INTERNATIONAL DEBT PROBLEM POLITICAL AND SECURITY CONSIDERATIONS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00153R000100060012-2
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 7
• Document Creation Date: December 22, 2016
• Document Release Date: July 21, 2011
• Sequence Number: 12
• Publication Date: March 28, 1983
• Content Type: REPORT

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ROOM NO.
7E48
DATE
28 Mar 83
Hqs.
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DATE
TRANSMITTAL SLIP 28 Mar 83
TO:
ROOM NO.
BUILDING
H s.
REMARKS:
Comments, please, ASAP
FROM:
Harry Rowen, C/NIC
ROOM NO.
BUILDING
7E62
H s.
FORM
FEB 55550' 241
NI0/E
REPLACES FORM 36-8
WHICH MAY BE USED.
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WASNFAX RECEIPT
OEPAATMENT OF STATE
B
S/S #
CLASSIFICATION NFTDE TI "i
NOW Paul McGonagle j_BBJIFDIOMI
632-0633
loft w awmi Mice, symbol) (Exteniaon)
JAR 28 1213 PH 183
ESSAGE DE SCRIp''TION_Paper on the International Debt Problem - Political
11! and Security Coneidoratione
CLEARANCE
S/S Officer:
eera4 `
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Extension
upon receipt. Must be put into final.
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International Debt Problem
Polit.oa an ecur c ons erations
The adjustment effort required of the LDCs is placing an
unavoidable strain on their political systems with implications
for many of our foreign policy objectives, including matters of
regional peace and security, North-South economic relations and
cooperation with, our European allies.
Regional Peace and Security
~r~rr.~-.rrr r r
Of particular concern is the danger that the pressures
on the political/economic systems of key countries could spark
changes in governments, changes in policies, and/or changes in
a country's ability to influence events. To the extent these
countries are unable to resolve their problems, or.tind the
solutions excessively painful, or perceive that the industrial-
ised nations are: unable or unwilling to provide needed resources,
they may begin to look for alternative sources of assistance
and lose interest in courting the west with moderate policies.
For instance, in the Middle East, Egypt and Sudan are key
to the peace' process. Sudan, by almost all measures one of the
world's most indcbted?economies, will continue to face tough
economic conditions for the foreseeable future and radical
states such an Libya will be looking for opportunities to take
advantage of those difficulties to overthrow the present
pro-western regime.
In Egypt, an even more critical country, the economic
difficulties are: not so imminent. Nevertheless, upless the
Egyptian government takes strong remedial action, , gypt. is
likely to undergo severe balance of payments diftivities
including eventual debt service problems in the neKt` stew
years. A great deal of Egypt's difficulties comes from price
controls and subsidized foodstuffs and so far the $lubarak
regime has been unwilling or unable to take corrective action
for fear of public unrest or even violence. Rather than
undertaking the necessary reforms, we expect the Egyptians to
request further U.S. assistance. That assistance will become
more expensive every year, however, and should we be unable or
unwilling to respond to their demands, the GOE will either look
for additional resources elsewhere or undertake politically
difficult and possibly uestabiliaing reforms. Eitiher way,
Egypt's economic' difficulties are going to make its participation
in the peace proess more expensive and possibly mire unpredictable.
CONIFIDENTtitt
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CON P I UEt4T I AL
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In the. Caribbean and Central America, U.S. and Venezuelan
foreign policy his coincided in recent years. The Venezuelan-
Mexican oil facility and other Venezuela aid has provided
many countries- of the region with much needed balance of
payments support.6 The GOV has supported the move towards a
democratic government in Salvador, while attempting to moderate
the Sandinista regime in Nicaragua. While Venezuela's current
economic debt problems probably do not affect that country's
stability -- at least in the short run -- it will limit the
resources available to Venezuela to continue to play its
positive role in;the region.
In Africa? Nigeria has been a strong supporter of the
peaceful resolution of disputes and an important barrier to
Libyan efforts to further radicalize the region. It has also
been supportive, though not uncritical, of our ettort to
conduct negotiations over Nambla. Nigeria's balance of payments
difficulties are severe, however, and have been further compli-
cated by the drop in oil prices. A decrease in Nigeria's
economic growth rate or even a possible tall in its level of
income could prove destabilizing and threaten both Nigeria's
struggling democratic process as well as the county's unity.
A new civil conflict in Nigeria could affect its oil production.
More importantly, it would likely have a hi'jh human cost and
stimulate separatist movements throughout Attica. Miyeria will
be looking for Western assistance in meeting its economic
needs. . If' the Nigerians perceive that we. have nut responded
adequately, theist moderate stance in the region could eventually
be affected.
North-South Economic Relations
As long as their balance of payments positions remain
precarious, many, of the LOCs are going to look for solutions to
their problems through changes in the Internatiuna# Economic
System. Pressures from the LDCs for greater concegsions by the
industrial nations on North-South issues are likely to increase.
We can, for example, expect increased strident demands in
UNCTAD for new and more generous commodity arrangerlpent.s.. We
may also see increased demands for a debt moratorium perhaps
unilaterally declared by the LUCs. While enthusiasm fur such a
moratorium is not yet readily apparent among the motor LOC
debtor nations it could become so it the current djat strategy
does not lead to rapid resolution of their problemo. it would
be more likely, for example, it several large Latin American
LDCs -- Mexico, Argentina, Chile or maybe Brazil or Venezuela
-- had a succession of fall-offs from IMP programs. There is
already some agitation for this move among smaller debtor
nations such as Bolivia and Nicaragua.
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CONFIDENTIAL
There are also likely to be residual long-term coneenquences
of the current debt situation. The populace
of
countries such
as Argentina and,Mexico may now blame their
own
governments
for mismanagement of their economies but as
time
goes on they
are very likely to redirect the blame toward
the
West in
general and the United States in particular. Unfortunately,
other than being: careful not to make it worse by either moralizing
or being condescendent there is very little we can do to stop
this process.
Bilateral Problems and instability in Key Countrit;a
Not all the consequences of the current situation will
appear in either;a regional or multilateral framewprk. Many
will be country 'specific. We will continue to receive many
requests for assistance and with a limited resource capability
to respond to those requests we are likely to see increasing
and often. unpredictable strains in bilateral relationships.
Should the Philippine economic situation worsen, or even if it
should tail to improve, we may see additional requests for
higher fees for our military base rentals. to Liberian -- with
severe its debt burden -- we may see similar requests against
our extensive communications facilities. These problems will.
become especially tense it other nations perceive 'that we could
help them further if we so wished. The Nigerians ;have already
pointed out the generous assistance we have given Mexico and
wondered why we have not done the same for them. More generally,
our response to various debt crises will make explicit: the
implicit rank-ordering of countries on the scale of tneir
political iaportince to the U.S., a problem which might-be
attenuated if the Europeans will-take the lead in poine countries
such as Nigeria.'
Critics of the IMP often argue that the adjustment programs
imposed on borrowing countries often place a severe strain on
their internal political systems. Unfortunately, while the
criticisms are correct they are misdirected, since sooner or
later these countries will be forced by economic circumstance
to take corrective action and the longer action is postponed,
the greater the eventual strains. Nevertheless, in countries
such as Nigeria and Egypt, the possibility of the economic
strains eventually producing widespread internal disorder
cannot be ignored.
in Argentina, that nation's current economic difficulties
could help elect,a populist/nationalist government from one of
the Pecon ist fact ions when elections take pl ace. Likely
continued economic instability will make it difficult for any
democratic government to govern Argentina and may encourage the
early return of military rule.
CONFIDENTIAL
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desire to divert public attention from internal difficulties --
both political aod economic -- was a contributing factor to the
Argentine decision to invade the Falklands. Similar actions by
Venezuelan again t Guyana or new Argentine moves, perhaps this
time against Chie, cannot be ruled out.
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Cooleration with Western and Japanese Allies
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CONFIDENTIAL
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It is generally believed that the Argentine military's
In the short-terry, most of the heavily indebted LDCs
require financial assistance from both individual -atio ns and
from multilatera4 organizations such as the IMF an$ the BIS as
well as debt rescheduling in the Paris Club. In the long-term
they will find solutions to their problems only in so far as
they increase their exports; for which they will need a
congenital worldlenvironment willing to buy their products.
While the U.B. c I n help these countries their prou,ems in
general are so e oreous that significant remedial Okction will
require assistan a from our allies. To date, coop1ration has
been quite good. Most of the heavily indebted nations have
undergone or-are undergoing multilateral public and-private
debt rescheduling. Most have adopted IMF programs with support
from the major Western nations and in several casel the Bank
for International Settlements has also provided bridging loans
often accompanieq by swap agreements with the U.S..Treasury or
Federal Reserve.
In the meantime, the 114F Interim Committee has agreed to
an increase in the IMF quotas and the G-10' (now G-11 with
Switzerland) has agreed to increase the resources ova.ilable for
the General Arrangements to Borrow. While such coiperation
will likely continue, danger areas remain. Protectionism,
which so .tar most major industrial nations have successfully
avoided, may become increasingly difficult tor individual
countries to:res4st if the expected recovery does materialize
or is short lived. Competitive devaluations such as that
recently taken bY,Sweden could also become a problem. Such
actions will not,only hurt the industrialized nations out also
threaten the rec very of the heavily indebted LuCs.. These
problems will lillely be the subject of discussion at such
forums as the Wilyliamsbury Summit and the GATT.
It. will also be important for the western nations to
develop a coordinated stance on the North-South issues to be
discussed at the 'next UNCTAD meeting. If we are to successfully
deflect initiati~ee for such il?l-conceived ideas as a debt
moratorium, we wl~11 have to make a convincing arguersent that we
have made a major effort to help the debtor countries in the
Paris Club, the MP and GATT and that such efforts will deal
adequately with the problem.
CON FFIDENTIAL
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CONFIDENTIAL
Perhaps thel*ost important contribution the Western
industrialised nations could make to the LDCs is encouraging a
worldwide economic recovery. Proposals to better coordinate
domestic econowif policies will also be the subject of the
Williamsburg .:Summit and other forums.
The successful Western assistance effort for Yugoslavia
is an example ofdeffective colaboration among Western governments,
central banks/eI$, the private banks and the IMF/CURD to shore
up a debt-riddenleconomy, thereby protecting vital._We tern
political and st>ateg-ic interests.
As the Yugoslav financial situation deteriorated in 1982
the post-Tito political leadership. turned increasitgly to they
Waste especially the U.S., for assistance. The USe; initiated
the-ssultilateral~"Friends of Yugoslavia' consultations which
resulted, in January 1983, in an agreement by 14 concerned
govirnments to provide $1.3 billion of economic assistance.
This assistance bras designed to help Yugoslavia avoid a poli-
tically damaging; rescheduling in 1983. .In addition central
banks andthe HIS have committed $500 milion in bridge financing
to help the GOY Beet its immediate financial obligations during
the seasonally weak first semester of 1983. The gpverruuent
economic assistance and bridge financing, as well ,ks IMtF
disbursements under the Yugoslav stabilization prcxjram are
conditioned on s agreement between the GOY and it$ private
bank creditors to refinance $1.4 billion in 1983 maturities and
provide $600 million in new loans. Indeed all elegie'nts of the
Yugoslav assistance effort are interdependent and necessary tor
the package to fiy.? It is hoped that the combination of
Western capital and real resources inflows will pruvieie- the GOY
the financial cushion needed to pursue difficult economic
reforms in a clidsate of political stability and independence.
The IMF mandatedl?reforms should push Yugoslavia further in the
.,direction of a a rket-oriented- economy and help stfenythen