INTERNATIONAL FINANCIAL SITUATION REPORT #42

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T01058R000304760001-6
• Release Decision: RIPPUB
• Original Classification: T
• Document Page Count: 13
• Document Creation Date: December 22, 2016
• Document Release Date: January 22, 2010
• Sequence Number: 1
• Publication Date: July 18, 1985
• Content Type: REPORT

Sanitized Copy Approved for Release 2010/01/22 : CIA-RDP85TO1058R000304760001-6
Iq
State Dept. review completed
Next 1 Page(s) In Document Denied
Sanitized Copy Approved for Release 2010/01/22 : CIA-RDP85TO1058R000304760001-6
 Sanitized Copy Approved for Release 2010/01/22 : CIA-RDP85TO1058R000304760001-6
I I
Central Intelligence Agency
Washington, D. C. 20505
DIRECTORATE OF INTELLIGENCE
International Financial Situation Report #42
18 July 1985
Summary
o Balance of payments problems and large budget overruns are pushing Mexico out o
comoliance with IMF targets.
o Brazil's negotiations with the IMF resumed on 15 July and promise to be difficult.
o All information indicates Peruts President-elect Garcia will not immediately seek a
formal IMF program. We concur with a recent US Embassy assessment that Garcia
seems intent on making the debt issue a principal theme of his inaugural.
o Castro probably believes the regional conferences Cuba is arranging will at least
to tensions between the US and debtor countries.
n RnmAnif's financial situation has deteriorated in recent months, and Bucharest may 25X1
need debt relief by late this year. Shortages of cash have caused Romania to be late
nn niumPnts to he IMF since April. 25X1
NOTE: THE NEXT REPORT WILL BE PUBLISHED ON 22 AUGUST 1985
This situation report was prepared by analysts of the Intelligence Directorate. Comments are
welcome and may he addressed to the Situation Report Coordinator,
Copy Lof 76
szsR voL 1-- 25X1
Sanitized Copy Approved for Release 2010/01/22 : CIA-RDP85TO1058R000304760001-6
 Sanitized Copy Approved for Release 2010/01/22 : CIA-RDP85TO1058R000304760001-6
Date Event/Country Camient
18 July Paris Club (Cuba Task Force) Meeting to discuss a rescheduling of
debt owed to official bilateral
creditors.
18-21 July QiU Summit (Addis Ababa) Discussions will include the African
debt situation. 25X1
19 July Paris Club (Jamaica) Meeting to discuss a rescheduling of
debt owed to official bilateral
creditors.
22 July
creditors.
Paris Club (Equatorial Guinea) Meeting to discuss a rescheduling of
debt owed to official bilateral
28 July
Presidential Inauguration of Visiting Heads of State and Foreign 25X1
Alan Garcia (Peru)
discussions on debt. Also, the
Cartagena Group probably will meet.
Ministers may hold infornml private
30 July- Latin American Debt Conference President Castro has invited Western
3 August (Havana) Hemisphere political figures, academics
and religious leaders to discuss the
debt issue. 25X1
12-14 August Labor Congress Meeting (La Bolivian Labor Confederation will
Paz) sponsor a conference on Latin American
debt and invite labor organizations fran
around the world. 25X1
August Cartagena Group Ministerial Meeting may be arranged after the
Meeting inaugurations of the governments of Peru
and Bolivia at a yet-to-be-determined
location. 25X1
Sanitized Copy Approved for Release 2010/01/22 : CIA-RDP85T01058R000304760001-6
 Sanitized Copy Approved for Release 2010/01/22 : CIA-RDP85TO1058R000304760001-6
DEVELOPMENTS IN MAJOR COUNTRIES
Mexico
Rising balance of payments problems and large budget overruns are pushing
Mexico out of compliance with IMF targets and may force the government to seek new
foreign loans, which officials have up to now said would not be needed.
o Mexico's oil price cut in mid-July, averaging about $1.00 per barrel, will
reduce 1985 petroleum export earnings by about $1.5 billion from last year's
level.
o Capital flight during the first half of 1985 is double the amount for all of
last year
25X1
25X1
25X1
Sanitized Copy Approved for Release 2010/01/22 : CIA-RDP85TO1058R000304760001-6
 Sanitized Copy Approved for Release 2010/01/22 : CIA-RDP85TO1058R000304760001-6
President de la Madrid so far has been unwilling to take the necessary measures to
allow Mexico to meet its 1985 IMF targets. Slashes in investment will not bridge the
widening gap between government revenues and expenditures, and the President probably
will have to make unpopular personnel and subsidy cuts. We doubt de la Madrid will go
far enough to satisfy the IMF, however.
Mexico's stopgap measure in early July that established a free-market rate for
tourist expenditures had a minimal effect on slowing the drain on foreign exchange
reserves temporarily. However, we believe that Mexico will be forced soon to devalue
the peso across the board. Nonetheless, even a substantial devaluation will not solve the
country's financial problems especially if oil prices continue to drop. In discussions with
the IMF, the Mexicans are likely to plead extenuating circumstances and ask for easier
terms. Bankers probably will consider new loans only if the Fund declares that Mexico is
in compliance with its IMF program.
International banks expect to complete the final phase of Mexico's $48.7 billion
debt rescheduling at the end of July. This phase covers $20.1 billion in debt maturing
between 1985-1990. The agreement will contain the controversial Mexican plan to allow
foreign creditor banks to offer shares in Mexican public companies to foreign investors,
..with proceeds from the purchases going to the foreign bank to repay Mexican debt.
Under the terms of the agreement, Mexico will complete its prepayment
of $1. billion to its creditor banks starting in September. The payments are to be made in
two installments before the end of 1985.
25X1
25X1
25X1
25X1
Brazil
Brazilian officials will attempt to reach an agreement with the IMF for a standby
25X1
facility when they resume negotiations with Fund representatives on 15 July,
To help pave the way for an agreement, Brasilia
25X1
announced measures in early July to reduce the projected $18 billion public sector deficit
for this year by 36 percent.
25X1
reconciliation on a new program will be difficult.
25X1
25X1
25X1
there have been few new
developments during recent talks with bankers regarding multiyear debt restructuring.
According to the US Consulate in Sao Paulo, however, Central Bank President Lemgruber
aroused creditor concerns at a luncheon with bankers late last month by raising the
prospect of reopening negotiations on many issues in the debt talks that had already been
resolved. Moreover, he stated in a press interview around the same time that Brazil may
have to negotiate a capitalization of interest on its entire foreign debt if bank creditors
do not resume voluntary lending in the future.
Sanitized Copy Approved for Release 2010/01/22 : CIA-RDP85TO1058R000304760001-6
 Sanitized Copy Approved for Release 2010/01/22 : CIA-RDP85TO1058R000304760001-6 25X1
Argentina
Bankers report growing confidence that the $4.2 billion jumbo loan will be fully
subscribed. As of 16 July the facility was $40 million short. We believe Argentina will
be able to demonstrate sufficient compliance with its IMF targets to gain access to the
first tranche of $2.2 billion in bank funds by mid-September and IMF standby loan funds-
totalling $230 million by 15 August and another $230 million by late-September.
President Alfonsin has been successful in engendering strong public support for the wage
and price freeze announced 14 June, and he appears politically stronger than at any time
since his inauguration. With a clearly defined austerity program and the absence of any
credible political opposition, we doubt he will backslide on his program any time soon. E
Nevertheless, the Alfonsin stabilization program will likely face challenges in the
coming months. The financial press already indicates that bankers and business analysts
foresee some serious problems in retaining popular support as the economy contracts and
layoffs increase. Additionally, we believe the government may continue to experience
difficulty in collecting taxes, a key to reducing the deficit in the short run.
REGIONAL SITUATIONS
Latin America
Among other Latin American countries, Peru's President-elect continues to make
debt one of his primary themes, and Chile reached an agreement in principle with the
IMF for a $765 million extended fund facility.
After a six-month stalemate, Chile's debt package is now moving along. The IMF
agreed in principle on 15 July to a three-year, $765 million extended fund facility,
clearing the way for a 17 July Paris Club rescheduling of $170 million, according to press
reporting.
25X1
25X1
Sanitized Copy Approved for Release 2010/01/22 : CIA-RDP85TO1058R000304760001-6
 Sanitized Copy Approved for Release 2010/01/22 : CIA-RDP85T01058R000304760001-6 25X1
Santiago expects to receive around $1 billion in new funds before the end of the
year, according to US Embassy reporting. The government assumes that the IMF will
make its first disbursement in August, bankers will begin final signing of the new loan
package before September, and the World Bank cofinancing loan will be cleared and
approved by October. We believe that this schedule could easily be disrupted by
technical delays or resurgent political problems, in which case Chile will not receive
enough foreign funds to cover its current account deficit and meet its IMF program
reserve targets in 1985. Thus, we project Santiago will continue to experience foreign
exchange strains this year-possibly selling off some gold reserves to meet
obligations-and will seek waivers from the IMF on its reserve and inflation targets. F_
President-elect Garcia, who will be
inaugurated on 28 July, will not initially seek a formal IMF program. In recent public
interviews, he has promised to pay Peru's foreign debt, but he continues to criticize the
IMF approach to Latin debt problems.
The part s debt expert has recently reiterated to US Embassy officials
that the new administration will not sign an agreement with the Fund in the short run.
We concur with a recent US Embassy assessment that Garcia seems intent on
making the debt issue a principal theme of his inaugural. His tougher line with the IMF
could generate domestic acquiescence to additional belt-tightening measures. This could
eventually set the stage for a self-imposed stabilization program-monitored by the
IMF-that would break the current financial impasse with creditors. There is some
danger, however that his adjustments will be implemented in patchwork fashion, leading
to worsening economic performance over the near term. Moreover, an anti-IMF stance
and rhetorical backing for unified debtor action could cause bankers to cease financial
support. With exports weakening, Garcia would soon face intensified cash strains that
would quickly create economic and political problems for the new government.
President Castro is not obtaining support from the key debtor nations in his
crusade for a Latin American debt moratorium, but he probably believes the regional
conferences Havana is arranging will at least aggravate tensions between the US and
debtor countries. Castro invited all the major unions in Latin America and the Caribbean
to a three-dav conference this week on the debt issue
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
Sanitized Copy Approved for Release 2010/01/22: CIA-RDP85T01058R000304760001-6
 Sanitized Copy Approved for Release 2010/01/22 : CIA-RDP85TO1058R000304760001-6
President de la Madrid recently told US officials he opposes Castro's radical approach,
and Argentine Foreign Minister Caputo has termed Castro's debt moratorium proposal
Meanwhile, hundreds of Western Hemisphere political
figures, academics, and religious leaders have been invited to another debt conference in
Havana on 30 July. The US Embassy in Buenos Aires reports Argentine President
Alfonsin turned down Castro's invitation, and press reports indicate Colombian
Betancur also declined.
Eastern Europe
In Eastern Europe, Poland and its. Western creditors signed an agreement to
reschedule $11 billion in overdue debt payments. Romania's financial situation has
deteriorated and the nation is now facing a severe foreign exchange shortage
Yugoslavia
Talks between US bankers and Yugoslav officials aimed at resolving the IMF's role
in monitoring Yugoslav economic performance-a major stumbling block to a multiyear
rescheduling agreement-ended in New York on 13 July.
Yugoslavs, and the IMF agreed that in lieu of another standby program after
April 1986, the Fund would conduct enhanced monitoring consisting of two Article IV
reviews annually. The Fund would measure Yugoslav trade and financial performance
against as yet unspecified "trigger" criteria. If performance fell below these standards,
Belgrade could be required to take policy action to correct the problem and possibly
negotiate a new standby program with the Fund. The banks want the enhanced
monitoring to extend through 1991 while the Yugoslavs want to limit it to 1990.
Talks with the full International Coordinating Committee to reschedule $3.5
billion in debt maturing in 1985-88 are now expected to resume later this month. The
key unresolved issues are interest rates and length of the rescheduling oerind_ F_
I Yugoslavia fails to reach an
agreement with the banks before 15 August it will be not be able to draw the second
tranche of its IMF standby credit.
Yugoslavia's hard currency account and trade deficits continue to show a sharp
deterioration in comparison to 1984. The convertible currency account through April
1985 showed a deficit of $359 compared to a $31 surplus last year. The trade deficit of
$521 million for the first 4 months was over three times the deficit for the same period
last year. Through 10 June, exports to hard currency areas were down 3 percent and
Poland
Poland and the Paris Club of Western creditor governments signed an accord on 15
July rescheduling approximately $11 billion in overdue debt from 1982-84 over a period
of 11 years with five years grace, according to press reports. The agreement was
initialed earlier this year, but formal signing was delayed when Warsaw tried to obtain
new credits from the governments and failed to make required payments on arrears from
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
Sanitized Copy Approved for Release 2010/01/22 : CIA-RDP85TO1058R000304760001-6
 Sanitized Copy Approved for Release 2010/01/22 : CIA-RDP85T01058R000304760001-6 25X1
the 1981 rescheduling agreement. To implement the agreement, Warsaw must now
complete payments on arrears from the 1981 agreement, sign bilateral accords with
individual governments and make interest payments on the rescheduled debt.
We estimate that Warsaw can cover only about half of the $900 million due'to
governments under the agreement this year if it continues to give priority to imports and
paving bank creditors. The Poles will probably demand new credits in the bilateral
negotiations, but Western governments seem reluctant to extend new loans. The Paris
Club has indicated it will reassess the agreement if Poland cannot meet its obligations,
but the governments probably would demand that Warsaw negotiate new rescheduling
Romania
Romania's financial situation has deteriorated in recent months, and Bucharest
may need debt relief by late this year.
caused Romania to be late on payments to the IMF since April. The US Embassy in
Bucharest reports increasingly frequent complaints from Western firms about missed
payments.
If Romania's payment problems continue to worsen, pressures to reschedule debt
and renew IMF supervision will build. This would be particularly galling to President
Ceausescu, who was humiliated by having to reschedule in 1982 and 1983 and has
complained of IMF interference. Ceausescu may have no choice except to acquiesce
In Asia, drawings on the Philippine financial package continue to be delayed, and
K
orea introduced a plan to bail out some of its major banks.
Philippines
On 1 July, the Philippine government requested its eighth 90-day moratorium on
all foreign debt obligations as drawings on the financial rescue package continue to be
delayed and negotiations continue on rescheduling individual loan aLyreements.
The second tranche of IMF funds-originally scheduled to be released in April-
continues to be withheld until the Managing Director can determine whether the revised
Shortages of cash have
25X1
25X1
25X1
25X1
25X1
Sanitized Copy Approved for Release 2010/01/22 : CIA-RDP85T01058R000304760001-6
 Sanitized Copy Approved for Release 2010/01/22 : CIA-RDP85T01058R000304760001-6
According to Embassy reporting, however, IMF officials indicate that the program is on
track and that the tranche is likely to be released on 31 July. IMF approval would allow
Manila to draw the $107 million second tranche disbursement which would in turn trigger
the first release from the $925 million new money package from the commercial
creditors. After it begins drawing from the new money package, Manila would then be
able to tap into the $3 billion revolving trade credit facility.
South Korea
Korea enacted a plan to keep its major corporations and banks financiall
According to Embassy reporting, in a kind of "bail out for banks" the
BOK will make concessional loans to commercial banks at a 3 percent interest rate-
down from the normal 6 percent. A $17 billion special account has been established for
this purpose and commercial banks will be allowed to rollover existing borrowings at the
lower rate. The Korean government believes these measures will keep most of the
major corporations solvent, maintain employment levels, and ensure economic growth.
The enthusiastic acceptance. of a Korea Development Bank syndicated loan is
indicative of bankers' continued willingness to take Korean exposure. The $650 million
facility was oversubscribed and increased from the original offer of $600 million. The 8
year loan consists of two tranches: $409 million at an interest rate of .625-.75
percentage point above LIBOR and $241 million priced at the US prime rate plus
25X1
25X1
Sanitized Copy Approved for Release 2010/01/22 : CIA-RDP85T01058R000304760001-6
 Sanitized Copy Approved for Release 2010/01/22 : CIA-RDP85TO1058R000304760001-6
FIK !CIAL BRIEFS
o Dominican Republic's bank advisory caimittee formally agreed to reschedule
sane $800 million in cannercial debt payments... covers payments falling due
1984-1989... agreement now to be circulated to 80 member banks for pro forma
concurrence. 25X1
o Mexico sponsored a conference on debt last week... organized by research
institute... invitations to financial experts from Latin America came from
de la Madrid, according to press reports... details of the meeting are not
certain.
25X1
I
o Panama's bank advisory caimittee finally agreed to an $877 million
camiercial debt refinancing package... conditional upon Paris Club
rescheduling and performance under INF standby and World Bank loan.. .clears
way for INF approval of new $120 million standby. 25X1
o Uruguay received tentative INF approval on its $120 million, 18-imnth
standby arrangement... negotiations yet to begin in earnest for new
cammercial bank loans to cover 1985 financing gap...Sanguinetti requesting
$25 million US bride loan to ease cash strains and help defuse anti-INF 25X1
Sanitized Copy Approved for Release 2010/01/22 : CIA-RDP85TO1058R000304760001-6
 Sanitized Copy Approved for Release 2010/01/22 : CIA-RDP85TO1058R000304760001-6
Africa/Middle East
drawings on INF standby would be suspended until new target negotiated.
o African external debt to be discussed at QIU Summit this week... collective
debt negotiation with creditors may be proposed... issue was hotly debated
at preparatory meetings, unlikely to be endorsed at summit.
o Paris Club rescheduled about $300 million in official debt payments owed by
Ivory Coast... includes all principal and half of interest payments falling
due in 1985... payments spread over 9 years, including 4 years race...Paris
Club also rescheduled $15 million owed by Togo this year. 25X1
o Z d ia's foreign exchange receipts running far below level needed to pay
creditors... already behind in INF, World Bank, and commercial bank
payments... arrears to INF will block formal negotiations on standby
arrangement.
Sanalia likely to fail 30 June INF performance target, according to U5
th bassy...arrears to multilateral creditors still too high...further
Sanitized Copy Approved for Release 2010/01/22 : CIA-RDP85TO1058R000304760001-6
 Sanitized Copy Approved for Release 2010/01/22 : CIA-RDP85TO1058R000304760001-6
SUBJECT: International Financial Situation Report #42
CODV No. 1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
1.6
17
18
19
20
21
2?
?I
24
25
26
Sec. James Baker Treasury
R. G. Darman
James W. Conrow
Robert Cornell
James E. Ammerman
Charles Schotta
James A. Griffin
Doug Mulholland
Manuel Johnson
Robert M. Kimmit
David Mulford
Sec. George Shultz State
Kenneth Dam
Morton I. Abramowitz
Michael Armacost
Ralph Lindstrcrn
W. Allen Wallis
Elliot Abrams
Richard Burt
Elinor Constable
Chester Crocker
Paul Wolfowitz
Richard Murphy
J.C. Kornblum
Byron Jackson
S. Bruce Smart
Camierce
It
NSC
if
It
Randall Fort PFIAB
Leo Cherne PFIAB
David Tarbell OSD (ISA)
DCI
ExDir
SA/DDCI
DDI
ADDI
Ch/PES/DDI
NIO Economics
DDO
Ch/DOO/EPOS
Roger Robinson
Douglas Mdv[i nn
David Wigg
45 Ch/DCD/AF
46 Ch/DDO/EA
47 Ch/DDO/EUR
48 Ch/DDO/LA
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64-65
66
67
68
69-76
18 July 1985
Ch/DDO/NE
Ch/DDO/SE
IAD/OOG/PEL
D/ALA
Ch/ALA/SAD/R
D/OEA
D/EURA
Ch/EURA/EE/EW
D/SC1VA
D/NESA
DD/OGI, D/OGI
Ch/OGI/SRD
Ch/OGI/ISID
Ch/0GI/TNAD
Ch/OGI/ECD
Ch/OGI /ECD/F I
CPAS/ISS/SA/DA
OGI /CD
25X1
25X1
Ch/OGI/Pub
OGI /Pub
25X1
1 - Edwin Truman, Federal Reserve Board
1. - Henry Wallich, Federal Reserve Board
1 - David Roberts, Federal Reserve, 25X1
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 Cants, State
1 - Lauralee Peters, State
1 - Peter W. Rodman, State
1 - J.D.Bindenagel, State, (for pass to
Ambassador Arthur Burns)
5 - Byron Jackson, C4mnerce
1 - Warren E. Farb, Commerce
1 - Steve Farrar, CNB
1 - William Isaac, Federal Deposit
Insurance Corporation
1 - Beryl Sprinkle, Treasury
25X1
25X1
1 - Sid Zabludoff, NIC/AG
1 - Ch/OGI/GD
1 - Ch/ECD
I- Ch/ECD/FI
1. - Ch/ECD/T
1 - Ch/ECD/DI
1 - Ch/ECD/CM
25X1
Sanitized Copy Approved for Release 2010/01/22 : CIA-RDP85TO1058R000304760001-6