INTERNATIONAL FINANCIAL SITUATION REPORT #45

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T01058R000405290001-6
• Release Decision: RIPPUB
• Original Classification: T
• Document Page Count: 13
• Document Creation Date: December 22, 2016
• Document Release Date: February 1, 2010
• Sequence Number: 1
• Publication Date: October 24, 1985
• Content Type: REPORT

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I I
Central Intelligence Agency
International. Financial Situation Report #45
24 October 1985
Summary
The new US initiatives on LDC debt, announced at the IMF/IBRD meetings in Seoul, were
welcomed by most members of the international financial community. We believe the successful
implementation of these proposals will depend on several key developments due to unfold over
the next few months, including: progress in Mexico's and Brazil's negotiations with the IMF,
commercial bankers' willingness to raise the $20 billion in new money for the LDCs, the debtor's
individual reactions to the modified debt strategy, and the collective response expected from the
Cartagena Group, which will meet in mid-December. Other developments in recent week
include: 25X1
Mexico may need about $9 billion in new money for 1986-
substantially more than the $4.8 billion already requested. The new figure reflects a
$2 billion financial gap carried over from 1985, higher-than-anticipated capital
flight, and a likely drop in oil prices because of Saudi Arabia's decision to increase
production. Mexico is scheduled to begin talks with the IMF in the next few weeks. 25X1
o While Yugoslav officials are optimistic about negotiating a MYRA with their official
creditors, their prospects are being dimmed by a disappointing economic
performance this year. Yugoslavia seems unlikely to meet their 1985 current
account and reserve targets.
o Disbursements from the Philippines' standby program and the bank new money
package continue to be delayed. According to Embassy reporting, Prime Minister
Virata states that the budget deficit is the only major issue yet to be resolved. 25X1
o South Africa's major creditors doubt that a rescheduling accord can be reached
before Pretoria's self-imposed moratorium deadline of 31 December.
This situation report was prepared by analysts of the intelligence Directorate. Comments are
welcome and may be addressed to the Situation Report Coordinator,
Copy o
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Date Event/Country Comnent
23-30 Saudi Arabia Conference on King Fahd has invited Arab and other
October Sudan creditor countries and institutions to a
conference discussing the Sudanese
econany and settlement of their debts to
Arab banks and other creditors.
25X1
25 October IMF Executive Board Meeting Arrears owed to the Fund by Sudan will
be considered. 25X1
28 October Cannercial Bank Meeting The Institute for International Finance
has invited about 60 executives from the
world's largest banks to a meeting to
discuss the new initiatives on
debt. ~ 1~ 25X1
14-16 University of South Carolina The University has invited Latin
November Debt Conference American and Caribbean countries and
major creditors, including the IMF and
World Bank, to a discussion of the debt
issue.
18 November Paris Club-Poland
bilateral creditors.
Tentatively scheduled meeting to discuss
rescheduling of debt owed to official
Meeting to review Cuban economic
performance under the June Paris Club
agreement. 25X1
21 November Paris Club-Central African
Republic
22 November Paris Club-Niger
25X1
Meeting to discuss rescheduling of debt
owed to official bilateral creditors.
25X1
Week of 16 Cartagena Group Ministerial
December Meeting (Montevideo)
Tentatively scheduled meeting of the
Cartagena Group foreign and economic
Meeting to discuss rescheduling of debt
owed to official bilateral creditors.
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KEY ISSUE
US Initiatives on Debt: Key Developments to Watch
The new US initiatives on LDC debt, announced publicly at the IMF/IBRD annual
meetings in Seoul, were welcomed by most members of the international financial
community They applauded the more active US
leadership , Lne new emp asis on economic growth, and the increased role for
25X1
We believe the successful implementation of the US initiatives will depend upon
the following key developments, which will begin to-unfold during the next few months:
o The nature and outcome of Mexico's and Brazil's negotiations for future
assistance from the IMF.
o Commercial bankers' willingness to lend the proposed $20 billion in new
money to 15 LDCs over the next three years.
undertake the type of structural adjustment that is being encouraged in the US proposals.
Brazil and Mexico-the two largest LDC debtors-will start new program
negotiations with the Fund in the next month. If agreements cannot be reached, we
believe Mexico or Brazil could seek an accommodation with the World Bank, but this
would still require substantial adjustment. We believe any new stabilization programs
are likely to reflect more of the growth-oriented policies encouraged by the US
initiatives. Secretary Baker is urging the IMF to give a high priority to structural
adjustment measures such as tax reform and market-oriented pricing policies. It is
questionable, in our judgment, whether or not the new money available through the new
US initiatives will be enough of a "carrot" to entice Brazil and Mexico to implement
substantial economic reforms. Countries like Argentina and Chile may be more likely to
reforms proposed by Secretary Baker.
o The debtors' reaction to and willingness to accent the types of policy
The extent of commercial bank participation in the new money facility bears
particular watching. The larger US banks probably will participate to ensure that their
outstanding commitments continue to be serviced. We believe, however, that smaller US
regional banks and European banks ma find it easy to walk away from talk of
money.
according to press reporting.
commercial bankers now want a stronger voice in determining where the new money
goes; in particular, they want to be able to direct the funds to their own customers in
LDCs. They also are seeking concessions from the US Treasury and banking regulators,
troubled LDCs with $20 billion in new money.
While guardedly optimistic about the initiatives, commercial bankers complain
that the only substantive portion of proposal is the call for banks to provide the debt-
25X1 Strong signals on commercial bankers' attitudes are likely
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to arise later this month when 60 major international bankers are scheduled to meet in
Washington to discuss their role in future debt negotiations.
From the debtor side, Latin officials in Argentina, Brazil, and Mexico view the US
proposal as an important gesture, a sign that the US recognizes the LDC need to restore
economic growth and obtain additional foreign capital. Considerable Latin skepticism
exists, however, about the initiatives' potential to ease the region's financial burden.
Buenos Aires questions the value of the initiatives if
interest rates rise or commodity prices fall further, according to the US Embassy. We
expect that a collective response to the US initiatives will come out of the Cartagena
ministerial meeting scheduled for mid-December. 25X1
REGIONAL SITUATIONS
Latin America
In Latin America.
following the 3 November election.
Argentina may devalue its currency
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new money facility was received from commercial bankers. Government officials have
told the US Embassy that the wage and price freeze will continue through the end of the
year. According to the US Embassy, some Argentines believe there could be a
devaluation of the official exchange rate shortly after the 3 November elections, which
should enable Argentina to maintain its competitiveness in world markets. Nevertheless,
we believe that political pressures will cause Alfonsin to expand public spendiner within a
Argentina
As a result of President Alfonsin's stabilization program, Argentina's inflation rate
was held to 2.0 percent last month, and Congress passed a 1985 budget containing the
lowest deficit in ten years. Moreover, the first $2.2 billion tranche from the $4.2 billion
Panama
Panama's commercial bank creditors have tentatively set 31 October as the
signing date for the 1985-86, $600 million refinancing package and the $60 million new
money loan. However, the ouster of President Barletta has further weakened Panama's
resolve to continue fiscal discipline. Although President Delvalle retained key members
of Barletta's economic team to demonstrate continuity and calm international financial
circles, Delvalle's recent populist economic stance probably has had a negative effect.
Delvalle last week boosted price subsidies on some consumer staples, and indicated a
disinclination to adopt economic reforms sought by the World Bank and by the US,
according to Embassy reports. If reforms are not adopted in a timely fashion,
disbursements from the IBRD, the US government, and commercial banks that are needed
to fill the financial gap may be in jeopardy.
Eastern Europe
In Eastern Europe, Yugoslavia's prospects for a MYRA are dimmed by poor
economic performance, and Poland's bilateral rescheduling agreements are proceeding
Yugoslavia
Yugoslav officials attending the IMF annual meeting in Seoul were reportedly
optimistic about persuading their official creditors to grant a multiyear rescheduling of
some $1.5 billion in debt falling due in 1986-88, according to press reports. Their
optimism is based on Yugoslavia's successful conclusion of a MYRA with commercial
banks in mid-September, which they believe will encourage official creditors to grant a
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similar arrangement. Finance Secretary Klemencic and other officials continue to stress
Yugoslavia's need fora longer-term arrangement in order to free key Yugoslav economic
decision makers for
Prospects for a MYRA from official creditors, however, are being dimmed by
disappointing economic performance in 1985. Earlier this year, official creditors
refused Belgrade's request for a MYRA on grounds that Yugoslavia had made insufficient
progress with economic adjustment, but promised to reconsider the request in 1986 if
Yugoslavia's economy showed further improvement. Instead, Yugoslavia seems unlikely
to meet their current account and reserve targets for 1985. Also worrisome is Belgrade's
return on 1 October to extensive price controls. The IMF strongly objected to a similar
set of measures announced in May 1984, which Belgrade subsequently lifted on 1 January
1985. Although the expanded price controls do not violate Yugoslavia's current Fund
program, they do violate the spirit of the agreement, and official creditors may see the
measures as backsliding on Yugoslavia's commitment to economic reform. Yugoslavia
has also reduced interest rates by 9 percent, making real rates even more negative.
Poland
Conclusion of the 1982-84 bilateral rescheduling agreements with Western
governments is progressing slowly.
o According to Embassy reporting, France in late September became the
second country to sign a bilateral with the Poles, but the agreement made no
mention of the $10 million in new credits that Paris previously indicated it
would grant.
o Press reports indicate that West Germany initialed an agreement with
Poland in mid-October, but details are not yet available.
o Finland initialed an agreement in July, and Sweden initialed an agreement on
10 October. According to US Embassy reporting, Sweden is considering
reopening a line of credit dating back to 1981 with a current balance of
$4-4.5 million.
Negotiations with other Paris Club governments-including the United States-are being,
hampered by disputes over interest rates and new credit commitments.
The US in late September received payment covering most of the 1981 interest
arrears due by 31 August. France and several other countries also had received some
payments. Because the payment was $1.5 million in arrears, however, the US has asked
the Paris Club to postpone the next meeting from the week of 28 October to
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Philippines
The third drawing on the Philippines' IMF program continues to be delayed and
lacking IMF approval, a $400 million disbursement from the commercial banks' new
money package has been held up as well.
While an agreement was not reached in Seoul, Virata
has indicated that the budget deficit is the only major issue yet to be resolved,
to Embassy reporting.
currently planned. The Philippine government is under a deadline to forge a rescheduling
In another issue, the planned merger of the Philippine National Bank (PNB) and the
Development Bank of the Philippines (DBP) is being complicated by the rescheduling of
their foreign debts. According to press reports, commercial bankers expect numerous
problems to develop if the reschedulings take place before the merger is concluded as is
target, according to Embassy reporting.
e Philippines, budget deficit is likely to be
2.5 percent of GNP instead of the targeted 0.9 percent. According to Philippine press
reporting, the Philippines has asked the Fund to consider increasing the target to
1.4 percent of GNP. Virata believes the Fund will now ar!ree to the larger budget deficit
Commercial bankers want
s of the merger before signing any rescheduling agreements.
Africa/Middle East
South Africa
The first meeting between South Africa's debt mediator, Fritz Leutwiler, and the
Major creditors doubt a rescheduling accord can be reached, however. before
rretoria's sell-imposed moratorium deadline of 31 December,
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The negotiation process will be a fragile one, and an extension of the moratorium
would provide added opportunity for events on either side to disrupt talks. A dramatic
increase in violence in South Africa or expansion of repressive government measures
might cause bankers to balk. 25X1
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o The Cartagena Group has tentatively scheduled a ministerial meeting for
Montevideo in mid-December... will respond to the new US initiatives... also
focus on a political dialogue, trade issues, and the capitalization of
interest payments. 25X1
o Cuba's commercial bank creditors rescheduled about $100 million in
principal due in 1985... repayment spread over 10 years, 6 years grace at
1.5 percentage points above LIBM...agreement Also rolls over sane
$370 million in short-term loans for one year. 25X1
o New Panamanian President Delvalle willing to host Latin American summit on
debt, according to US Brbassy...former President Barletta had agreed to
host meeting at request of Peruvian President Garcia ...Delvalle considering
convening stmnit in early 1986. 25X1
o Political pressures recently forced President Lusinchi to demand a
contingency clause in Venezuela's restructuring that would allow a
renegotiation in the event of a sharp decline in future oil
prices-signing of the $21.2 billion deal not expected until December at
the earliest. 25X1
Europe
o Bulgaria negotiating a $125-million club loan led by West Germany's
Deutsche Bank... third loan since June, raises Sofia's borrowing to
$450 million for 1985...needed to finance imports of Western capital goods
and agricultural products. I _j 25X1
o France's President Mitterrand visited several Latin nations... announced
France is willing to promote a summit to discuss debt, according to press
reporting... however, he noted that a meeting at that level must be
"successful." 25X1
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o A 5-year, $167 million syndication is being raised for Ranania. needed tQ
meet rescheduled obligations ccminff due this fall
o IMF team in Turkey is generally upbeat about the econany which strengthened
after weak first quarter... fiscal and monetary policies still off-target...
team thinks Ozal was premature in announcing there would be no program in
o North Korea unable to make debt payment of $9 million to Indonesia...
continues to have trouble making its payments to Western Europe and
Japan... Koreans suggest resolution by countertrade or a two to three year
payment postponement. 25X1
o Bankers' confidence in South Korea continues as $300 million loan to Korean
Export-Import Bank was signed in Paris...sane concern voiced about overall
debt level, and limited tions available to Korea to deal with econanic 25X1
difficulty. ~ 7
Taiwan aspires to be an
international financial center, has not yet ado ted sufficient banking
standards to facilitate such development. 25X1
Africa/Middle East
o Western banks reduced Nigerian trade financing as letter of credit arrears
rose by $1 billion in the past few months ...$116 million in promissory
notes released bringing total to $925 million out of estimated $6 billion
in uninsured trade arrears... public opinion strongly against IMF accord.
o IMF is not optimistic about payment of Zambia's arrears...new program not
expected before April 1986, by then arrears would be over $160 million...
situation may become "irresolvable" without change in IMF policy, according
to US Thbassy. 25X1
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SUBJECT: International Financial Situation Report #45I I24 October 1985
Copy No. I Sec. James Baker. Treasury
2 R. G. Darman
3 James W. Conrow
4 Robert Cornell
5 James E. Ammerman
6 Charles Schotta
7 James A. Griffin
8 Doug Mulholland
9 Manuel Johnson
10 Robert M. Kinmit
11. David Mulford
12 Sec. George Shultz State
13 John C. Whitehead t'
1.4 Morton I. Abramowitz
1.5 Michael Armacost
16 Ralph Lindstran
1.7 W. Allen Wallis
18 Elliot Abrams
19 Richard Burt
20 Elinor Constable
21. Chester Crocker
22 Paul Wolfowitz
23 Richard Murphy
24 J.C. Kornblum
25 Byron Jackson
26 S. Bruce Smart
27
28
29 David Wigg
30 Stephen Danzansky
Canner ce
It
NSC
it
31. Randall Fort PFIAB
32 Leo Cherne PFIAB
33 David Tarbell OISD (ISA)
34 DCI
35 ExDir
36 SA/EUCI
37 DDI
38 ADDI
39 Ch/PES/DDI
40 NIO Economics
41. DDO
42 Ch/DOD/EPOS
43 Ch/DDO/NCD
44 Ch/DDO/AF
45 Ch/DIO/EA
46 Ch/DUD/EUR
47 Ch/DDU/LA
48 Ch/]TO/NE
49 Ch/DDO/SE
50 IAD/OOG/PEL
51 D/ALA
52 Ch/ALA/SAD/R
53 D/OEA
54 D/EURA
55 Ch/EURA/EE/EW
56 D/SOVA
57 D/NESA
58 ID/OGI, D/OGI
59 Ch/OGI/SRD
60 Ch/OGI/ISID
61 Ch/OGI/TNAD
62 Ch/OGI/ECD
63-64 Ch/OGI/ECD/FI
65
67 Ch/OGI/Pub
68-70 OGI/Pub
version distribution: 25X1
1 - Edwin Truman, 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 - Roland Kuchel, State
1 - Lauralee Peters, State
1 - Peter W. Rodman, State
5 - Byron Jackson, Commerce
1 - Warren E. Farb, Cc nnerce
1 -r ~ DIA 25X1
1 - Steve Farrar, QVB
1 - William Isaac, Federal Deposit
Insurance Corporation
1 - Beryl Sprinkel, CEA
5 -
1 -
1 - Ch/OGI/GD
1 - Ch/ECD
1- Ch/E?/FI
1 - Ch/ECD/T
1 - Ch/ECD/DI
1 - Ch/ECD/CM
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OGI /CO 25X1