LATIN AMERICA: PROSPECTS FOR A DEBTORS' CARTEL

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T01058R000100310001-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 9
• Document Creation Date: December 22, 2016
• Document Release Date: April 22, 2010
• Sequence Number: 1
• Publication Date: July 8, 1985
• Content Type: REPORT

Sanitized Copy Approved for Release 2010/08/09: CIA-RDP85T01058R000100310001-1
25X1)
Central In Wise-Agency 3/
DIRECTORATE OF INTELLIGENCE
8 July 1985
Latin America: Prospects for a Debtors' Cartel
Sumary
We believe Latin American debtors probably will begin soon
to develop new tactics to try to ease their repayment burdens,
but in our view there is little near-term potential for these
countries to organize a debtors' cartel or to mobilize
collective action to force concessions from creditors. Our
judgments are based on limited recent reporting and on the
results of a simulation exercise we conducted. The Latin
debtors' new tactics are likely to include intensified
collective lobbying for increased official assistance and
greater pressure by individual countries on commercial banks to
provide financial relief. These tactics, in our opinion, will
be aimed at drawing Washington directly into efforts to solve
the region's debt difficulties. We believe that selective
financial concessions by commercial lenders and governments can
continue to defuse the potential for radical action.
Factors that could alter this outlook and raise the odds
that debtors might resort to collective action include a
dramatic deterioration of external economic conditions, an
upsurge in domestic political instability, or perceived
intransigence on the part of creditors. The decisive roles, in
our view, will continue to be played by the top leaders of the
major debtor states, es per- the presidents of Mexico,
Brazil, and Argentina.
ALA M-85-10073
This typescript memorandum was prepared for the staff of t
Security Council, by
Sanitized Copy Approved for Release 2010/08/09: CIA-RDP85T01058R000100310001-1
State Dept. review completed
 Sanitized Copy Approved for Release 2010/08/09: CIA-RDP85T01058R000100310001-1
I I
Introduction
Sentiment among Latin American countries for collective
action to obtain debt relief--including the possibility of
forming a debtors' cartel--first surfaced in 1982, then waned
late last year after the major countries dramatically improved
their trade performance, rescheduled their debt obligations,
obtained new commercial and institutional lending and saw
interest rates fall. There is evidence that such sentiment is
surfacing once again, but we currently lack extensive reporting
on the willingness of key debtors to support collective
action. To assess the potential threat, we simulated a
Cartagena group meeting, a consultative mechanism on debt
issues organized in 1984 by eleven Latin American countries.*
We employed experienced country and financial analysts in the
roles of Latin American foreign and finance ministers and
Western bankers, respectively (see appendix for details). The
group drew on what little fresh evidence is available and
filled in gaps with our own analysis and informed opinion on
the political and economic factors that would prove decisive in
new deliberations. We considered forming a debtors' cartel and
then discussed other collective action to force repayment
concessions from creditors. Finally, the group surfaced a
third alternate plan: collective propagandizing and lobbying
with creditors to obtain easier repayment terms and reduced
Debtors' Cartel
still remain apprehensive about the Latin erican debto e
forming a cartel and repudiating their debt. We believe that
some governments, such as Bolivia, and Cuba may fuel this
concern by advocating a cartel. Our simulation persuaded us,
however, that there is only a slight possibility that such a
group could coalesce:
-- The divergence between the economic interests of the larger, more
moderate governments and the smaller more radical debtors
fragmented efforts to organize a cartel. Although La Paz and
Lima argued there was little to lose, the larger debtors
*Argentina, Bolivia, Brazil, Chile, Colombia, Dominican Republic,
Ecuador, Mexico, Peru, Uruguay, and Venezuela.
SECRET
Sanitized Copy Approved for Release 2010/08/09: CIA-RDP85T01058R000100310001-1
 SECRET
Sanitized Copy Approved for Release 2010/08/09: CIA-RDP85T01058R000100310001-1
challenged this assertion. For example, Buenos Aires argued that
confronting creditors would undermine efforts to obtain the $4.2
billion credit now in syndication while Brasilia contended that
radical actions would impede its efforts to finalize its
multiyear debt rescheduling. As the simulation progressed, we
saw a consensus that the economic costs of radical action by
debtors would be too high. The largest and most influential
debtors remain concerned about protecting recent financial gains,
such as multi-year reschedulings and future access to new
credit. A cartel, the group decided, might provoke retaliation
from industrial governments, resulting in the potential loss of
foreign aid and export markets.
-- Mexico, Brazil, and Ecuador played key moderating roles in our
simulation. Mexico City--fearing the cessation of trade credits
and damage to its improving relations with the United
States--counseled against radical action by emphasizing potential
losses. Brasilia advocated moderation in order to maintain good
relations with banks and to head off OECD protectionism against
exports, both keys to resolving its debt difficulties. Quito, a
strong advocate of market-oriented policies, philosophically
rejected outright confrontation with creditors.
Collective Action for New Repayment Schemes
According to the US Embassy in Buenos Aires, the Foreign Ministers of
Argentina, Brazil, and Uruguay recently discussed an Argentine proposal for
Latin American debtors collectively to reorganize debt payments to
commercial banks. The scheme calls for a fixed schedule of repayments fnr
the debtors.
25X1
is would be achieved by capping interest rates on future
debt payments with the IMF and World bank issuing bonds to creditors 25X1
covering the difference in repayments. In our simulation:
-- The Latin American nations found the idea of a fixed, predictable
repayments schedule attractive and considered raising the issue
in future discussions with creditors. The debtors were unable to
agree formally to force such a scheme on banks, however, because
most were concerned that it would alienate creditors, causing the
immediate loss of trade lines and new lending as well as
derailing the possibility of negotiations on future
concessions. The debtor representatives also were sobered by the
technical difficulties of formulating a specific plan. No major
debtor country currently felt that foreign exchange strains were
intense enough to justify a unilateral reduction in interest
payments.
-- Mexico, Brazil, and Chile each played a key role in our
Sanitized Copy Approved for Release 2010/08/09: CIA-RDP85T01058R000100310001-1
 SECRET
Sanitized Copy Approved for Release 2010/08/09: CIA-RDP85T01058R000100310001-1
deliberations, but their positions were conditional. Although
Mexico prefers to maintain its good reputation with creditors, it
indicated that a drop in oil prices combined with political
pressures could push it to threaten a capping scheme. Similarly,
Brazil and Chile rejected the proposal because it would hurt
their good relations with creditors, but if their exports and
reserves drop markedly, each would likely reconsider their
positions.
Over the past several weeks, Fidel Castro has attempted to ally
himself with the Latin debtors by publicly speaking out on their financial
plight and suggesting collective action. In numerous speeches, he has
argued that Latin American countries will only resume development when
creditors cancel their debt. Otherwise, Castro contends that Latin
countries should simply refuse to pay. Although some Latin American
countries publicly are pleased that he is drawing attention to their
financial bind, none has yet endorsed any of his proposals. In our
simulation:
-- Castro's arguments for regional action against creditors were
given short shrift. Some debtors were piqued by his attempt to
grab the limelight, while others pointed to his hypocrisy in
espousing radical action while privately working out new debt
arrangements with creditors. Except for Bolivia, the group
simply saw his proposal as another type of collective action that
would jeopardize their good relationships with creditors and
industrial country governments. 0 25X1
Intensified Joint Pressure for Concessions
This third option arose spontaneously in the course of our group
discussions. It includes tactics already employed by some debtors, but
would represent an escalation because action would be collective. In
addition, it was the only proposal that all debtors would accept, because
it highlighted the financial problems of each country without jeopardizing
the goodwill and cooperation of foreign creditors. This option emerged, we
believe, because Latin governments--under domestic political pressure to
restore economic growth--feel compelled to find some course that will gain
further debt servicing concessions.
-- In the simulation, the debtors agreed to use both the press and
direct lobbying--in particular with the US Congress and
Washington bureaucracies--to publicize the need for easing Latin
America's debt burden. They also opted to continue the Cartagena
group as a loose confederation to provide mutual support and to
share information on successful approaches for gaining
concessions. I 25X1
S E C R E T
Sanitized Copy Approved for Release 2010/08/09: CIA-RDP85T01058R000100310001-1
 cPrQI:T
Sanitized Copy Approved for Release 2010/08/09: CIA-RDP85TO1058R000100310001-1
I I
-- Some differences still occurred. Throughout the discussion,
Brazil and Mexico worked to focus attention on the need to reduce
trade barriers and lower interest rates. Conversely, Argentina,
Bolivia, and Peru advocated playing the trump card of raising the
flag over political instability and resulting economic cha s to
nudge creditors toward providing new concessions. 25X1
The Imponderables
Although we are confident of our analysis that in the near term no
meaningful collective action would occur, over the longer run dramatic
changes in the economic and political equation could substantially heighten
the prospects for collective action. Comments by representatives of
individual countries on the political difficulties of sustaining economic
austerity produced the greatest sense of common cause during the entire
simulation exercise as well as increasingly strident calls for financial
relief. 25X1
In our simulation, the debate between debtors and creditors escalated
steadily as Latin governments faced with resurgent payments problems and
pressured by a population frustrated with "belt-tightening" felt compelled
to consider tougher actions on the debt. Bankers, however, remained
hesitant to lend and instead suggested reserve drawdowns, tougher import
cuts, and tighter austerity. This response heightened frustration among
the debtors, producing more credible threats of a moratorium, increasingly
contentious financial negotiations, and growing demands by the largest
debtors that commercial banks cap interest payments and even forgive some
debt. As the bankers claimed inability to extend further concessions, the
debtors began to appeal for official intervention, especially greater
support from multilateral institutions. 25X1
We believe this scenario could occur in time as a result of any of a
number of developments:
-- Deteriorating external conditions could severely diminish debt
service capabilities. Slowed global economic growth, the spread
of protectionism in foreign markets, and the collapse of
commodity prices--notably oil--could reduce foreign exchange
earnings; additionally, rapidly rising interest rates would swell
the burden of interest payments.
-- Foreign banks and the International Monetary Fund could require
more stringent austerity as a condition for new money or debt
relief. In the view of debtor governments, such policies would
likely lead to unacceptably harsh living conditions and,
eventually, political instability.
-- Domestic political reverses in one or more countries could
encourage key Latin civilian governments to take firmer stands
S E C R E T
Sanitized Copy Approved for Release 2010/08/09: CIA-RDP85T01058R000100310001-1
 crrDC'T
Sanitized Copy Approved for Release 2010/08/09: CIA-RDP85T01058R000100310001-1
against foreign creditors in order to rally popular support.
-- The leader of one of the large Latin debtor countries--Alfonsin
of Argentina seems the most likely case--driven by a personal
sense of destiny and ambition may tout revolutionary changes in
debtor-creditor relations to increase his own regional stature.
Other Latin countries could become more receptive to radical
action if a well-respected, major debtor led the way.
-- Collusion by two or more Latin debtors--drawn together by common
ideologies or other bonds--on the debt issue could breed wider
acceptance of collective action throughout the region. 0 25X1
Implications for the United States
The simulation exercise complemented the thrust of recent reporting
that indicates the views of the Latin debtor countries are evolving in a
more political direction. Although a debtors' cartel remains unlikely, we
expect the Latin Americans to mount increasingly frequent and intense joint
lobbying efforts to obtain concessions from commercial banks and industrial
country governments--especiall Washington--that will ease their debt
burdens. In the simulation, Latin debtors generall25X1
have seen their economic fortunes tied closely to trends in the US
economy. Our simulated country representatives expressed some concern,
however, that US preoccupation with Central America was eclipsing
Washington's ability to focus on the debt issue. 0 25X1
Latin leaders, in our exercise, also seem convinced that resolution of
their financial problems hinged largely on US government policies and
actions. For example, the recent decline in international interest rates
moved this previously emotional issue to the background in our exercise.
Nonetheless, the Cartagena countries remained apprehensive about the
prospect of future rate increases, and in such a case probably would press
the US to provide official financial relief and to adopt policies to bri--
interest rates down. 25X1
So long as the Latin Americans are unable to unify on the debt issue,
creditor governments will probably continue to be able to maneuver on a
bilateral, case-by-case basis by granting selective concessions. The
debtors have been especially disturbed about the prospect of languishing
export earnings, and in our simulation trade concessions were found
potentially effective in defusing the threat of radical action. In our
simulation, well-timed bridge loans by the United States--as well as direct
intervention with the IMF to design more realistic adjustment
programs--were effective in retaining debtor cooperation and goodwill.
Alternatively, the call for increased direct investment--a US-supported
initiative--only served to crystallize debtor frustration in the
simulation, because the group assessed that depressed economic performance
SECRET
Sanitized Copy Approved for Release 2010/08/09: CIA-RDP85T01058R000100310001-1
 crrnrr
Sanitized Copy Approved for Release 2010/08/09: CIA-RDP85TO1058R000100310001-1
and growing nationalism would impede large-scale inflows of investment
funds necessary to substitute for bank lending. F__1 25X1
Sanitized Copy Approved for Release 2010/08/09: CIA-RDP85T01058R000100310001-1
 Sanitized Copy Approved for Release 2010/08/09: CIA-RDP85T01058R000100310001-1
I I
Appendix
The Simulation
The forum was a simulated closed-door session of a Cartagena group
Ministerial meeting, the typical setting for such deliberations in the
past. The analysts played the roles of finance ministers from Brazil,
Mexico, Argentina, Chile, and Bolivia as well as foreign ministers from
Brazil and Uruguay. We believe that this formulation faithfully
incorporated moderate and radical viewpoints on the debt, involved the key
decisionmakers as well as maverick elements, and struck a balance between
technical financial concerns and broader political considerations. 0 25X1
Because of their focused expertise, we believe the country analysts
were good proxies for the Western-educated elites that would actually
conduct the negotiations. We also included a representative of a US
moneycenter bank. Although this is at odds with Cartagena group
deliberations, the debtors share 25X1
information to test their perceptions about banker response to their
proposals. Consequently, we built in an automatic feedback mechanism. F 25X1
In the exercise, the participants were instructed to defend the
interests of the countries or groups they represented. The debtors viewed
the mandate in terms of reducing the repayment burden while the creditors
sought to protect interest payments. Unlike a brainstorming session, where
analysts react individually, the simulation forced the group to interact
dynamically. Consequently, we believe we were able to consider more
variables in making policy recommendations as well as gauge the extent to
which more radical rhetoric influenced the interaction among the
Sanitized Copy Approved for Release 2010/08/09: CIA-RDP85T01058R000100310001-1
 Sanitized Copy Approved for Release 2010/08/09: CIA-RDP85T01058R000100310001-1
I I
SUBJECT: Latin America: Prospects for a Debtors' Cartel
1 - David G. Wigg, NSC
1 - James Conrow, Treasury
1 - Edgar Gordan, Treasury
1 - W. Robert Warne, State
1 - Lawrence Rossin, State
1 - Lauralee Peters, State
1 - Jacqueline Tillman, NSC
1 - Raymond Burghardt, NSC.
1 - NI0/LA
1 - NIC/AG
1 - PDB Staff
1 - C/DDI/PES
1 - DDI/CPAS/ISS
1 - D/ALA
2 - ALA/PS
1 - ALA Research Director
4 - CPAS/IMC/CB
1 - ALA/SAD
7 - ALA/SAD/R
2 - ALA/SAD/E
1-
1-
S E C R E T
Sanitized Copy Approved for Release 2010/08/09: CIA-RDP85T01058R000100310001-1