INTERNATIONAL FINANCIAL ISSUES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84B00049R001700250006-6
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 7
• Document Creation Date: December 20, 2016
• Document Release Date: June 11, 2007
• Sequence Number: 6
• Publication Date: October 27, 1982
• Content Type: MEMO

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CONFIDENTIAL
THE DIRECTOR OF CENTRAL INTELLIGENCE
National Intelligence Council
NIC #8661-82
27 October 1982
MEMORANDUM FOR: Deputy Director for Intelligence
Deputy Director for Operations
Director, EURA
Director, OALA
Director, OEA
Director, OGI
Director, NESA
Director, SOVA
Chief, PES
Chairman, National Intelligence Council
FROM: Maurice C. Ernst
National Intelligence Officer for Economics
SUBJECT: International Financial Issues
1. International financial and debt problems are likely to get as
much attention in 1983 as did energy problems during the 1974 and 1980 oil
crises. There is already enormous interest in these problems at the policy
level, including the Cabinet and Sub-Cabinet. Policy officials are
hungrily grabbing any papers and nuggets of information they can get their
hands on and are extremely receptive to any new ideas and analyses.
Although the financial issues are of particular concern to OALA, they cut
across everyone's interests because of the potential economic and political
repercussions.
2. Some of the main characteristics of the international financial
problem are:
o The economies of most LDCs, including particularly Latin America,
are being hit hard, as is Eastern Europe.
o The debt problems have worsened greatly in recent months and
things are likely to get even worse next year.
o There is cause for concern that LDC problems will breed
protectionism, bilateralism, and perhaps a borrower's revolt of
some sort.
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it
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o In the latter event, there could be a threat to the stability of
the international financial system.
o LDC debt problems are almost certain to be an important issue in
the North-South dialogue, which could get very nasty.
o And the financial position of some banks is going to be weaker,
posing difficult longer-term problems for governments.
o Although financial problems are unlikely to lead directly to
radical left or Communist takeovers in LDCs, they will probably
breed anti-US policies of various kinds and increase political
tensions in many LDCs.
Issues for 1983 and the Role of CIA
3. CIA's role on international financial issues will involve large
parts . Although much of the CIA contribution will
be country-specific, some issues will be best addressed on a regional or
functional basis. Obviously there will have to be a great deal of current
monitoring and current intelligence production. I believe that the bi-
weekly report "The International Financial Situation Report" that OGI has
just begun to publish, will serve an important purpose in bringing together
material that would otherwise be widely dispersed or missed altogether. In
order to regularly report on and assess related developments, such as
changes in LDC trade, policies, or politics, special consideration of this
issue might be given in the IEEW. Beyond current monitoring and reporting,
there will be a need for various kinds of ad hoc assessments, some of the
more important of which are listed below. I do not tr
feasibility, given resource constraints and trade-off
Specific Issues
Mexico
(1) Continuing assessments of Mexican trade, balance of payments,
debt, unemployment, inflation, political maneuvering, and
negotiations with the US and the IMF, are much in demand.
(2) There will also be demands for support of an interagency group
which has just been established to develop policies to help the De
la Madrid administration. Assessments which could be helpful to
this group include:
o Mexico's oil and gas production and export possibilities--
equipment, financial and market needs; potential role of the
US.
25X1
25X1
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o Likely food needs, especially grain, in the next year or two.
o Possibilities and prospects for non-oil export markets,
including consideration of how US action might facilitate or
hinder these exports.
o The potential for private direct investment in Mexico--what
kinds of measures are required? Are these realistic, given
Mexican politics?
(3) Mexico is trying to negotiate an agreement with the IMF. Once
such an agreement is negotiated, there will need to be a careful
assessment of the political barriers to implementation and the
possible scenarios that may develop. Which are the areas of
possible slippage? What would be the consequences if slippage
occurs? How divisive will the austerity program be?
Brazil
(1) Brazil's financial situation is touch and go--a major crisis could
develop at any time. The first priority will be to watch this
closely.
(2) There is also a priority need to examine possible economic trends
over the next two to three years. The main question is to assess
what kinds of policies and international economic trends would be
required to put Brazil in a comfortable financial position, the
likelihood that this will happen, and the possible consequences if
it does not. The assessment should include consideration of:
o Export prospects--markets for traditional exports;
possibilities and policy requirements for new exports.
o The potential for import savings--in the energy area, in
response to specific policy instruments; as a consequence of
lower production.
o Alternative possibilities for credit flows and debt services.
(3) Brazil is a natural leader among LDCs as one of the two largest
debtors, a country with a large, diversified economy, and a recent
history of moderate, "responsible" policies. We should pay
particular attention to political currents that may affect
Brazil's policies in dealing with the financial and debt
problems. We need to know what and how domestic political
pressures and foreign policy objectives may affect these
policies.
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Argentina
Apart from current monitoring, the two key questions in Argentina
related to financial issues are:
(1) What would have to be done to get the financial situation under
control--rescheduling; an IMF agreement requiring some additional
austerity?
(2) Whether doing these things is politically feasible.
Obviously the answer to the second question depends partly on how difficult
the necessary adjustment will be but partly also on the way the balance of
political forces evolves.
Other Latin America
Venezuela, Ecuador, Chile, and Peru are having serious financial
problems as are most countries in Central America and the Caribbean. The
remainder of Latin America also is having difficulty getting credit.
Assessments of the economic and political dimensions of the financial
problems are needed. The assessments should cover:
o The nature and dimensions of the financial problem;
o The economic adjustments likely to be necessary;
o The political frictions and constraints on such adjustments;
o And the possible fall-out for domestic and foreign policies.
Africa
A large number of Sub-Sahara African countries have been in dire
financial straits for the past two years. Little attention has been paid
to them because, apart from Nigeria, all are extremely small and their debt
makes up only a minute share of total LDC debt. Nevertheless, debt
problems may have serious consequences for the countries themselves,
requiring severe economic retrenchment and possibly breeding even more
political instability.
It would be very useful to have brief assessments of:
o The dimensions of the debt problem.
o The other economic factors (especially export prices) driving the
economic situation.
o The economics and politics of the adjustment process.
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Oil Exporting Countries
The soft oil market has pushed most OPEC countries and other oil
exporting countries into large current account deficits and greatly reduced
the surplus of the Persian Gulf countries. The financial squeeze has
implications in a number of areas, including.:
o The incentive to raise oil out-put;
o Domestic budgets and economic development;
o Foreign aid;
o OPEC cooperation and Saudi policy;
o US oil policy.
Global
Some issues will need to be examined on a global basis:
(1) There is a need for improving data bases on international
finance. In particular, the existing OGI data base on LDC debt
needs to be expanded to include short-term debt. Moreover,
because the distinction between OPEc countries and other LDCs is
rapidly losing meaning, the data base should include both
categories. In addition, it should include the Communist
countries.
(2) There will be a need to assess the global economic impact of LDC
and East European debt problems. In order to pay their debts
these countries will have to cut imports and reduce economic
activity. This will mean lower exports from the industrial
countries, which will reduce their economic activity. ~ -
(3) The impact of LDC financial problems and economic adjustments on
various aspects of the US economy will be a matter of growing
concern.
(4) Financial and debt issues are certain to be pushed hard by LDCs in
various international fora, such as the UN, the World Bank, etc.
There will be loud and insistent demands for a restructuring of
debt on terms favorable to the borrower. This political process
will have to be closely followed and assessed. More generally, it
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will be important to continuously assess any indications of
collusion among LDCs in handling debt issues, such as
rescheduling.
There are a great many important questions concerning aspects of the
international financial system on which CIA has little unique information
or expertise, but may be able to make a highly selective contribution,
These include, for example:
Maurice C. Ernst
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CONFIDENTIAL
NIC #8661-82
27 October 1982
SUBJECT: International Financial Issues
DCI/NIC/NIO/Econ:M.Ernst:bha(27 Oct 82)
Distribution:
1 - Each addressee
1 - DCI
1 - DDCI
1 - DCI/SA/IA -
1 - ER
1 - VC/NIC
1 - NIC/AG -
1 - DDI Registry
2 - NIO/Econ
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