Content Type: MEMO

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WASHINGTON, D.C. 2050
DDI 5
#7891-82
29 September 1982
National Intelligence Council
MEMORANDUM FOR: Acting Director of Central Intelligence
SUBJECT: Mexico, Brazil, Argentina--The International
Financial Crisis
1. The financial crises in Mexico and Argentina have transformed the
international debt problem from one which could be treated as reflecting deficiencies
of policies and management in a few countries to one which involves the health of the
entire international financial system and the performance of the world economy.
Bankers are curtailing loans to Brazil not because their assessment of Brazil's
economic policies and political stability have turned negative, but rather because they
are extremely nervous about a high degree of exposure in the present' international
economic and political environment. This nervousness has reached the point of
constituting a crisis of confidence in international lending, which is drastically
curtailing the flow of capital to Less Developed Countries. At a minimum the LDCs
will have to make strenuous economic adjustments. At worst these required
adjustments may be so severe as to disrupt economic activity, spur a political backlash
against Western governments and financial institutions, and, in a few countries,
possibly bring about major changes in domestic and foreign policy orientation.
2. Mexico, Brazil and Argentina are the three largest LDC debtors, with over
$110 billion of debt, mostly to banks. Argentina is seriously in arrears on its debt
service payments. Its government is too weak to get the economy in shape and all
political risks are in the down side from the point of view of international lenders.
Argentina will probably have to reschedule its debt soon.
3. The critical question in Mexico is whether and how soon a political consensus
can be developed in support of drastic, painful domestic economic adjustments. Far
from facilitating this process, President Lopez Portillo so for has played political
games that have further undermined the confidence of the financial community.
Rumors abound that he will make some dramatic statements at the UN on Friday
condemning the bankers, announcing default, and urging others to do likewise.
Although some rhetoric can be expected, it would not make much sense for LP to do
this at the some time that his central bank President is trying to negotiate with the
IMF. Even so, the situation is fraught with risks, including the risk of serious popular
reactions in Mexico, and some splits in the PRI.
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4. Brazil is now feeling the impact of Mexico and Argentina, in spite of having
followed very cautious economic policies. Brazil may have to go to the IMF, or
further curtail imports, or reschedule its obligations.
5. The international financial problem could get a lot worse and there is some
risk either that major countries will have to declare a debt moratorium, or that their
economies will be severely disrupted by lack of imports. The problem involves the
relationships between governments, central banks, commercial banks, and borrowing
countries. It is unlikely that any single policy solution will work. Rather, a whole
range of policies will have to be considered, including:
o domestic monetary policy and its international linkages;
o regulation and support of banks;
o assistance to the developing countries themselves.
6. The stakes are high. Although a banking collapse is highly unlikely because
central banks would keep major commercial banks afloat, a contraction of world trade
together with a lapse into bilateralism is a serious possibility.
7. Attached is a good review of the problem, hot-off-the-press, by the best
financial analysis group in the country--the Morgan Guaranty.
Attachment,
As stated
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International lending:
implications of a
slowdown
new lending amounted to $32 billion
'at an annual rate In the third quar-
ter and only a $15 billion rate in Sep-
tember alone, down from a $50 bil-
lion rate in the first half of this year.
Provisional data for the past month
indicate that there have been 'very
few new syndicated Eurocurrency
loans to developing countries, es-
pecially Latin American borrowers.
With the exception of just a few
credits for Yugoslavia, Hungary, and
the Soviet Union, Eastern European
borrowers have been shut out of
Eurocurrency credit markets this
year.
The Immediate reason for the re-
cent deceleration In bank lending
to the developing countries is that
two of the most prominent borrow-
ers from commercial banks, Mexico
and Argentina, have encountered
difficulties In meeting their pay-
ments of principal and interest on
part of their external debts. To-
gether, the two countries account
for almost one-fourth of bank claims
on the developing countries. Table
2 shows that U.S. bank claims on
Argentina and Mexico represent
about 35% of total bank claims on
these countries, or the same per-
centage as on all developing coun-
tries. Mexico, with new medium-
term Eurocredits of over $7 billion
In the first half of 1982, alone ac-
counted for over a quarter of the
After more than a decade of very
rapid expansion, international lend-
ing, especially to developing coun-
tries, Is slowing sharply. Compre-
hensive data covering all banks in
the BIS-reporting area Indicate vir-
tually no increase in claims on de-
veloping countries In the first quar-
ter of this year. Such claims by U.S.
banks and their foreign branches
actually declined by $11/2 billion to
$119 billion in the first quarter of
1982. Those of German banks and
their foreign branches (but exclud-
ing their foreign subsidiaries) fell by
more than $1 billion to $23 billion in
the first quarter. Last year, by com-
parison, net new lending by the
BIS-reporting banks to the non-
OPEC LDCs increased by 20%, and
that by U.S. banks. increased by
24%. In previous years, expansion
of bank lending to developing coun-
tries was even more rapid (see
chart).
Data on the volume of gross new
medium-term Eurocurrency bank
credits publicized In the past few
months point to a further scaling
back of lending to the developing
countries (see Table 1). Such gross
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Table I
Gross new Eurocurrency credits
publicized medium-term bank credits
billions of dollars, at annual rates
Developing countries 45.24 50.48
31.82
Non-OPEC LDCs
33.37
37.96
15.82
Brazil
5.75
5.91
4.51
Korea
2.82
1.58
3.00
Chile
2.20
.90
1.76
Taiwan
0.93
1.02
Peru
1.41
1.68
.76
Philippines
1.28
.68
.75
Max/co
7.53
14.59
.38
Colombia
1.01
'.17
.30
Malaysia
1.73
3.59
.10
Thailand
0.69
.71
Argentina
2.53
.93
OPEC countries
11.87
12.53
15.97
Venezuela
7.56
7.89
7.56
Nigeria
1.80
.93
2.83
Ecuador
0.93
1.23
.80
Indonesia
0.73
.74
.24
Eastern Europe
1.36
.75
1.07
Hungary
.55
1.04
East Germany
.47
_03
Romania
.22
-
-
Soviet Union
.03
.75
-
developing-country total In the first
half of this year, but only 1 % of this
total in the third quarter. In view of
the importance of Mexico and Ar-
gentina to the entire banking com-
1st half 3rd quarter munity, their debt financing prob-
lems have had a major impact on
lending to other countries in the
region.
Even before the latest round of
developing-country debt problems,
It was widely recognized within the
banking community that a slowdown
in the pace of bank lending to these
countries was Inevitable. Bank lend-
Ing to them accelerated sharply af-
ter the first oil shock, and it has
continued to grow very rapidly in
recent years. Over the past three
years, for example, BIS-reporting
banks' claims on the developing
countries grew at a 21% average
annual rate, and those of U.S. banks
rose at a 17% rate. These rates of
growth for loans far outstripped
aging close to 10% per annum
since' the mid-1970s (see chart).
Moreover, the rates of increase in
loans to several countries - par-
ticularly Mexico and Argentina -
were considerably above the aver-
age pace of lending and, thereby,
resulted in increasing concentra-
tions of bank credit to certain coun-
tries (see Table 2).
Regulatory authorities in a num-
ber of countries also have taken or
are planning steps that directly or
Indirectly could slow foreign lend-
ing. In addition to Imposing capital-
asset ratio requirements on a con-
solidated balance sheet basis, some
countries have set formal or infor-
mal guidelines on foreign country
lending in response to concerns
about concentrations of country
credit risk. Supervisory authorities
in some European countries have
contacted banks on an informal
basis to limit lending to individual
countries. The Japanese Ministry of
those of bank capital, which for the
largest U.S. banks have been aver-
Finance, which earlier set limits on
Japanese banks' medium- and long-
term loans to foreign countries in
relation to capital, is reported to be
considering an extension of the
limits to cover short-term loans as
well. This action could lead to a sig-
nificant slowing of Japanese banks'
international lending, which has
been very rapid in the past few
years,'and in some instances to a
contraction of loans outstanding to
certain countries. Such a slowing
could contribute to Increases In
lending spreads.
Another factor contributing to the
slowdown in international lending Is
the negative impact of current in-
ternational and domestic financial
strains on the functioning of the
Eurocurrency market. In particular,
there are signs of a contraction of
the Interbank market. In a world
environment of Increased risks, the
maintenance of adequate capital in
relation to assets is especially im-
portant, and banks have been tak-
ing steps to moderate the growth of
their total assets. One way Is by
limiting interbank lines. Interbank
deposits, which account for more
than half of gross Eurocurrency lia-
bilities, are a major source of fund-
ing for many Eurobanks and an im-
portant component of their liquidity.
With banks reviewing and, in some
Instances, reducing their Internal
guidance lines to certain other
banks, the scope for Interbank de-
positing Is being narrowed. In ad-
dition, banks may shorten the ma-
turity of their deposits with certain
other banks, a move that could
pose problems for attempts by the
latter to match the interest rates on
their liabilities to those on their as-
sets. The resultant contraction of
the interbank market is likely to
cause difficulties for some banks
in funding their Euroloans, and may
lead some to withdraw from, or at
least scale back their participation
in, the syndicated Euroloan market.
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Table 2
BIS-reporting banks' claims on selected countries
% change'
Total end-1981
U.S. banks' % share of
end-1981 total
1979
1980
1981
(S billions)
All
9 large
Developing countries"
25
20
17
331.3
35
23
Non-OPEC LDCs'?
32
24
20
258.5
36
23
Mexico
33
38
34
56.9
38
20
Brazil
17
18
16
52.7
32
20
Argentina
91
49
25
24.8
34
21
Korea
59
39
19
19.9
45
28
Chile
87
51
43
10.5
55
31
Philippines
47
27
9
10.2
53
38
Taiwan
7
-21
22
6.6
75
47
Colombia
62
30
17
5.4
51
36
Thailand
31
9
27
5.1
32
21
Malaysia
18
19
67
4.4
22
19
Egypt
22
49
35
4.4
27
20
Peru
5
8
9
4.4
45
24
Turkey
4
11
-3
4.2
34
21
OPEC countries
9
8
5
72.8
32
22
Venezuela
48
17
8
28.2
40
27
Algeria
18
-0
-8
8.4
1e
11
Indonesia
-0
8
-16
7.2
33
27
Nigeria
- 52
30
34
6.0
19
15
Ecuador
19
24
16
4.5
47
27
Eastern Europe
20
9
' 2
71.5
11
7
Soviet Union
- 0
T 3
21
16.3
3
2
Poland
27
2
--6
15.3
13
8
East Germany
26
16
8
10.7
9
6
Yugoslavia
34
28
3
10.7
25
15
Hungary
15
1
-4
7.7 ' ?
15
9
Romania
52
31
-12
?5.1
7
5
'Includes effects of exchange rate changes.
"Excludes countries that are offsli re banking centers.
Source: Bank for International Settlements (BIS), The Maturity Distribution of International Bank Lending;
and Federal Financial Institutions Examination Council, Country Exposure Lending Survey.
Table 3
Current account balance
% of exports of goods and services, annual averages
Latin America
Argentina
-1
-14
Brazil
-35
-75
Chile
-21
-19
Colombia
-21
-11
Ecuador
-22
-7
Mexico
-29
-54
Peru
--3
-83
Venezuela
+4
+36
Asia
Indonesia
-19
-4
Korea
-23
-35
Malaysia
-3
-11
Philippines
+6
-17
Taiwan
+10
-13
Thailand
-9
-11
+19
-25
-48
-57
-19
-28
+9
-1
-22
-23
-31
-28
-37
--9
-27
+13
-8
+10
-4
-22
+5
+2
-25
-25
+8
-2
-21
-27
- 49
-63
--46
-42
-28
-33
+4
-22
-12
-27
-28
+5
-19
Their aggregate current account
..-deficit remains very large both In
':absolute terms and in relation to
= '= "their exports of goods and services,
and a number of countries now face
larger deficits in relation to their
exports of goods and services than
they did after the first oil crisis (see
-Table 3). In addition, several oil-
exporting countries such as Mexico,
Indonesia, and Nigeria have very
large current account deficits.
The large payments imbalances
of the non-OPEC LDCs have per-
With fewer banks able and willing
to participate in new international
loans, and with less bank capital to
support such lending, International
lending is bound to slow down fur-
ther.
Impact of the global environment
on thb developing countries
The economic and financial prob-
lems confronting a number of de-
veloping countries today are, to an
important extent, a result of an ad-
verse global environment. Today's
environment is far less conducive
to developing-country economic
growth and to maintenance of their
debt servicing capacity than that
which existed until a few years ago.
In 1979-80, -the non-OPEC LDCs
were again confronted with large
Increases In their oil-import bills
owing to a sharp rise in world oil
prices. Balance-of-payments adjust-
ment by the non-OPEC LDCs after
the second oil shock, however, has
turned out to be far more difficult
than that after the first oil shock.
This is' best demonstrated by the
fact that even though oil prices have
weakened somewhat from their
peak in early 1981 and the OPEC
surplus has virtually disappeared
(representing a swing of more than
$100 billion in two years), the pay-
ments positions of the non-OPEC
LDCs have benefited very little.
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Table 4
Real GDP growth
annual averages, In percent
1970-73
1974-75
Latin America
Argentina
2.8
2.8
Brazil
11.7
7.6
Chile
Colombia
6.8
4.9
Ecuador
12.9
6.0
Mexico
7.0
5.9
Peru
6.1
5.1
Venezuela
5.3
6.0
Asia
Indonesia
8.6
6.3
Korea
9.9
7.8
Malaysia
8.7
4.6
Philippines
6.2
6.1
Taiwan
11.8
3.8
Thailand
8.3
6.3
1976-78
1979-80-
1981-82
0.5
4.3
-6.0
6.6
7.3
-1.7
6.1
4.5
-`.u
3.0
7.4 ~
4.9
2.9
5.3
8.7
4.6
0.0
3.5
2.3
6.1
-0.2
0.0
7.5
7.5
6.3 - ?
12.3
0.1
6.0
8.7
6.6
5.2
6.4
5.9
-
3.2
12.4
-
7.3
4.7
13.0
5.9
6.3
more restrictive. Economic growth
in the industrial world averaged only
about 1% in 1980-81 and will be
close to zero this year. Moreover,
prospects for a quick turnaround of
economic conditions in the Indus.
trial countries are not good. De-
anitn mn?nfinn ,,.. e.....t..... .... -J
a disinflationary environment, gov-
emments have refrained from adopt,
ing stimulative economic policies
implemented in the past. Rather,
the broad th t f
s
economic po
ru o l
y
cies - particularly monetary poll-
cies and more recently fiscal poli-
dies as well - continues to be di-
rected at fighting inflation and curb
Ing inflationary expectations to lay
the groundwork fora sustained eco-
nomic recovery. Even though hopes
sisted despite a pronounced con-, that disinflation could be achieved
traction of their economic growth, quickly and painlessly have faded
which Is estimated to have slipped .away, the commitment to a new era
to about a 2% rate last year from a of much lower inflation, If anything,
trend rate of.close to 6%. There has become more widespread. Thus,
was little or no growth for Latin countries that pursued more ex-
America as a whole last year, and pensionary policies ?-- most notably
there may be a decline this year(see France in 1981 and early 1982 -
'Fable 4). While the Asian develop- have by necessity begun to shift
Ind countries have managed about a their ?poljcies in the direction of
51/z% rate of growth in the last cou- countries with. relatively low rates of
.2 pie of years, this nonetheless rep- -Inflation and`strong payments posi-
resents a considerable slowdown tions.,..,.
A~,d for the region. By contrast, in 1974- ,The disinflatfonary environment In
75 the non-OPEC LDCs were able the Industrial countries, In turn,
to maintain a rate of economic has affected the capacity, of the
growth close to 5% per annum, or developing countries to service
only slightly below the trend rate in external debt. The growth, of non-
the late 1960s and early 1970s.. ; . -OPEC LDCs' export earnings, for
LDC balance-of-payments adjust- example, fell to less than a 5%
ment efforts since the secondwit rate in 1981 and is negligible this
shock have been thwarted to &