INTERNATIONAL FINANCIAL SITUATION REPORT #39

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T01058R000304230001-4
• Release Decision: RIPPUB
• Original Classification: T
• Document Page Count: 13
• Document Creation Date: December 22, 2016
• Document Release Date: April 26, 2010
• Sequence Number: 1
• Publication Date: April 18, 1985
• Content Type: REPORT

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Central Intelligence Agency
VYashington, D. C 20505
DIRECTORATE OF INTELLIGENCE
International Financial Situation Report #39
18 April 1985
Summary
The Cartagena Group is about to press parti i ants in the Bonn summit to enter into a
political dialogue on debt. The group has decided to 25X1
advise those attending the summit of the group's political and economic concerns, extend an
invitation to each country to join in a dialogue, and request the G-7 countries to set a time and
place for the initiation of talks. Other developments in recent weeks include:
o The IMF approved on 24 March Mexico's program for the last phase of its three-year
25X1 cytpnrlp1 f inri fsr,ility_ We believe Mexico will be unable to meet most of its targets.
o Brazil hopes to conclude debt talks by 31 Mav when k loans that were rolled over
during earlier debt negotiations mature.
o The IMF declared Argentina out of compliance on 29 March and withheld disbursement
of standby funds. An IMF team is now in Buenos Aires to scrutinize performance data
and Argentine policy actions.
o Unofficial results from last Sunday's elections indicate center-left candidate Alan
Garcia of the APRA party probably will be inaugurated as Peru's next President.
Garcia has said that he would reject the intermediary role of the IMF in debt
negotiations and hold annual debt servicing to 20 percent of Peru's export earnings.
o
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The IMF has found Manila out of compliance on s
everal targets of
its standby
arrangement.
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are becoming concerned about Korea's creditworthiness.
o South Korea recently obtained a $600 million syndication, but Korean bankers were
disappointed with the low number of participants. Meanwhile, some commercial banks
NOTE: THE NEXT REPORT WILL BE PUBLISHED ON 23 MAY 1985
This situation report was prepared by analysts of the Intelligence Directorate. Comments are
welcome and may be addressed to the Situation Report Coordinator, on or secure
telephone
Copy23 of 76
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KEY ISSUE
DEVELOPMENTS IN MAJOR COUNTRIES
LDC Debt and the Bonn Summit
The Cartagena Group of 11 Latin American debtors is about to press participants
in the Bonn summit meeting of industrial countries to enter into a political dialogue on
debt. The group has decided, to advise those 25X1
attending the summit of the group's political and economic concerns, extend an invitation
to each country to join in a dialogue, and request the G-7 countries to set a time and
place for the initiation of talks. 25X1
international reserves.
Mexico
On 24 March, after nearly six months of tough negotiations, the IMF approved
Mexico's program for the last phase of its three-year extended fund facility. Approval
came only after Mexico promised to make additional budget cuts and to introduce other
anti-inflationary measures such as import liberalization. Under the program, the budget
deficit is to be cut to 4.9 percent of GDP, several percentage points below last year's
level. Tight restrictions also were placed on domestic credit, accrual of government
interest arrearages to the Central Bank, net external borrowing, and drawdowns in
We believe Mexico will be unable to meet most of the targets in the program.
Moreover, opposition from Mexico's long-protected private
business sector caused Mexico City last week to withdraw the portion of the export
promotion plan that would allow companies unrestricted use of 40 percent of their export
25X1 earnings for imports.
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Brazil
After taking office in mid-March, the new civilian administration quickly
announced austerity measures and reestablished contact with foreign creditors to restart
debt talks, which were suspended in February when Brazil fell out of compliance with its
IMF-supported program. According to Embassy reporting, Brasilia ordered a 10-percent
cut in public spending, halted new federal lending for two months, and froze government
hiring. Moreover, the government tightened price controls, lowered inflation
adjustments for government bonds and the exchange rate, and a bankrupt
financial institution - Brasilinvest - rather than rescue it.
Brasilia hopes to conclude debt talks by 31 May when bank loans that were
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temporarily rolled over during earlier debt negotiations mature.
Argentina
On 29 March the IMF declared Argentina out of compliance and withheld
disbursement of standby funds, putting on hold attempts to complete a $4.2 billion
commercial bank new money package. The IMF decision was based on Argentine failure
to slow inflation, which reached an annualized rate of 850 percent in March. According
to the terms of the standby arrangement, inflation was targeted to fall to 300 percent, or
12 percent per month, with a 15-percent monthly maximum. =
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If all goes smoothly and promised adjustments are implemented quickly, the
controls and wage restraints is expected soon.
An IMF team is now in Buenos Aires to scrutinize performance data and Argentine
policy actions. In an effort to reconcile with the Fund, Argentina has already announced
some financial adjustment measures, including the prohibition of bank acceptances and of
bank intermediation of company-to-company loans, according to Embassy reporting.
These transactions will be replaced by short-term bank loans at market-determined
interest rates, giving the Central Bank greater control over the money supply. Buenos
Aires also reduced guarantees on deposits and subsidies to member banks and announced
its intention to boost tax revenue through tougher enforcement, but it sharply lowered
reserve requirements on term and savings deposits to a range of 4.5-14 percent.
According to press and Embassy reports, the implementation of inflation-fighting
REGIONAL SITUATIONS
Latin America
Venezuela
Through 8 March, the Central Bank reports making nearly $800 million in 1985
public-sector debt payments - including $611 million in interest - to prevent
accumulation of arrearages, according to Embassy reporting.
private-sector debtors are falling further behind; only
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$400 million in private-sector interest has been paid through February, against
approximately $1.0 billion in obligations. Venezuela continues to resist the linkage of a
public-sector rescheduling to private-sector debt repayments. With no real leverage on
the government to settle these past due payments, we expect bankers to use minor
issues, such as the terms for the relending facility, to delay a rescheduling agreement
until private-sector interest arrearages are brought more current.
Chile
Santiago now is scrambling to find additional financial resources, but negotiations
for new lending from official sources are unlikely to result in immediate relief. Chile's
$750 million extended fund facility - scheduled for IMF Executive Board consideration
on 17 May - likely will provide less than $175 million this calendar year, and the World
Bank structural adjustment loan may not be concluded until next year
avoid serious financial strains by drawing down $380 million in reserves to cover debt
servicing. Although we believe Chile could persuade bankers to increase their lending
offer to $700-800 million by giving guarantees to private-sector debt, this would still
leave a financing gap that probably would compel Chile to implement severe austerity
a Paris Club rescheduling, asserting that $226 million in new disbursements could be
threatened while only $132 million in relief would be gained. To obtain some relief, the
Chileans have asked the United States to reschedule CCC credits, according to Embassy
and State Department reporting. Meanwhile, press reports indicate Chile has managed to
Despite the tightening financial squeeze, Santiago is steadfastly reusing
Unofficial results from last Sunday's presidential elections indicate that center-
left candidate Alan Garcia of the APRA party probably will be inaugurated as Peru's next
President in July. Based on Garcia's speeches, interviews and speeches of other APRA
candidates, and documents published by the party, we speculate that the economic policy
of an APRA administration likely will be highly nationalistic and will put heavy emphasis
on economic planning. We believe it will be more difficult for creditors to negotiate
with the new APRA government than with the outgoing Belaunde administration. Garcia
has said that, if elected, he would reject the intermediary role of the IMF in debt
negotiations and hold annual debt servicing to 20 percent of Peru's export earnings.
The Belaunde administration continues to adjust policies in a manner consistent
with Fund recommendations, although Lima has no formal IMF-supported program in
place.
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Finance Minister Garrido Lecca approached 25X1
Paris Club and Socialist bloc creditors with new plans to meet obligations but on easier
terms. In an attempt to improve its standing with official creditors, the US Embassy
reports the Peruvians intend to make monthly partial payments to Paris Club countries.
In addition, Lima has renegotiated $170 million in debt owed to the Soviets by promising
payment with minerals and other exports. The Soviets agreed to this commercial
concession to win political gains, 25X1
Lima made a $16 million good faith payment to commercial banks last month to
keep overdue interest below 180 days and prevent loans from being downgraded by US
regulators, according to press reports. The move probably was aimed also at getting
banks to keep trade credit lines at the current $300 million level, but we believe Lima's
cash shortages will continue to complicate relations with bankers. Finance Ministry and
Central Bank officials contend that the Peruvian Treasury has currency to pay only $400
million to Peru's creditors this year, but owes $3.6 billion in principal and interest. F1 25X1
Colombia
Bogota is hoping the favorable IMF Article IV mission report will support its
position in ongoing negotiations with foreign creditors. Although US Embassy reports
indicate the document gives an encouraging appraisal of Bogota's recent economic policy
adjustments, observers close to the talks say the IMF mission still is not entirely satisfied
with exchange rate policy, trade liberalization efforts, and reserves available to cover
debt a ments.
money without some form of IMF monitoring.
We believe that international bankers are unlikely to provide new
President Betancur continues to resist a formal agreement with the Fund,
Upon his return from the United States,
Betancur publicly placed his prestige behind the conclusion of a commercial bank
financing arrangement without a standby arrangement, and we believe that backing away
from this position would in his view be politically difficult.
Colombia's financial needs still pressing, Betancur's uncompromising stance and a lack of
agreement with commercial banks on new money could lead to further erosion of
reserves as the seasonal trade surplus dwindles, and at worst, a foreign exchange crisis in
some government officials consider Betancur's attitude unrealistic. With
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Eastern Europe
Among East European countries, Yugoslavia reached agreement with Western
government creditors on a rescheduling of official debt, Poland has had difficulty lining
up new credits from Western governments, and East Germany has built up its reserves in
an effort to cushion itself against unfavorable international financial conditions. 25X1
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Yugoslavia
Yugoslavia and Western creditor governments agreed in late March to reschedule
roughly $800 million in official debt falling due between January 1985 and 15 May 1986,
according to Embassy reporting. The agreement reschedules 90 percent of principal over
nine years, including a four-year grace period. Final signature of the agreement depends
on approval of the IMF standby arrangement by the Fund's Executive Board, which will
meet at the end of April. The rescheduling agreement contains a goodwill clause
promising continued involvement by government creditors in Yugoslavia's adjustment
program, provided that Belgrade maintains an appropriate relationship with the IMF
following expiration of the 1985 standby program. Creditors indicated a willingness to
consider less stringent Fund monitoring in the future if Yugoslav economic performance
Poland
Poland has had little success in its effort to obtain led es of new Western governments.
Bonn
indicated that it will not provide guarantees and new credits until Warsaw's arrearages on
the 1981 debt rescheduling agreement are paid off, the 1982-84 Paris Club debt
rescheduling agreement is officially signed, and the 1985 multilateral and bilateral FRG-
Polish debt rescheduling pacts are concluded. While turning aside the request for credits,
West German Economics Minister Bangemann agreed to strongly support Poland's
application for IMF membership and to encourage US support for Polish membership in
the Fund. British Foreign Secretary Howe, during an official visit to Poland in mid-April,
also responded unfavorably to Polish requests for credits. According to Polish press
reports, the British official stressed that the restoration of credits was conditional on
Poland's signing of the Paris Club rescheduling agreement.
The Poles are off to a poor start i fulfilling their hard-currency export plans this
year. exports to non-socialist countries fell by 14.9
percent and imports rose 1.1 percent in the first two months of 1985 compared to the
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planned $1..5 billion hard currency trade surplus.
previous year. The hard currency surplus was only $62 million, compared to $190 million
in the January-February period in 1984. The decline was mainly due to extremely cold
weather which contributed to breakdowns in the transportation system, decreased
production time, and diverted coal from exports to domestic use. Although the Poles
may make up some of the decrease in exports during the rest of the year, it will be
difficult to meet the 7-percent increase planned for 1985. According to Embassy
reporting, the Poles are revising downward their im~lans in order to meet this year's
Meanwhile, the Polish banking system received at least $250 million of new hard
currency deposits from Polish citizens who took advantage of a grace period before
tougher requirements were imposed on documenting sources of hard currency offered for
deposit in interest-bearing accounts. According to the Polish press, the new deposits
brought the total amount of hard currency in the Polish banking system at the end of
March to more than $1.1 billion. The newly deposited funds could prove useful to Warsaw
in reducing the financing gap looming this year. Poland 25X1
used private hard currency deposits for external payments in the late 1970s and early
1980s. 0 25X1
East Germany
East Germany's Foreign Trade Bank President Polze told a US Embassy official
that East Berlin has built up its large reserve position primarily as a cushion against
possible unfavorable international financial developments. Polze indicated that he was
particularly concerned with two possiblities: spillover of another East European
country's borrowing problems to East Germany, and a generalized international banking
crisis. Polze said the bulk of recent medium-term borrowings - which helped push East
Germany's foreign exchange holdings in Western banks to $4.6 billion at the end of
September - will remain on deposit, while some of the funds will be used for a gradual
reduction of short-term debt. Polze claimed that the credits are not linked to imports
for any specific investment projects, although we believe East Berlin may eventually use
some of the money to finance capital goods imports mandated by the 1986-90 economic
plan. F-1
Western Europe
Portugal
The Embassy reports that Lisbon is making little headway in negotiations with the
World Bank for a loan to restructure public-sector enterprises. Lisbon has not gone far
enough to reform government management of the firms nor has it reduced back payments
owed to these monopolies. Moreover, the Portuguese have not settled on performance
criteria for one of three companies that will given special scrutiny by the World Bank.
The World Bank believes an agreement is unlikely this year if Portugal's latest proposal is
$600 million syndicated loan from commercial banks.
Among Asian countries, the IMF has found the Philippines out of compliance on
several targets under its standby arrangement, and the South Korea recently obtained a
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Philippines
IMF has found Manila out of
compliance on several o the targets set as conditions of its $615 million standby
arrangement, including the credit ceilings to the public and private sectors, the reserve
money target, and reforms of the sugar and coconut monopolies. New end-of-May
targets are being established in an attempt to salvage the Philippines' economic
adjustment program. As a result, we believe that the $160 million in IMF funds originally
South Korea
In its first major borrowing of 1.985, a $600 million syndicated loan was signed on
29 March for the Korea Exchange Bank (KEB). According to Embassy reporting, the
terms are slightly more favorable than a similar borrowing by the KEB last year. The
loan consists of two tranches: $362 million with an interest rate of 0.625-0.75
percentage point above LIBOR and $238 million at the US prime rate plus 0.1 percentage
point. Both tranches are repayable within eight years, including a four-year grace
period, and the US prime tranche carries a cap on interest tied to the US 3-month CD
rate. At the time of the KEB's last borrowing in December 1984, bankers believed Korea
would have to pay higher rates to attract lending; in light of the terms of the recent
7r cation, however, many bankers feel Korea likely will avoid higher rates in 1985. ^ 25X1
While this syndication was a success, several factors point to bankers' increasing
concern about lending to South Korea. According to Embassy reporting, a KEB official
indicated that he was not overly pleased that 40 percent of the participating banks were
Japanese, while the Canadian and US regional banks stayed away. He also indicated that
the KEB was accustomed to more than the 14 participants that this loan had attracted.
In addition, many smaller banks are nearing their limits on 25X1
Korean exposure; they are concerned that Korea may soon become the third largest LDC
debtor replacing Argentina; they are reluctant to commit funds for more than five years;
and syndications such as this one with narrow spreads and low visibility are no longer
attractive lending vehicles. F--~ 25X1
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Moreover, at least one major US bank
with substantial exposure in South Korea is increasingly concerned about Korea's
creditworthiness, and while the bank has not officially lowered its credit rating for
Korea, it is actively considering it. The primary sources of the banker concerns are the
rumoured financial difficulties of Korea's highly leveraged conglomerates, a slowdown in
exports which contributed to a $594 million current account deficit in the first two
months of 1.985, problems arising from the deregulation of the domestic financial center,
Africa/Middle East
Jordan
According to the US Embassy, Jordan will soon borrow $200 million in the
Eurodollar market to help combat falling foreign exchange reserves. The loan will be for
eight years, including a four-year grace period, at 0.5 percentage point above LIBOR for
the first four years and 0.625 above LIBOR thereafter. Jordan has obtained similar
amounts the past two years but is entering the market earlier this year than expected.
Reserves have plummeted sharply over the past year - in part because of declining Arab
aid - and stood at $448 million in February, or about half the level held at the end of
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Sec. James Baker
R. G. Darman
Beryl Sprinkel
James W. Conrow
Robert Cornell
Charles Dallara
Charles Schotta
James A. Griffin
Doug Mulholland
Manuel Johnson
David Mulford
Treasury
ft
Sec. George Shultz
Kenneth Dam
Morton I. Abramowitz
Michael Arn cos t
Ralph Lindstran
W. Allen Wallis
Langhorne Motley
Richard Burt
Richard McCormack
Chester Crocker
Paul Wolfowitz
Richard Murphy
J.C. Kornblum
State
It
Byron Jackson Camnerce
Lionel Olmer
NSA
it
Roger Robinson NSC
Douglas McMinn
David Wigg
Randall Fort PFIAB
Leo Cherne PFIAB
David Tarbell OISD (ISA)
DCI
ExDir
SA/IDCI
IDI
ADDI
Ch/PES/DDI
NIO Economics
EDO
Ch /IDO/EPOS
Ch/DDO/AF
Ch/DDO/EA
Ch/DDO/EUR
Ch/LOO/LA
66
67
68
69-76
18 April 1985
49 Ch/E[)D/NE
50 Ch/EOO/SE
51 IAD/00 3/PEL
52 D/ALA
53 Ch/ALA/SAD/R
54 D/OEA
55 D/EURA
56 Ch/EURA/EE/EW
57 D/SOVA
58 D/NESA
59 DD/OGI, D/OGI
60 Ch/OGI/SRD
61 Ch/OGI/ISID
62 Ch/OGI/TNAD
63 Ch/OGI/ECD
64-65 Ch/OGI/ECD FI
1 - Edwin Trimmn, Federal Reserve Board
1 - Henry Wallich, Federal Reserve Board
1 - David Roberts, Federal Reserve,
New York
1 - Leo Cherne, PFIAB, New York
1 - E. Gerald Corrigan, President,
Federal Reserve Bank, New York
1 - Alan Greenspan,
Townsend, Greenspan and Co.
2 - Doug Mulholland, Treasury
1 - Richard Carbs, State
1 - Lauralee Peters, State
1 - Peter W. Rodman, State
1 - J.D.Bindenagel, State, (for pass to
Ambassador Arthur Burns)
5 - Byron Jackson, Carmerce
1 - Warren E. Farb, Camnerce
1 - William Isaac, Federal Deposit
5 -
1 -
1 -
CPAS/ISS/SA/DA
Ch/OGI/Pub
OGI /Pub
OGI /CO 25X1
NIC/AG
1 - Ch/OGI /CD
1 - Ch/ECD
1- Ch/ECD/FI
1 - Ch/ECD/T
1 - Ch/ECD/DI
1 - Ch/ECD/CM
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SUBJECT: International Financial Situation Report #39
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