INTERNATIONAL FINANCIAL SITUATION REPORT #61

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90T00114R000404330001-4
• Release Decision: RIPPUB
• Original Classification: T
• Document Page Count: 13
• Document Creation Date: December 27, 2016
• Document Release Date: April 27, 2012
• Sequence Number: 1
• Publication Date: February 12, 1987
• Content Type: REPORT

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DIRECTORATE OF INTELLIGENCE
International Financial Situation Report #61
12 February 1987
Summary
The Third World debt situation is fast approaching another crisis point. This time the
crystallizing problem is Brazil. Brazil's economy is deteriorating rapidly with the trade surplus
plunging and inflation soaring. We see a growing risk that President Sarney may suspend or limit
payments to divert criticism for failed domestic policies and to refurbish his flagging popular
support. The Sarney administration has yet to formulate a coherent strategy to stem the rapidly
decaying economic situation due to dissension within the government's economic team. Most
recently, the Central Bank President resigned due to irreconcilable differences with FiRlnce
Minister Funaro over economic policy. His replacement, Francisco Gros, who is a protege of
Funaro, is expected to advocate expansionary fiscal and monetary policies, and take a tougher
Brazil, however, is not the only country where debtors' relations with creditors are being
disrupted.
We expect the Argentine-bank creditors talks, scheduled to begin today, will be long
and difficult, reflecting Buenos Aires insistence on larger-than-expected new money
requests, narrow interest rate spreads, and the bankers' reluctance to commit new
funds.
Ecuador already failed to make its January and February interest payments, totaling
some $80 million.
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Chile recently threatened to suspend debt service if a way was not found to close
Santiago's $650 million financing gap.
The Philippines
publicly taking a tough negotiating position.
welcome and may be addressed to the Situation Report Coordinate
NOTE: REPORT #62 WILL BE PUBLISHED ON 19 MARCH 1987
This situation report was prepared by analysts of the Intelligence Directorate. Comments are
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KEY ISSUE
Brazilian Debt Negotiations
Evidence is mounting that Brazil is prepared to take a firm stand in demanding
lenient debt rescheduling terms - com arable to those won b Mexico - in u comin
negotiations with bank creditors.
We believe Brasilia will use the same heavy-handed negotiating tactics
with its bank creditors if they refuse to meet demands for, sharply lower interest spreads,
about $2 billion of new money, and no IMF conditionality.
We believe bankers, for their part, will remain reluctant to grant major concessions
unless Brasilia implements sounder steps to stabilize Brazil's economy. Indeed, they are
steadfastly opposed to committing new loans without an IMF-supported program.
Nonetheless, Brazil and its creditors will seek to avoid a collapse in negotiations,
25X1 realizing that there is too much to lose by both sides failing to participate.
With the demise of the Cruzado Plan and diminished credibility of the
administration, interest rates on certificate of bank deposits have soared from 200
percent in early January to over 800 percent this week and inflation could move toward
four digits this year. The President's efforts to forge an agreement with business and
labor have so far failed. As a result, labor unions are threatening another general strike
if significant wage hikes are not granted soon, according to the US Consulate in Sao
Paulo. Meanwhile, continued paltry monthly trade
We see a growing risk that President Sarney may suspend or limit payments to
divert criticism for failed domestic policies and to refurbish his flagging popular
support. The Sarney administration has yet to formulate a coherent strategy to stem the
rapidly decaying economic situation due to dissension within the government's economic
team. Most recently, Central Bank President Bracher resigned due to irreconcilable
differences with Finance Minister Funaro over economic policy. He was replaced by
Francisco Gros, a director of the National Bank of Economic and Social Development.
Gros, a protege of Funaro, is expected to advocate expansionary fiscal and moneta
policies, and take a tougher position on foreign debt, according to the US Embassy.
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DEVELOPMENTS IN MAJOR COUNTRIES
Mexico
Mexico still lacks 100 percent commercial bank commitment to its new money
package. The country's bank advisory committee contends an agreement can be reached
by the end of the month, but the difficulty in working out a compromise could postpone
final approval until late March. To encourage full participation, Mexican officials
recently have made trips to the United States and Europe to drum up support for the
plan, which asks banks to lend a fixed portion of their 1982 PxnncnrP la u la
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Mexico's announcement earlier in the month that it was able to
build foreign exchange reserves last year - despite receiving only $500 million of the
$3.5 billion it originally sought from c for 1986 - has raised doubts
about the country's true borrowing needs
percent, but Mexicans and outside observers generally are convinced the level will
exceed 120 percent. Budget Minister Salinas, closely identified with Mexico's growth
plans, could see his presidential aspirations dashed if recovery is stalled.
Argentina
Buenos Aires is scheduled to begin formal talks with commercial banks on 12
February; Argentina will request $2.1 billion in new financing, according to the US
Embassy. The government hopes for a quick agreement so that any adverse domestic
political fallout will have cleared before campaigning for the November congressional
and gubernatorial elections enters into full swing. We believe, however, that the larger-
than-expected new money request, Buenos Aires' likely insistence on narrow interest rate
spreads, and bankers' growing reluctance t mit new funds to any Latin debtor
presage long, difficult negotiations.
The Paris Club is requiring that Argentina sign and make payments due under all
1985 debt rescheduling agreements before it considers 1986-87 debt rescheduling,
according to Embassy reporting. Buenos Aires has not yet signed bilateral agreements
with Denmark, Israel, the Netherlands, Sweden, the UK, and the US, although a special
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task force is working hard to reconcile remaining differences. The Paris
proposed a March meeting date should Argentina fulfill its conditions.
packages with their commercial creditors.
Other Latin American Countries
In Latin America, Chile, Venezuela and Ecuador continue to negotiate debt relief
over disagreement on how to close the projected $650 million financing gap.
Negotiations between Chile and its bank advisory committee continue to falter
three proposals are currently on the table. The first
World Bank approval, according to the US Embassy.
and the commercial banks $430 million. The advisory committee is presently considering
this plan, but creditor country concerns over the misuse of this lending window could nix
allow Chile to pay interest once rather than twice annually, thus deferring interest
payments. All but one of the twelve banks on the committee support this plan because it
meets regional and foreign bank insistence on no new lending to Santiago. The second
scheme would garner funds through a bond issue that bankers would guarantee. Although
this proposal would not require lending Chile new money, most banks are reluctant to
become a guarantor for Chile. The third and most recent plan stipulates that the World
Bank and commercial bank cofinance Chile's gap, with the IBRD contributing $20 million
we expect Chile will ask to reschedule about $200 million due in 1987-88.
projected financing shortfall in June. Santiago has requested Paris Club debt relief and
Chilean negotiators - frustrated by the delay in resolution - threatened to suspend
debt service last week, but switched to a wait-and-see stance after speaking with the US
Treasury, according to US Embassy reporting. The US Treasury believes a final
agreement-possibly including the retiming proposal-may be in place this week.
Meanwhile, Chile may ask fora relaxation of its IMF reserve targets to bridge a
Venezuela
Venezuela has softened somewhat its position in negotiations with commercial
banks over public-sector debt Unless the banks
yield to remaining pressure, however, it is unlikely that an agreement will be reached by
29 March, the current deadline for principal repayments.
principal repayments -and secure as much as $400 million in new lending in 1987.
According to US Embassy sources, Finance Minister Azpurua is optimistic that
Venezuela can renew its access to international capital markets - if it makes some
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Ecuador
Ecuador remains at an impasse with foreign bank creditors. Complicating factors
in the negotiations have been Quito's claimed inability to make its January or February
bank interest payments totaling $80 million without exceptional short-term fin ' g and
continuing disagreements over the terms of a 1987 finance package.
Commercial bank representatives and members of Ecuador's economic team are
meeting this week to tr to resolve the deadlock.
President Febres-Cordero has been on the defensive since his temporary abduction
by Air Force paratroopers last month and he does not want to be seen slashing reserves
to satisfy foreign economic interests.. According to US Embassy reporting, he has been
angered by bank demands for assurances that Ecuador will not seek recourse to creditors
for February debt service. He feels Ecuador deserves special onsideration, given his
administration's responsible debt payment record.
Asia
In Asia, Paris Club creditors rescheduled some Philippine official debt, Indonesia
has gone a lon way in alla in bankers' fears in art b announcin an austere draft
budget
Philippines
The Philippines' Paris Club creditors, impressed by the scope of Manila's economic
adjustment effort, agreed to reschedule $870 million in long-term loans over 10 years,
with a five-year grace period. All principal and 70 percent of interest falling due
between January 1987 and June 1988 will be rescheduled. Meanwhile, the Philippines
consultative group (CG) of creditor governments and multilateral financial institutions
agreed to provide $1.5 billion in official development assistance in 1987 - a 15-percent
increase over 1986 levels but short of Manila's $2 billion request. The CG dismissed
Manila's bid to establish a $7 billion "growth contingency fund" to bridge projected
F_ I
medium-term financi
ng gaps.
Negotiations with commercial bank creditors
e a e anti some g may be
Y pro ress has been made on Argentine and Brazilian debt talks with
hanlruna A1+1.......1. 1.h TL_1!_
is publicly- taking a tough negotiatin osit
i
b
g p
on, we
elieve government
officials are privately beginning to think that a continued stalemate will soon begin to
work against Manila's interests by delaying the normalization of its relations with the
major international banks. As result, Philippine negotiators may be more receptive to
its BAC's offPrc_
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$3 billion in 1987. With its $10.1 billion in gross foreign reserves and $2.3 billion in
unused commercial credits, Jakarta probably will not be forced to seek additional funds
Indonesia
Indonesia's austere draft FY 87/88 budget has gone a long way in restoring bankers'
confidence. Jakarta will not have to reschedule its foreign debt in
either 1987 or 1988 unless oil prices plunge to $10 a barrel for a prolonged period. The
'current account deficit also is expected to fall from $4 billion in 1986 to between $2.6 to
to cover this year's deficit unless oil prices fall below $13 a barre
Western bankers, however, predict Jakarta will try to shore up its
member such as Indonesia would be unprecedented.
We believe Indonesia will experience little or no economic growth in 1987, and that
the economy will remain vulnerable to external shocks. Foreign bankers believe Jakarta
could hedge against further appreciation of the yen or declining oil prices by negotiating
an IMF standby program. Senior government officials, however, reject the conditions
attached to IMF standby programs, and prefer to negotiate drawing under the
Compensatory Financing Facility. However, an oil based CFF for a leading OPEC
aid from donor countries this year.
economy with a return to the commercial market after April. The government, however,
hopes to ease the debt burden with $3.8 billion in export credits, soft loans, and bilateral
renegotiation of last year's commercial debt accord will begin on 24 February.
In Africa, Egypt's negotiations with the IMF continue and South Africa's
Africa/Middle East
Egypt
Negotiaions between Egypt and the IMF for a standy pro_ ram resumed last month
with growing evidence that Cairo plans to. test the Fund's firm position. Egypt is
maintaining the position - set out in the November economic policy paper - that
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standby conditionality must be on terms favorable to Cairo. Egypt is seeking support
from at least one European country for a standby based on these conditions, even though
many official creditors feel the policies set forth in November are insufficient to tackle
E is economic troubles accordin to the US Embass .
even if the two sides can
agree on the term of the standby, the remaining differences over interest rates,
exchange rate unification, and energy price increases make it unlikely that an agreement
will now out for a repayment of less than $500 million, according to the US Embassy.
under last year's agreement. But South Africa, stressing growing political constraints,
South Africa
The opening round of talks to renegotiate last year's South African-commercial
bank debt accord has been moved up two months to 24 February, in part due to growing
creditor concern that the negotiations may get caught up in Pretoria's increasingly anti-
Western election campaign. South African negotiators have already formed a hard line
position and have hinted at discrimination against American creditors - by offering
better terms and faster repayment to other foreign banks. Nevertheless, both South
African and private bank negotiators are satisfied with the basic structure of the existing
agreement, and will probably renew the accord with minimal changes, according to the
US Embassy. The overriding question during the negotiations will be the amount of
principal South Africa pays this year. The banks are asking for repayments totaling $1.3
billion - about 15 percent of outstanding principal - or more than twice the amount
Eastern Europe
Poland failed to reach agreement with the Paris Club last month.
Poland
Poland failed to reach agreement with the Paris Club last month to revise the
previously initialed 1986 rescheduling. The agreement was not finalized due to a lack of
agreement on 1987 debt servicing. The creditors offered to reschedule over nine years
more than $1.3 billion in principal and interest payments agreement due in 1986 and the
first half of 1987, except for debt service due under the earlier 1981 agreement.
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Warsaw, which requested better terms including a longer consolidation period and a halt
to late interest charges through the end of September 1987, refused to compromise.
Negotiations may resume in March. Meanwhile, Polish estimates concerning its debt
servicing ability are bleak: Poland owes more than $5 billion on commercial and official
debt this year, plus at least $2 billion in arrears from 1986, but projects paying only $1.6
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unless it keeps the cotton-soybean export and loan disbursement rates equal.
25X1 The World Bank and IDB renewed loan disbursements to Paraguay after one month
suspension due to overvalued guarani ... Asuncion recently devalued export rate of 550
guaranies to the dollar for cotton and soybeans ... Paraguay risks future suspensions
private investment.
Peruvian officials, euphoric over 9-percent GDP growth last year, project 7-
percent growth this year with inflation dropping to 40 percent ... surging prices in
December and January and rapidly expanding public deficit, however, suggest inflation
underestimated ... private forecasters predict 5-percent growth at most, due to lagging
Brunei's seizure of the privately-owned National Bank of 13runei has developed into
one of Southeast Asia's biggest financial scandals in recent years ... about 90 percent of
the loans outstanding - $621 million - went to companies linked to wealthy Malaysian
financier Tan Srk Khoo, whose family owned over 70 percent of the bank ... almost no
interest or principal has been paid on these loans for years ... Khoo's close relationship to
Brunei's ruling royal family is central mystery in the affair.
India's rising foreign debt, $40 billion projected by year-end 1987, will make it
second largest Asian debtor ... currently debt is manageable but New Delhi may face
debt servicing problems in a few years
responsible pattern of international behavior.
North Korea is interested in joining Asian Development Bank (ADB) ... may view
ADB as useful forum for propoganda activities and other mischief-making ... but if it is
prepared to play constructive role in bank, North Korea could be drawn into a more
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Africa/Middle East
Iraq considering pegging dinar to basket of currencies rather than US dollar ... may
raise domestic prices of some imported consumer goods but likely to have little impact
IMF last week approved one-year, $825 million standby agreement for Nigeria ...
requires floating exchange rate, tight fiscal policies, financial deregulation ... Lagos had
pledged not to draw down available funds, but could reverse position if confronted with
serious foreign exchange shortage later in year.
Sudan made $6.7 million token payment to the IMF late January ... does not remove
the country from ineligibility list because Khartoum owes $585 million in arrears.
Bank of Zambia suspended indefinitely the "commercial pipeline" proposal to settle
short-term debt arrears in January ... due to deterioriation in foreign exchange inflows ...
Zambia says it, will try to settle debts, but through reinvestment of Kwacha in approved
local projects.
Eastern Europe
Borrowing by East European countries, down to $1 billion last year from $3.3 billion
in 1985, probably will increase this year because of reduced hard currency earnings and
continuing debt obligations ... troubled debtors, Poland, Yugoslavia and Romania,
probably will remain unable to secure new commercial loans.
Romania exploring possibility of repaying official debt rescheduled in 1982-83 by
year-end, roughly $300-400 million ... 1986 balance of payments estimates indicate
Bucharest would be hard pressed to do so ... part of ongoing attempt to eliminate
Western debt as soon as possible.
Probable waiver by creditors of Yugoslavia's export target for October-December
1986 will allow second phase of Belgrade's 1985-88 commercial bank rescheduling
agreement to proceed without further negotiation ... likely financincr rran in 1987 eniild
force revision of rescheduling agreement later in the year, however.
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APPENDIX
Key LDC Debtors: Poor Trade Performance in 1986
Most key debtors experienced substantial reductions in export earnings in 1986. Oil
exporters -Ecuador, Mexico, Nigeria, and Venezuela - were hard-hit by the sharp drop
in oil prices. Lower commodity prices and reduced grain sales cost Argentina nearly $1
billion. High domestic demand in Brazil - the result of the ill-fated Cruzado Plan -
increased domestic sales but reduced the quantity of goods available for export, reducing
export receipts by over $3 billion. On the other hand, the Philippines benefited from a
modest rebound in prices for traditional exports such as coconut products and managed to
post a small export gain.
For the debtors as a group, import cutbacks in 1986 did not match export declines.
As a result, the combined trade surplus was cut nearly in half, aggravating financial woes
and further delaying sustained economic recovery. Among individual countries, Mexico
and Nigeria slashed imports in response to lower oil exports, but in both countries the
trade surplus still declined sharply. Argentine efforts to boost real GNP growth led to an
import surge, slicing over $2 billion from the trade surplus. Brazil was forced to cut
imports to limit reductions in its trade surplus, despite an urgent need for higher import
growth to boost domestic productive capacity.
1985 1986 %chng 1985 1986, %chng
Argentina 8.4 6.9 -18 3.8 4.6 21
Brazil 25.6 22.4 -12 13.2 12.9 -2
Ecuador 2.9 2.1 -28 1.6 1.7 6
Mexico 21.9 15.8 -28 13.5 11.4 -16
Nigeria 12.8 6.5 -49 8.5 5.5 -35
Philippines 4.6 4.7 2 5.1 4.7 -8
Venezuela 14.2 9.2 -35 7.3 7.0 -4
90.4 67.6 -25 53.0 47.8 -10
*1986 figures are estimated.
1985
1986
chng
4.6
2.3
-2.3
12.4
9.5
-2.9
1.3
0.4
-0.9
8.4
4.4
-4.0
4.3
1.0
-3.3
-0.5
0.0
0.5
6.9
2.2
-4.7
37.4
19.8
-17.6
Key LDC Debtors: Exports and Imports, 1985-86*
(billion US dollars)
Exports Imports Trade Balance
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SUBJWT: International Financial Situation Report #61
Copy No. 1 See. Janes Baker
2 R. G. Darman
3 Janes W. Conrow
4 Robert Cornell
5 Thomas J. Berger
6 Charles Schotta
7 Janes A. Griffin
8 Doug Mulholland
Gaston Sigur
Richard Murphy
Harry Gilmore
Byron Jackson
S. Bruce Smart
David Mulford "
Sec. George Shultz State
John C. Whitehead "
Nbrton I. Abramowitz
Jerome H. Kahan
Michael Ammacost
Ralph Lindstran
W. Allen Wallis
Elliot Abrams
Rozanne Ridgway
Douglas McMinn
Chester Crocker
Treasury
"
Cannerce
"
NSC
"
Randall Fort PFIAB
Leo Cherne PFIAB
David Tarbell OSD (ISA)
DCI
ExDir
SA/IDCI
MI
AIDI
Ch/PFS/IDI
NIO Economics
AID/NIC AG
1 - Manuel II. Johnson, Vice Chairman,
Federal Reserve System
1 - H. Robert Heller, Federal Reserve
Board
1 - Edwin Trunan, 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 - John Bohn, Chairman, Exlm Bank
2 - Doug Mulholland, Treasury
1 - Ambassador Richard McCormack, State
1 - Martin A. Wenick, State
1 - Nicholas Burakow, State
1 - Peter W. Rodnan, State
5 - Byron Jackson, CaTmerce
I - Warren E. Farb Cammerce
1 - DIA
1 - Ron Silverman, QVB
1 - Beryl Sprinkel, CEA
1 - Eugene McAllister, EPC
1 -
1 -
1 -
1 -
1-
1 -
1 -
1 -
1 -
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