INTERNATIONAL FINANCIAL SITUATION REPORT #46

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T01058R000405480001-5
• Release Decision: RIPPUB
• Original Classification: T
• Document Page Count: 11
• Document Creation Date: December 22, 2016
• Document Release Date: April 26, 2010
• Sequence Number: 1
• Publication Date: November 21, 1985
• Content Type: REPORT

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Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
International Financial Situation Report #46
21 November 1985
Summary
International bankers-led by the Group of 14-are inching toward a collective reponse to
the Baker initiative. Meanwhile, according-to Foreign Minister Caputo, Argentina, one of the 15
countries that could qualify for new money under the initiative, views the plan positively and is
willing to discuss structural reforms with the international financial community "to adapt them
to Argentine needs." However, Adolfo Canitrot, the Argentine Economy Ministry's Secretary for
Economic Coordination, says that the real test for the Baker plan is Mexico, and "Argentina will
not define its position until the Mexican issue is resolved." Other developments in recent weeks
include:
o Mexico's economic program, outlined last week, seeks to halve the deficit and cut
inflation from 60 to 45 percent. While de la Madrid appears to recognize the policies
needed to avert an economic crisis, he probably lacks the political mettle to
implement them.
o Next month, Brazil plans to present the IMF with its stabilization program for 1986
which, according to Embassy reporting, Brazil views as nonnegotiable. Brazil's
economic team believes it can negotiate a multiyear debt rescheduling with foreign
banks even if a formal agreement with the IMF is not reached.
o Argentina's failure to comply -with IMF targets will delay the disbursement scheduled
for this month. According to Embassy reporting, Argentina has raised its projection
for 1986 new money requirements by $1 billion to $3 billion.
o Philippine officials announced an agreement with the IMF staff mission has been
year.
IMF Executive Board may meet on 11 December to review the staff report;
their approval would trigger the release of a $212 million disbursement.
o One of South Africa's major creditors has proposed a debt repayment scheme to be
enacted if the South Africans do not make major political changes by the end of the
reached on Manila's performance under its standby arrangement.
This situation report was prepared by analysts of the Intelligence Directorate. Comments are
welcome and may be addressed to the Situation Report Coordinator,
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KEY ISSUE
US Initiative on Debt: An Update
International banks are inching toward a collective response to Secretary of
Treasury Baker's proposal that they provide $20 billion in new money to 15 debt-troubled
LDCs over the next three years.
the Group of 14--an informal group of bankers--to
meet in New York on 7- November to further discuss the Baker proposal. According to
Embassy reporting, members of the Group of 14 are generally positive toward the
initiative, but want answers to questions such as:
o Will there be changes in US-and European bank supervisory provisions?
o Will the World Bank support the plan with increased lending?
o Will the debt-troubled countries adopt structural reform programs?
o Will industrial-country governments make additional financial commitments
to debtor countries?
An Embassy source in a major European bank states bankers will not make a public
commitment until these questions are answered; the source believes the process could
take months.
According to Embassy reporting, bankers are thinking of using the Group of 14 as
an advisory body that would work with the World Bank and the IMF. This Group also
would work with the individual bank advisory committees that handle reschedulings and
new money requests. A meeting of the Group of 14 has been scheduled for this week in
Toronto to discuss technical organizational matters. The next substantive meeting
probably will be held in early December.
Recent public statements by Foreign Minister Caputo indicate that Argentina
views the Baker plan positively, and is willing to discuss structural reforms with the
international financial community "to adapt them to the Argentine needs." However,
Adolfo Canitrot, the Argentine Economy Ministry's Secretary for Economic Coordination,
says that the real test for the Baker plan is Mexico, and "Argentina will not define its
position until the Mexican issue is resolved."
Canitrot also indicated that Argentine and Mexican economy
officials talk almost daily to discuss solutions to their foreign problems.
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DEVELOPMENTS IN MAJOR COUNTRIES
Mexico
Next year's ambitious economic program, outlined last week in the President's
annual budget message, seeks to halve the government's budget deficit and cut inflation
from 60 to 45 percent. President de la Madrid also promised economic readjustment and
reaffirmed the country's intention to honor debt obligations. Nevertheless, although the
President again appears to recognize the proper policies needed to avert an economic
crisis, he probably lacks the political mettle necessary to fully implement them. As a
result, a growing sense of desperation in Mexico City may lead him to agree to a strict
IMF-supported program that he knows the country will not meet.
De la Madrid's credibility has been weakened by his handling of last September's
earthquakes, and he faces an uphill battle in his efforts to convince Mexicans of the need
for renewed economic adjustment. Political infighting within de la Madrid's economic
cabinet threatens to undermine the confidence he needs to gain popular approval, stem
capital flight, and temper inflationary expectations. Moreover, pressures to abandon the
adjustment are sure to increase the months ahead. For example, labor probably hopes to
recoup some of the losses in real wages experienced over the last three years and
businessmen are sure to demand compensation if increased competition from abroad cuts
into their profits.
Brazil
President Sarney's government intends next month to present the IMF with its
stabilization program for 1986 which, according to the US Embassy, Brasilia will view as
nonnegotiable. The same reporting indicates that the government believes that its policy
differences with the Fund are slight and that the major dispute is over the speed of
adjustment. Accordingly, Brasilia's program reportedly will spread adjustments over
-three years and allow 5 to 6 percent annual growth. In our judgment, the Sarney
Administration may expect the Fund to agree to its terms because it is willing to forego
the small amount of new IMF money associated with a conventional Fund program, and
because creditor countries recently acknowledged that debtor economies need to grow.
Brasilia's economic team believes it can negotiate a multiyear debt rescheduling
with foreign banks even if a formal agreement with the IMF is not reached
that s rt of enhanced IMF surveillance arrangement, the Brazilians may seek a formal
1985-1986 rescheduling with Fund monitoring for now, while deferring a longer-term debt
accord.
Argentina
Despite well-publicized success in fighting inflation-prices rose only 1.9 percent
in October--Buenos Aires' failure to comply with IMF targets will delay disbursement
from the IMF scheduled for this month. While the $800 million in commercial bank
money scheduled for disbursement on 26 November will not be affected, the $600 million
The US Embassy reports that if bankers balk at a multiyear rescheduling under
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tranche planned for late December may be delayed. The Fund has suspended this
disbursement for two months because of Argentina's large Central Bank deficit, slippage
in other fiscal targets, and failure to ease import restrictions.
Other economic developments bode ill for Argentina's long-term growth
prospects. Opposition from the bureaucracy and infighting among economic ministers
have hampered Alfonsin's plans to increase private-sector participation in the oil and
telecommunications industries. Also, his economic team's resistance to a currency
devaluation is harming export competitiveness. The Embassy reports, moreover, that
Argentina has raised its 1986 projections for new money requirements by $1 billion to $3
billion and is aiming for a GDP growth rate of 6 percent next year. This, in our view,
may indicate that Alfonsin plans to fuel a rapid expansion through borrowing instead of
relying on slow, steady growth based on consistent economic policies and major
structural reforms. We believe his apparent emphasis on quick growth probably will
force his economic team to focus on politically expedient, short-term measures.
REGIONAL SITUATIONS
Latin America
In Latin America, Chile's debt package could be delayed as two Italian banks
refuse to sign, an IMF team arrived in Bolivia to discuss a new standby, and Panama
signed its commercial bank refinancing agreements.
Chile
The refusal of two government-owned Italian banks to fully commit funds and sign
a new commercial lending agreement is threatening to delay Chile's debt package. The
World Bank in late October approved Santiago's request for a $250 million structural
adjustment loan and a $300 million co-financing agreement with commercial banks,
-which along with IMF disbursements, already have provided Santiago with $370 million to
shore up its diminishing net foreign exchange reserves, now estimated to be below
$300 million. The completion of the commercial loan agreement would make Chile
eligible to draw more funds-$194 million of its World Bank co-financing loan-and hel
Santiago meet its IMF end-December program reserve target.
Although the signing is progressing as planned, some banks have made
disbursement contingent on 100 percent participation. We believe that the loan
agreement will be completed even if the Italian banks continue to demur, but that
disbursement could be held up until January, raising the prospect of a temporary
suspension of Chile's IMF pro ram and foreign exchange troubles unless the Fund grants a
waiver.
Bolivia
An IMF negotiating team arrived in Bolivia on 14 November to discuss a new
standby agreement to help cover next year's projected financing gap of $200 million.
Fund representatives, according to State reporting, are impressed with La Paz's new
economic program thus far, but believe that additional fiscal reforms are necessary to
continue Bolivia's success in stabilizing inflation, which the U.S. Embassy reports was
2 percent in October. La Paz also has formally requested a compensatory credit facility
of $50 million because of falling tin prices, which the Fund is likely to provide once an
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IMF-supported, program is in place, according to the U.S. Embassy. Current IMF
calculations, however, do not take into account the recent tin crisis, which threatens to
reduce La Paz's foreign exchange earnings by $50-70 million. Fund officials do not
believe the crisis will threaten the economic recovery, an opinion that Bolivian officials
and the U.S. Embassy do not share. Meanwhile, press reporting indicates that Venezuela,
Colombia, Brazil, and the Andean Development Fund have contributed over $55 million
to the proposed $150 million United Nations stabilization loan for Bolivia.
Panama
After months of delay, Panama and its commercial bank creditors signed an
$850 million refinancing agreement on 31 October. The deal provides a $60 million new
long-term loan and about $80 million in trade credits, and refinances some $580 million
in 1985-86 debt obligations. In addition, bank creditors promise to maintain $130 million
in deposits with local subsidiaries. The first $20 million tranche of the new loan is
scheduled for disbursal by yearend but continued drawings are tied to economic policy
changes the Delvalle government appears unlikely to implement. Even though
Panamanian financial authorities are telling bankers that labor, industrial, and
agricultural reforms required for a World Bank structural adjustment loan will be made
soon, Delvalle-according to US Embassy reporting-has not formulated an economic
program and, like his predecessor almost certainly lacks the political muscle to push
through the reforms.
Eastern Europe
Among the East European countries, Poland says it will not be able to make all of
the payments due to commercial banks and governments over the next two months.
Yugoslavia is nearing completion of its 1985-88 commercial bank rescheduling
agreement.
Poland
Warsaw, for the first time, formally admitted to its government creditors this
month that it cannot cover all payments due to banks and governments in the next two
months. According to Embassy reporting, the Poles are deciding whether to pay the $220
million in interest due to its official creditors in November or the $240 million in
principal owed to banks in December. Warsaw also claims it cannot cover the $550
million in interest due at the end of the year on its rescheduled 1982-84 official debt.
According to the same Embassy report, Poland was scheduled to meet with the Paris
Club this week to sign a rescheduling agreement for debt due in 1985, and it is requesting
another meeting next month to discuss payment problems anticipated for 1986. The
decision to approach the Paris Club for relief suggests Poland will continue giving
preferential treatment to the banks. The Paris Club may demand-equal treatment, but
the Poles know the governments have little leverage because they tolerated more than
$10 billion in arrears in 1982-84. We believe Poland faces even greater difficulty
allocating payments next year, when the gap between resources and debts due is
expected to widen to about $2 billion.
Yugoslavia
The 1985-88 rescheduling agreement with commercial banks approved by
Yugoslavia in mid-September is nearing final completion. The chairman of the
International Coordinating Committee (ICC) was expected to send the formal loan
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documentation to Yugoslav officials by 5 November
Assuming Belgrade's approval, the chairman did not expect major problems when
he submitted the agreement to Yugoslavia's numerous commercial bank creditors
represented by the ICC during the week of 11 November. However, one issue yet to
resolved involves demands of some banks for an alternative interest rate to LIBOR, with
some West German banks wanting an adjusted LIBOR rate and other US banks preferring
an adjusted certificate-of-deposit rate. The numerous revisions made in the proposal
originally approved by Belgrade in mid-September will require reapproval by higher
Yugoslav political authorities than the Ministry of Finance,
Thus, signing will probably be delayed until after the first of the year.
Western Europe
Greece
EC Finance Ministers approved a $1.5 billion loan package to help Greece through
its current balance of payments crisis, but linked the loan to the implementation of strict
economic adjustment measures. The six-year loan is divided into two tranches; one to be
drawn immediately and one in 12 months. The finance ministers insisted that they take
part in reviewing the Greek economic package before the second tranche is disbursed.
Without the funds from the EC, the Greeks would have faced serious difficulties meeting
their debt payments next year. One US moneycenter bank estimates that Greece's total
debt will reach $16.4 billion by yearend 1985 and $18.2 billion by yearend 1986. Most of
this debt is in the form of long-term loans whose grace periods have begun to expire.
Amortization payments on public-sector long-term debt, which accounts for 80 percent
of total debt, will average more than $1 billion a year during the second half of the
decade, up from less than $580 million paid in 1980-84.
In hopes of rectifying their economic ills, Prime Minister Papandreou announced a
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series of austerity measures last October. The international banking community,
however, is expected to defer any new money loans for at least six to nine months until
Athens shows the political will to implement the austerity program.
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Until recently, as US and European banks pulled back, Japanese
lenders had taken their place.
Philippines
Philippine officials announced that an agreement with the IMF staff mission has
been reached on Manila's performance under its $615 million IMF standby arrangement.
US Government sources indicate that the IMF Executive Board may meet on 11
December to review the staff report. Their approval would trigger the release of
$212 million in IMF balance of payments assistance. Any further delay in IMF
disbursements, however, could endanger the Philippines' commercial bank new money
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package. Under this agreement, an "event of default" occurs if the Philippines fails to
draw an IMF tranche 45 days after the negotiated schedule. Since the third tranche was
scheduled to be disbursed by October 1985, the release of the remaining $525 million in
the Philippines would technically be in default after 15 December.
According to press reports, Prime Minister Virata said that the monetary and
fiscal targets agreed to with the Fund run only through the end of December. This leaves
Manila little room for maneuvering as their program runs through June 1986 and
additional IMF reviews will be needed for the remaining $208 million in disbursements.
We believe that additional government spending tied to the presidential election, now
scheduled for 7 February, will increase the likelihood of compliance difficulties with the
end-December targets. Some observers believe Manila will finance a large part of the
election by reallocating already budgeted funds, rather than relying on an increase in
overall spending.
Africa/Middle East
South Africa
South Afrimqls first meetin with bank creditors last month was brief and
inconclusive, Although both sides agreed to meet
epor s -indicate the debt mediator--Swiss banker
again on 26 November, recent press reports-
Fritz Leutwiler-has postponed the second meeting until early next year. Although
Pretoria has not yet made an official announcement, we believe this delay ensures South
Africa will extend the current debt repayment moratorium beyond its self-imposed
yearend deadline-perhaps by as long as six months, according to US
Embassy reporting.
Leutwiler may have postponed talks in hope that a decline in blacK
unrest or possible progress on reform after the South African parliament convenes in
January would improve Pretoria's standing with the international financial community.
Meanwhile, some Western bankers may soon take a much harder line with Pretoria
on linking a debt accord to progress on racial reforms.
Although the plan probably is intended primarily to jolt South African officials
into serious negotiations with creditors, we believe an explicit linkage between a
bilateral debt agreement and progress on reform would complicate debt talks by further
polarizing Pretoria and bankers and reducing both sides' negotiating flexibility. In our
judgment, hank creditors probably are overestimating their leverage with Pretoria if they
believe such a move will motivate more rapid racial reform.
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o Cartagena Group tentatively has scheduled a meeting of Latin American
foreign and economic ministers for 15 December in Montevideo... will discuss
and respond to the Baker initiative on debt. 25X1
Tin market crisis another blow to LIEs...substantial loss of export
earnings expected for Indonesia, Malaysia, Thailand... Bolivia hit hardest,
facing loss of $50-70 million in foreign exchange ..banks reviewing
creditworthiness of affected countries. 25X1
o Panama's Foreign Minister Jorge Abadia has begun to contact Latin American
governments to arrange a summit meeting on debt...reportedly there is a
"positive attitude" regarding the meeting so far. 25X1
.o Jamaica unlikely to receive IMF waiver of September performance target
failure... Prime Minister Seaga remains reluctant to implement price hikes,
other measures deemed essential by Fund... IMF believes if standby is
revised Jamaica will require more foreign assistance.
o Peru continues to 111111 [ ueU L service u 111e111.s...'11Ub L v L-v V111%; Lal
lenders.
o Venezuela's rescheduling `remains on hold while banks negotiate over the
government's proposed "contingency" clause.. .would permit revisions in the
agreement nifi nt changes in oil revenues or interest
rates...
Europe
o East Germany does not plan to seek new syndicated loans in the near
future... $1 billion in undrawn credits remain fran previous
syndications... Bank for International Settlements figures show foreign
exchange reserves of $5.26 billion at mid-year, up $771 million fran three
months earlier.
o Portugal negotiating with banks for reduced spreads on two 1983 loans...
trying to send message that Portugal is in strong financial position with
reserves of $1.7 billion... if successful, negotiations on two more loans
are likely.
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o he government of Thailand approved an emergency law that'will allow the
Finance Ministry to refinance public-sector debt.. .put ceiling on FY86
foreign loans at $1 billion, half the amount of pre-1984 levels..
Africa/Middle East
o IMF approved Mali's third standby arrangement... provides $24 million over
17 months ...econanic program includes price hikes, reform of state
enterprises... Bamako likely to use drawings to make payments on previous
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o Senegal seeking inmediate Western financial assistance to save imperiled
IMF program... tax shortfall and low export prices have delayed debt
payments violating Fund guidelines... probably can avert immediate
suspension, will face problems remaining solvent through 1986.
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must cane to terms with the Fund before a rescheduling can occur.
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SUBJECT: International Financial Situation Report #46
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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. Kimnit
David Mulford
Sec. George Shultz State
John C. Whitehead "
Morton I. Abramowitz
Michael Armacost
Ralph Lindstran
W. Allen Wallis
Elliot Abrams
Richard Burt
Elinor Constable
Chester Crocker
Paul Wolfowitz
Richard Murphy
J.C. Kornblun
Byron Jackson Commerce
S. Bruce Smart
NSA
David Wigg NSC
Stephen Danzansky. "
Randall Fort. PFIAB
Leo Cherne PFIAB
David Tarbell OSD (ISA)
DCI
ExDir
SA/DDCI
DDI
ADDI
Ch/PES/DDI
NIO Econanics
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D/SOVA
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Ch/OGI/ISID
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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 - Roland Kuchel, State
1 - Lauralee Peters, State
I - Peter W. Rodman, State
5 - Byron Jackson, Carmerce
1 - Warren E. Farb. CaTmerce
1 - DIA
1 - eve array,
1 - William Isaac, Federal Deposit
Insurance Corporation
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