THE CARTAGENA GROUP: POLITICIZING THE LATIN DEBT PROBLEM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T01017R000100630001-0
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 11
• Document Creation Date: December 22, 2016
• Document Release Date: January 6, 2011
• Sequence Number: 1
• Publication Date: April 1, 1986
• Content Type: MEMO

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DATE F/ [ F -
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- DIRECTORATE OF INTELLIGENCE
1 April 1.986
The Cartagena Group: Politicizing the
Latin Debt Problem
Summary
The declarations issued by the Cartagena Group are part of
the Latin debtor effort to gain concessions from their
international creditors. The Group's pronouncements also are
intended to appease growing domestic popular sentiment for a
tougher stand with creditors. Moreover, Latin leaders want
Washington to view their debt problem as at least as important as
issues in Central America.
Despite the growing cohesiveness of the Group, the unique
and diverse financial situations of each debtor country, the
continuing disagreement over how to resolve their debt problems,
and the fear of financial fallout will continue to undercut a
hardline approach by the Group. Falling dollar interest rates
and continued progress in debt negotiations also will moderate
Latin debtor criticism. Nonetheless, should a major debtor
succeed in negotiating significant concessions, Cartagena members
will put strong pressure on creditors to obtain similar terms.
Dramatic changes in the global economy or in the Latin
political environment could heighten the prospects for collective
action by the Cartagena Group. Developments that would most
likely alter the reluctance of Latin nations to reject the
current approach on debt would-be deterioration in conditions the
debtors perceive the United States as having control over--such
as sharply rising dollar interest rates, spreading OECD trade
protectionism, and uncompromising creditors demands for substantial
economic reforms as a condition for new money.
This memorandum was prepared byl Ithe Office of
Global Issues. Comments and queries are welcome and may be
directed to the Chief, Economics Division, OGI
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Central Intelligence Agency
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I I
The Cartagena Group: Politicizing the Latin Debt Problem
A key development relating to the Latin American debt
situation during the three past years has been the rising
outspokenness of Latin debtors. The process of politicizing the
debt issue began in February 1983, when the President of Ecuador,
Osvaldo Hurtado, sent a proposal to the Economic Commission for
Latin America (ECLA), the Latin American Economic Systems (SELA),
and all Latin American nations seeking a common response to the
region's economic crisis. His initiative led to formation of the
Cartagena Group I, which has held four ministerial-level meetings
on the debt issue.
Evolution of the Cartagena Group
At the end of the June 1984 ministerial-level meeting held
in Cartagena, Colombia (see Appendix A), the Cartagena Group
issued its first statement on the debt issue. Although the
resulting statement generally was moderate in tone, the proposals
for debt relief went further than previous Latin declarations and
contradicted longstanding US policy. For example, the Latin
ministers called for limiting total debt service to a
"reasonable" percentage of export earnings and asked for interest
capitalization where convenient to the debtor. Moreover,
establishment of the Cartagena Group created a permanent forum to
voice Latin concerns; this consultative system would enable
1 The Cartagena Group consists of Argentina, Bolivia, Brazil,,
Chile, Colombia, Dominican Republic, Ecuador, Mexico, Peru,
Uruguay, and Venezuela.
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the debtors to coordinate their positions more effectively by
sharing information on debt negotiations.
The September 1984 follow-up meeting of the 11 Cartagena
Group countries in Mar del Plata, Argentina resulted in a
moderately' worded, 10-point communique that expressed concern
over the loss of the "sense of urgency" by the industrial
countries regarding their debt repayment difficulties. They also
indicated that they would invite the industrial governments to
engage in a direct political dialogue in the first half of
1985. By late 1984, however, some of the complaints of the Group
had been defused as dollar-denominated interest rates fell and
Latin trade balances showed substantial improvement.
The Cartagena Group met in the Dominican Republic in
February 1985 to prepare the Group for the April 1985 IMF/IBRD
Interim and Development committee meetings. Issues they
addressed at this meeting included the extension of Mexican-like
multiyear restructuring terms to other debtors, a broadening of
debt negotiations beyond commercial banks to include creditor
governments and institutions, and the recognition of hardships
brought on Latin debtors by stringent adjustment programs and
unfavorable external factors. The declaration simply reiterated
the Cartagena Group's desire for a dialogue between debtor and
creditor countries and warned of serious regional instability if
their request was ignored.
By August 1985, some Latin leaders--including Uruguayan
Foreign Minister Iglesias--were seeking to strengthen the
Cartagena Group because they viewed it as the best forum to
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discuss the political aspects of Latin America's foreign debt
problem, according to press reporting. They began to 25X1
search for a way to reduce debt payments rather than merely
postpone them through multiyear debt restructurings. They also
were becoming increasingly disturbed by the transfer of resources
from debt-troubled countries to creditors. Cartagena Group
members began examining proposals for interest payment relief and
they came out strongly advocating increased funding for the
multilateral institutions.
The Cartagena Group's foreign and economic ministers met for
the fourth time in December 1985 in Montevideo, Uruguay mainly to
respond to the US initiative on debt, which was announced by
Secretary Baker in October. The 11 Latin American nations issued
a set of "emergency" measures for negotiations on debt and growth
that went beyond the US initiative (see Appendix B). The
ministers presented counterproposals to the US approach and in a
joint declaration cited structural problems in industrial
countries--particularly high real interest rates--and falling
terms of trade as the major obstacles to solving their debt
problem. In addition to the nine Montevideo proposals, the
Cartagena Steering Committee, which met on 27-28 February in
Punta del Este, Uruguay to respond to the "emergency" situation
created by the drop in oil prices, voiced full support for
Cartagena members' efforts to modify existing debt agreements,
especially by renegotiating interest rates.
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I I
Present Objectives and Strategies
The declarations issued by the Cartagena Group are part of
the Latin debtor effort to gain concessions from their
international creditors, an objective that heretofore has been
.accomplished through bilateral negotiations. The Group's
pronouncements also are intended to appease growing domestic
popular sentiment--in countries like Argentina, Mexico, and
Venezuela--for a tougher stand with creditors. Moreover, Latin
leaders want Washington to view their debt problem as at least as
important as issues in Central America.
Tactically, the Cartagena Group is trying to shift debt
negotiations from commercial banks and the IMF to policymaking
levels in creditor governments. By trying to arrange a political
dialogue between themselves and industrial country governments,
the debtor nations are seeking "coresponsibility" for finding a
solution. They are acutely aware that concessions, such as the
ones they are pursuing on interest rates, might have to be
facilitated by regulatory changes by creditor governments.
we believe they envision a
dialogue that would begin with a general exchange of impressions
and ideas and would evolve toward the implementation of specific
measures to relieve LDC debt burdens and to promote further
financial flows to debtors.
During the last two years the roles and positions of each
Latin country at the Cartagena Group meetings have changed,
primarily because of the evolving nature of their financial
situations. One significant and disturbing trend has emerged;
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the largest debtors--Mexico, F3raziI, and Argentina--have recently
acquired a greater say in the direction of the Group. The big
debtors are now making an effort to communicate more often with
each other on their financial troubles, and at the Montevideo
meeting, a steering committee made up of Argentina, Brazil,
Colombia, Mexico, and Venezuela was organized to follow the
progress of Cartagena proposals. Given that Mexico, Brazil, and
Argentina are working more closely together, the Group has now
been injected with enhanced political clout.
Implications and Outlook
The Cartagena Group established a political forum to voice
Latin concerns to industrial country governments through public
declarations, but so far no consensus has been reached on radical
alternative proposals such as a unilateral moratorium on interest
payments. Indeed, by limiting itself to the lowest common
denominator, the Cartagena process has reinforced a moderate
position. Most Latin leaders continue to take a two-track
approach to resolving their financial burden: servicing their
debt to the best of their ability, while concurrently seeking
more concessions. Nonetheless, the Cartagena process has
encouraged the Latin debtors to-share information on debt
negotiations and to use that information to seek better terms
from creditors--the so-called spillover effect. The creation of
the consultative system also has heightened the level of
participation on the part of Latin political leaders to press for
changes in the policies and operations of official and private
Western institutions.
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The flavor and results of the Cartagena process suggest that
Latin debtors will continue to meet as long as the Group's
position does not threaten their ability to negotiate
individually with commercial banks and creditor governments. We
also expect members to continue to see merit in sharing
information and presenting unified positions in multilateral
institutions. The decisive roles in the Cartagena Group will be
played by the finance and foreign ministers of the major debtor
nations--especially Mexico and Brazil. Future meetings will
continue to serve as rhetorical forums--expressing Latin
solidarity--and to alert creditors to their growing
frustrations.
Despite the growing cohesiveness of the Group, the unique
and diverse financial situation of each debtor country, the lack
of consensus on how to resolve their debt problems, and the fear
of financial fallout will continue to undercut a hardline
approach by the Group. Falling dollar-denominated interest rates
and continued progress in debt negotiations also will moderate
Latin debtor criticism. Nevertheless, should a major debtor
succeed in negotiating significant concessions, Cartagena members
will individually put strong pressure on creditors to obtain
similar terms.
Dramatic changes in the global economy or in the Latin
political environment could heighten the prospects for collective
action by the Cartagena Group. In our view, developments that
would most likely coalesce Latin nations and alter their
unwillingness to buck the current approach to debt would be those
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they view the United States as having some control over, such
as: sharply rising interest rates, spreading OECD trade protec-
tionism, or uncompromising creditor demands for economic
austerity and far-reaching economic reforms. Other factors'that
could force a stronger collective stand would be: increasing
domestic political pressures in key Latin countries resulting
from a continuing inability for the nations to grow at
politically acceptable levels 'or falls in export prices/earnings
sufficient to make continued debt servicing nearly impossible.
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Appendix A
Consensus of Cartagena
Summary of Proposals
1. Immediate and drastic reduction in nominal and real interest
rates.
2. Shift in the reference interest rate to one that does not
exceed banks' cost of funds and that is not based on an
"administered" rate (e.g. the US prime rate).
3. Minimal spreads and elimination of bank commissions.
4. Temporary mechanisms to attenuate the impact of high interest
rates, including a compensatory fund in the IMF, concessional
official credits, and extension of repayment periods.
5. Improvement in repayment and grace periods based on the
debtor's capacity for repayment and need for economic
recovery, and 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.
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.
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13. Revision of IMF conditionality to give priority. td growth and
employment creation and shield the borrower from increases in
III LCCCJ L I'd LC J.
14. Accelerated use of World Bank and IDB resources through:
--
an increase in program loans and in the maximum
allowable percentage.. of financing of project costs,
--
accelerated disbursement of credits already contracted,
--
a temporary but subst
counterpart requireme
antia
nts,
l reduction in local currency
and
--
elimination of gradua
tion.
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-
tarriff barriers for traditional and industrial products,
including technology goods..
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Appendix B
Declaration of Montevideo
Summary of 'the Nine Proposals
December 1985
1. Western action to return real interest rates to historic
levels and examination of mechanisms to ease the debt
service burden.
2. Increased capital flows to the region and a separation
of old debt from new'ddebt, with future credit flows
getting lower rates.
3. Increases in commercial bank lending to at least match
world inflation.
4. A limitation on debt'payments, linked to either economic
growth or to export earnings.
5. A 20-percent annual increase in multilateral development
lending for the next1three years.
6. Arrangement of multiyear restructuring and interest
capitalization through the Paris Club without creditors
requiring an IMF-supported adjustment program.
7. Enlarging and broadening the coverage of the IMF's
compensatory financing facility to help offset the
impact of deteriorating terms of trade, natural
disasters, and increased interest rates.
8. An easing of conditionality required by creditors for
new loans to allow for economic growth.
9. Elimination of industrial country protectionist
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