SENIOR INTERDEPARTMENTAL GROUP ON INTERNATIONAL ECONOMIC POLICY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85-01156R000200250005-4
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 14
• Document Creation Date: December 22, 2016
• Document Release Date: September 7, 2010
• Sequence Number: 5
• Publication Date: June 25, 1984
• Content Type: MEMO

THE SECRETARY OF THE TREASURY
WASHINGTON 20220
June 25. 1984
UNCLASSIFIED
(With ~_ _ -~_ Attachments)
MEMORANDUM FOR THE VICE PRESIDENT
SECRETARY
OF
STATE
SECRETARY
OF
DEFENSE
SECRETARY
OF
AGRICULTURE
SECRETARY
OF
COMMERCE
DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET
DIRECTOR OF CENTRAL INTELLIGENCE
UNITED STATES TRADE REPRESENTATIVE
ASSISTANT TO THE PRESIDENT FOR NATIONAL SECURITY AFFAIRS
ASSISTANT TO THE PRESIDENT & DEPUTY TO THE CHIEF
OF STAFF
ASSISTANT TO THE PRESIDENT FOR CABINET AFFAIRS
CHAIRMAN, COUNCIL OF ECONOMIC ADVISORS
ASSISTANT TO THE PRESIDENT FOR POLICY DEVELOPMENT
ADMINISTRATOR, AGENCY FOR INTERNATIONAL DEVELOPMENT
SUBJECT Senior Interdepartmental Group on
International Economic Policy (SIG-IEP)
A meeting of the SIG-IEP is scheduled to be held on
Wednesday, June 27, 4:00 p.m., in the Roosevelt Room.
The agenda is as follows:
1. Status on Argentina; and
2. Report on Cartagena.
Discussion papers on both agenda items are attached.
Attendance will be principal, plus one.
UNCLASSIFIED
(With ^___=:`_ Attachments)
THE
THE
THE
THE
 DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20220
UNCLASSIFIED
(with ??t-Attachment)
From: David C. Mulfo
Secretary Regan notes that the attached Secret document
entitled "Argentine Economic and Financial outlook" contains
extraordinarily sensitive material and requests that the docu-
ment be closely held.
UNCLASSFIIED
(with L Attachment)
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This paper provides a brief overview of the current Argentine
economic and financial situation and the outlook for the balance
of 1984, in line with NSDD-8's call for regular monitoring by the
SIG and IG. It outlines the implications of alternative scenarios
that could develop in the course of the next several months and
concludes that Argentina's ability to effectively defy the IMF and
world banking system is strictly limited. Our conclusion is that
if Argentina does not reach agreement with the IMF and cannot obtain
significant concessions from commercial banks or the USG, it will be
unable to bring interest on its external obligations current by
September 30 and cannot expect to avoid a major political/economic
crisis by late 1984 or early 1985. This raises certain important
policy problems which are discussed in the conclusions section of
this paper.
The Economic and Financial Outlook:
Argentina's moderate economic recovery, apparent since early
1983, has become mired in near-record inflation rates and accomp-
anying further demonetization. While real GDP grew by 2.8% in
1983 (largely due to increased public sector expenditures and
expanded manufacturing output) the GOA 1984 goal of an annual
inflation rate of 285% will be far exceeded; the May CPI increase
stood at 17.1%, or 568% on an annualized basis.
While the trade account has shown continued improvement it
largely reflects a sharp contraction in imports andflagnantexgort
revenues. The official exc ange rate appears to be seriously
overvalued with little prospect for improvement.
Continued delays in reaching agreement with the IMF and the
banks is likely to increase diversion of export transactions
through the parallel market and Argentina would face the prospect
of a diminished trade surplus.
Argentina needs an estimated $4 billion in foreign exchange
inflows in 1984 to meet its interest obligations and essential
principal payments. This is substantially larger than the $2 bil-_
lion commonly cited and reflects the need to repay $750 million
of the bank bridge loan and $1750 million in arrears on public
sector interest obligations and trade finance during the course of
the year. The difference also reflects excessive GOA optimism on
the anticipated size of official reschedulings and an overly opti-
istic view of trade prospects. If Argentina is unable to reach
an agreement with the IMF this year, its financing requirements
would grow by some $600 minion (the equivalent of two drawings
under the proposed standby arrangement) to $4.6 billion.
T
DECLASSIFY: OADR
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Our estimate of Argentina's financial outlook for the balance
of 1984 presumes that Argentina has approximately $1.2 billion in
cash reserves and would be willing to use all but some $300 million
to meet its obligations, including payment of the remaining $350
million in accrued interest obligations on public sector debt due
by June 30. It also presumes payment of an additional $900 million
public sector interest obligations coming due in the second and
third quarters of the year.
In addition to the immediate question of arrears on public
sector obligations, there is a risk that U.S. banks may have to
place a substantial portion of their exposure on some $2.2 billion
in Argentine private sector debt with central bank exchange cover
on a non-accrual basis on June TO. U.S. bank exposure to the
private sector would become classified as "value-impaired" once
interest arrears exceed 180 days past due. This coo d occur in
a matter of we s.
Argentina's financing needs cannot be met without - substantial
net new credits from private foreign banks. Such credit inflows
are__moa unlikely in the absence of an agreement between the GOA
and the IMF on a Letter of Intent. Even with an agreed Letter of
Intent, the magnitude of financing required may exceed the market's
potential for Argentina.
- Relations with the IMF
Argentina and the IMF are still very far apart in negotiations
and an agreed Letter of Intent is unlikely in the near term. The
GOA's submission of its own draft Letter of Intent without approval
of the IMF staff has also undermined confidence in the GOA's sin-
cerity.
President Alfonsin has repeatedly stated his opposition to
orthodox adjustment measures to deal with Argentina's economic
difficulties. He still believes that Argentina can increase real
wages and output while curtailing near-record inflation rates.
As a consequence, large discrepancies exist between the IMF and
the GOA over targets for the size of the fiscal deficit and rates
of monetary expansion. In addition, substantial differences prevail
over interest, exchange_ rate and pricing policies.
- Relations with Banks
Argentina's 11 major creditor banks (the advisory committee for
the Argentine syndicate of some 300 banks) face a decision before
end-June on a scheme to bring interest payments current through
April 2. For now, the banks have opted for daily extensions on
the repayment date for the $750 million due on the $1.1 billion
commercial bridge facility. On June 20, the GOA applied the $100
million remaining in the New York Fed escrow account created on
March 30 to bring interest payments current through January_24.
This leaves a balance of $350 million needed to bring payments
current through April 2.
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If agreement _.,n be reached on a Letter c,~ Intent before
June 28 the Advisory Group banks would provide Argentina with $125
million in new money and the GOA would put up $225 million; this
would bring interest payments current through the first quarter.
The $125 mi.ialon in new bank money would-bp-fully collateralized
by GOA deposits with the NY Fed.
Without an IMF agreement by June 28, the banks have proposed
that the GOA pay $350 million required to bring public sector
interest payments current through the first quarter. It is our
understanding that five members of Argentina's bank advisory com-
mittee oppose accepting GOA deposits as full security for a loan
of the $350 million in the absence of an Argentine accord with the
IMF. Those opposing are Chase, Lloyds Bank, Dressner Bank, Credit
Suisse, and Royal Bank of Canada. The bank advisory group was to
meet on June 25 to further discuss the problem.
Alternative Scenarios for the Balance of 1984:
Three recent developments will have a major impact on the
course of events for Argentina during the second half of the year;
(a) the regulator decision (effective September 30) forcing loans
with interes arrears of 90 days to a non-accrual basis, unless
they are brought completely current, (b) Argentina's proposal of
a unilateral Letter of Intent to the IMF, and (c) the U.S. decision
to not renew the commitment for a $30-6-million Treasury swap-Se-yo-n--
June 15.
The U.S. regulatory decision means that Argentina, to maintain
its loans on an accrual basis with U.S. creditor banks, must not
only pay the remaining $350 million by June 30 needed to bring
interest arrears current through April 2, but must pay an additional
$900 million b September 30 to bring payments current through
that date. T e GOA may not yet fully appreciate the significance
of this decision.
The regulatory decision effectively defuses June 30 as a
critical point for those banks that judge it unlikely that the GOA
will bring payments current by the end of the third quarter. For
this reason, several U. S.---banks__have_decided to comply with the
decision on June 30, although _.the dgcis un is_not binding unxTl
not current through the second quarter. Payment of the $350 million
would not eliminate the need to report some adverse impact on earn-
ings for the second quarter because interest would only be current
through April 2. Nevertheless, payment of the $350 million is
still important because it would permit banks the r}on of listing
GOA loans on an accrual basis on June 30. It would also be seen
as a demonstration of good faith by the GOA.
The GOA's unilateral "better of Intent" made it quite clear-
that the GOA finds itsel unablei to make the needed economic adjust-
ments that would be consis with economic stabilization with
the support of the IMF. The non-renewal of the U.S. Treasury swap
commitment beyond June 15 underscored the need for an agreed program
with the IMF as a prior condition to additional financial support.
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Scenario A: Cooperate/Play for Time
No Letter of Intent by June 30, but GOA pays bank interest and
Latin Swaps. The Banks roll repayment of $750 million on bridge
loan to September 15 while the GOA negotiates in earnest for the
rescheduling of 1982-84 obligations and new finance despite the
lack of an IMF Agreement.
o Immediate Cash. An immediate drain of $750 million, leaving
gross liquid reserves of about $450 million; only $150 million
more than a minimum acceptable level of about $300 million.
o Third Quarter. Payment of $900 million interest needed to bring
Argentina current through September 30 is highly unlikely in the
absence of significant net new finance (e.g. $1 billion or more).
o Fourth Quarter. Without substantial net new bank lending, the
non-accrual of interest by the end of the third quarter leads to
erosion of trade finance in the fourth quarter, possibly on the
order of $0.5-1.0 billion. The negative impact on trade, however,
is probably not felt until December.
Conclusion. In the absence of an IMF agreement, Argentina would
begin feeling a financial crunch during the fourth quarter which
could become severe by early 1985. When banks are forced to place
Argentine loans to the public sector on a non-accrual basis, an
immediate impact will be felt on the bank earnings of about 25%
at the median for the laregest 23 institutions, with the reductions
ranging up to 86% in one case.
Scenario B: Confrontation
No Letter of Intent and the GOA pays off the Latin loans but not
the $350 million accrued bank interest.
o Immediate Cash. Improved by $350 million.
u Third Quarter. Banks are non-accrual on Argentine loans and
GOA must pay a total of $1350 million on September 30 to be
current. Prospect of net new finance -- either IMF or banks
is almost nil, trade finance dries up in third quarter.
o Fourth Quarter. Loss of trade finance begins to disrupt trade
by November.
Conclusion. An Argentine financial crunch emerges quickly in the
third quarter. This could lead to increased GOA pressure for a
rescheduling of interest payments. Demands by political opponents
of Alfonsin could lead to an even more radical stance vis a vis
debt. More conservative elements in Argentina would begin to
think of the implications of the pending finance/trade collapse.
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Scenario C: Extreme Confrontation
No Letter of Intent. No payments to banks or Latin creditors. The
GOA declares a unilateral rescheduling of interest payments.
o Cash. Cash reserves are maximized in the short-run at around
$1.2 billion range, growing to as much as $2.5 billion in the
third quarter before quickly eroding following a collapse of
trade finance.
o Third Quarter. Banks react very negatively and suspend trade
finance as they are forced to list loans as "value-impaired."
In some cases, creditors seek to attach assets, disrupting Argen-
tine 41 ,
trade.
o Fourth Quarter. Major economic, financial and political unrest
develops as the full impact of confrontation begins to be felt.
Transitory political gains accrue to Alfonsin as xenophobic
nationalism is focused against bank creditors, bolstering support
from extremist elements. A substantial negative impact on the
economy becomes increasingly clear by year-end and more conserva-
tive elements begin to think of alternative governments by the
first quarter-of 1985.
Conclusion. A major deterioration in the political situation
follows close on the heals of economic crisis. Instability and a
possible change of government could follow, with some successor
regime ultimately renewing negotiations with creditors.
Overall Conclusions and U.S. Policy Implications
Even if Argentina agrees to a Letter of Intent and pays the
$350 million by June 30, there will still be a major payments
crunch by September 30 as the GOA must bring all interest payments
current to avoid classification. If Argentina does not agree to a
Letter of Intent and the X350 million payment to the creditor
banks is not ma a by June 30, tra a inance is expected to erode
quickly with a visible impact on trade by the end of the third
quarter or early in the fourth.
Argentina places a high priority on economic growth and would
go to great lengths to avoid a recession precipitated by a reduced
flow of imports. The GOA is quite sensitive to the need to supply
domestic markets, even if this meant a shortfall in exports. Thus,
any reduction in trade finance is likely to trigger a major effort
to maintain imports through increased cash from export proceeds.
However, Argentina's potential through d
trade -- inc uding with Soviet block nations -- is extremely limited
The USSR is already quite unhappy with the large chronic negative
bilateral balance of trade with Argentina and is not likely to
purchase additional volumes to assist Argentina in its hard currency
payments to Western industrialized countries.
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There are essentially five courses of action open to the
United States in the face of Argentine intransigence or confron-
tation on the debt issue over the next six months. These options
are not mutually exclusive but are set out to assist definition
and discussion of the issue.
(1) The United States could encourage banks and the IMF to "bend
the rules" and be supportive of Argentina with substantial
net new financing, definite its continuing failure to adiust
This option should be rejected out of hand. It would deal a
mortal blow to the present international debt strategy and
might quickly lead to reduced commercial lending to LDCs and
would increase the risk of a major financial crisis.
(2) The U.S. Government could take actions to punish Argentina
for its failure to pay interest to the banks and to reach
agreement with the Fund. This would include encouraging
banks to take legal action, encouraging U.S. bank regulators
to classify Argentine loans as substandard, and cutting off
finance from U.S. agencies such as short-term Eximbank trade
lines. This option is not attractive since it entails a
number of negative side effects including interjection into
the regulatory process. But, it would make clear to the
world that Argentina cannot successfully pursue T course of
confrontation.
(3) As opposed to taking the aggressive actions listed in (2)above,
the United States could consult with the G-5 Debt Deputies to
determine the feasibility of~nt artinn plan to increase
moderately the pressure on Argentina by curtailing financial
flows from the MDBs and G-5 governments. This would be large-
ly Symbolic in the first instance, until it led to a cutoff
of currently programmed disbursements.
(4) The United States could maintain its present stance of helpful
but detached concern for Argentina. However, in order to
avoid the possibility that other countries conclude that
Argentina is "getting away" with no adjustment program while
defying the banks, the United States would issue -- after
appropriate consultations with other countries -- a detailed
public statement expressing concer_n~and summarizing the finan-
cial implication for Argentina a persistence in a course of
instransigence or confrontation. The object would be to make
it clear that the GOA could not proceed on its present course
for more than another six months without serious deterioration.
The utility of this option would depend on how it was imple-
mented i.e., private consultations with the Argentines and
others followed by a major public statement if the GOA was
unresponsive.
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(5) The United States could maintain its present stance of helpful
concern for Argentina. The hope would be that in the next
two months Argentina reaches agreement with the Fund and
begins to put together the required critical mass of bank
financing. Meanwhile, the United State would begin to assess
(on a highly restricted basis) precisely how far it is willing
to go to rescue Araentina_when the inevitable crisis comes.
This option presupposes that the Unites States would not. in
the final analysis, be willing to see Argentina economically
devastated and fall to a militant rightist or leftist dictator-
ship. The ultimate conclusion on which this option rests is
that the United States should not commence aggresive actions
which, in the final analysis, it would nut be willing to see._
carried to a logical conclusion.
Treasury
June 25, 1984
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Argentina
Uses and Sources
1984
(millions of dollars)
First Half
Second Half
Year
A. Uses, total 7489
7121
14610
1. Arrears 1750
-
1750
i. Public sector interest 450
450
ii. Trade finance (private & public) 1300
-
1300
2. Interest payments, total 2839
3048
5887
A. on public sector debt 900
900 1
1800
B. which must be made 939
948
1887
i. International organizations
(100)
(102)
(202)
(incl. IBRD, IDB)
ii.
BONEK
(185)
(197)
(382)
iii.
BONOD (on A-251 private sector
debt)
(283)
(326)
(609)
iv.
Bonds
( 47)
( 47)
( 94)
v.
Swaps and assured interest
(224)
(176)
(400)
vi.
Bridge and medium-term cacmercial
credits
(100)
(100)
(200)
C. other interest payments
1000
1200
2200
3. Bank bridge loan repayment -
750
750
4.
Advisory group 3/30 loan repaid
-
100
100
5.
Merchandise imports (FOB)
1926
2640
4566
6.
Freight and insurance
120
160
280
7.
Unpostponeable principal payments
554
423
977
i. International organizations
68
69
137
ii. BONEK
110
60
170
iii. BONG (capitalized interest)
180
-
180
iv. Swaps
196
294
490
8.
Fepayment of 4 Latin countries
300
-
300
1.
Direct investment
120
80
200
2.
Merchandise exports (FOB)
4779
3900
8679
3.
Drawings on:
i. IMF
-
600 f
00 2,
ii. International organizations
56
-
56-
iii. 3/30/84 package
400
-
400
4.
Trad
e financing (suppliers credits)
-168
-60
-228
4.
Rese
rves (- = increase)
-
900
900
i. GOA deposits with NY FED
-
-
-
(as of 6/14/84 at $900 mn)
C. Gap B-A 2302 1701 4003
1/ Assumes no interest arrears on 9/30/84
f Assumes IMF Executive Board approval in 1984,
and disbursement of first 2 conditional tranches OASIA/IDN
3/ Assumes reserves of no less than $300 mn. by yr.end 84 6.20.84
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t-ULNr .UQLN 1A
OUTCOME AND IMPLICATIONS OF LATIN DEBTORS' CONFERENCE
IN CARTAGENA ON JUNE 21-22
Overview
The Cartagena meeting of eleven Latin countries did not
result in formation of a debtors' cartel, but moved Latin debtors
further in the direction of presenting a common front to their
creditors. The political content of the event was high. Specific
proposals for solutions are greatly at odds with long-standing
U.S. policy. Banks are likely to be concerned about the
communique's suggestion that creditor governments pressure them
for further concessions and by the support expressed for Argentina
and Bolivia. The United States and other industrialized countries
face increasingly contentious and frequent negotiations within
the IMF, World Bank, and possibly other fora as the major Latin
debtors press for greater debt relief and expande trade and
private and official capital flows.
Background
After three days of lower-level preparatory meetings, the
Foreign and Finance Ministers of Argentina, Bolivia, Brazil,
Chile, Colombia, the Dominican Republic, Ecuador, Mexico, Peru,
Uruguay, and Venezuela met in Cartagena, Colombia, on June 21
and 22 to consider problems of their external debt. Colombian
President Betancur gave the opening address, in which he mentioned
the United States repeatedly in an exposition of the "largely
external" causes of Latin America's crisis.
The Communique
The communique, the "Consensus of Cartagena," issued on Friday,
June 22, was generally moderate in tone, did not create a "debtors'
cartel," and did not mention the United States by name. However,
the overlay of political rhetoric was heavy. The communique
reiterated the signatories' intent to honor their external commit-
ments, but not to the extent that this might interfere with their
obligations to their people to assure economic development and
social peace. While the 17 specific appeals for solutions were
familiar, they went further than previous Latin declarations and
were at odds with long ndina n PQ 9-Y The communique
implicitly expressed support for both Argentina and Bolivia and
effectively rejected President Betancur's stronn call for substan-
n investment
ei
t f
.
g
or
ial improvement in the climate for direc
It also esta is a mec anism or continued intraregional
expressed willingness to meet with creditor govern-
consultation
,
ments and institutions, and proposed creation of a "Working Group"
within the World Bank Development Committee. The first follow-up
meeting of interested Latin countries will be held in Buenos Aires
bef.,re the World Bank/IMF late September annual meeting.
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Implications
Press reports over the weekend indicate that banks' public
reactions to the conference have been low key and restrained.
Nonetheless, the conference and its communique are likely to
cause concern among money center banks and possibly alarm among
the smaller banks that were already nervous about their Latin
American exposure. The communique seeks to enlist creditor
government support to pressure banks for additional concessions.
The expressions of support for Argentina and Bolivia and t e
fact that Argentina is to host the first follow-up meeting later
this summer could also unsettle the banks.
The proceedings and communique escalated the level of
political rhetoric and yy, sage influence of
Forei n Ministers, The meeting highlighted the Latins' view that
t eir debt has ceased to be purely a financial ma r and now
requires top level international political attention if world
peace is to be maintained. In his opening address, president
Betancur noted that the Marshall plan to rescue Europe had been
agreed upon in three weeks, implying that the industrial countries
should now be equally expeditious in their response to Latin
America's ills. The United States and other industrialized
countries probably face frequent and increasingly contentious
negotiations in the World Bank, IMF, and other international
fora as the major Latin debtors pursue this theme.
While the participants stopped short of forming a "debtors'
cartel," the establishment of the regional consultative mechanism
and the renewed call for agreement on common criteria to guide
(individual countries' debt negotia inns appear to move Latin
!!!!America further in the direction of presenting a unified front
to their creditors.
Information is not yet available to determine the individual
countries' degree of commitment to the rhetoric of the communique.
Additional analysis will required to determine the signatories'
response to possible future developments such as another increase
in the U.S. prime rate.
Attachment: Summary of 17 Proposals
Treasury/IDN
June 24, 1984
 CONSENSUS OF CARTAGENA
SUMMARY OF PROPOSALS
1. Immediate and drastic reduction in nominal and real
interest rates (the fundamental objective to which the
creditor governments should give their best efforts)
2. Shift in the reference interest rate to one which does
not exceed banks' cost of funds and which is not based
on an "administered" rate (e.g., the U.S. prime rate)
3. Minimal spreads and elimination of commissions and late
payment fees while negotiations are underway
4. Temporary mechanisms to attenuate the impact of high
interest rates; including:
a compensatory fund in the IMF
concessional official credits
extension of repayment periods
5. Improvement in repayment and grace periods based on:
the debtor's capacity for repayment and need for
economic recovery
O? multi-year reschedulings and capitalization of interest
where convenient to the debtor
6. Partial deferral of interest payments in the case of countries
with extreme balance of payments problems (e.g., Bolivia)
7. Limitation of total debt service payments to a "reasonable"
percentage of export earnings compatible with maintenance
of domestic productive activity
8. Elimination of the requirement for the public sector to
assume private sector commercial risk
9. Elimination of regulatory rigidities which impede new
commercial bank loans, recognizing the creditworthiness
of sovereign debtors
10. Reactivation of capital flows, including renewal of short-term
trade finance
 11. Increase in the financial resources of the IMF, World Bank,
and IDB
12. A new distribution of SDRs compatible with the liquidity
needs of developing countries, longer terms for IMF
adjustment programs, and increased access to IMF resources
13. Revision of IMF conditionality to:
give priority to growth and employment creation
shield the borrower from increases in interest rates
14. Accelerated use of World Bank and IDB resources through:
an increase in program loans and in the maximum allowable
percentage of financing of total project costs
accelerated disbursements of credits already contracted
a temporary but substantial reduction in local currency
counterpart requirements
15. Longer terms and lower interest rates for Paris Club
reschedulings, accompanied by new lines of concessional
credit sufficient to prevent the interruption of imports
16. Immediate attention to the developing countries' appeals for
the stabilization of commodity prices at remunerative levels
17. Rapid elimination of industrial countries' tariff and non-
tariff barriers for traditional and industrial products,
including high technology goods
Drafted: T.Crawford, IDN
June 24, 1984