INTERNATIONAL FINANCIAL SITUATION REPORT #44

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T01058R000305090001-9
• Release Decision: RIPPUB
• Original Classification: T
• Document Page Count: 13
• Document Creation Date: December 22, 2016
• Document Release Date: April 26, 2010
• Sequence Number: 1
• Publication Date: September 19, 1985
• Content Type: REPORT

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Cmtral n igence cy
International Financial Situation Report #44
19 September 1985
Summary
Renewed LDC dissatisfaction with current international monetary arrangements has
bolstered Third World resolve to urge reform during the IMF/World Bank Annual meetings next
month in Seoul. For the first time, LDCs have submitted proposed modifications for formal
consideration at the meetings, forcing industrial countries to address their criticisms of the
international monetary system. Other developments in recent weeks include:
o President de la Madrid is demonstrating his commitment to austerity by recent
deficit-reducing moves, realignment of his economic policy-making team, and cuts
embodied in the 1986 budget. However, de la Madrid faces increasing pressure to
find alternatives to Mexico's current debt arrangements.
o The US Embassy maintains that Sarney's naming of Dilson Funaro as Finance Minister
makes it clear that the Brazilian government intends to stress its commitments to
economic growth and social spending and to soft-pedal orthodox inflation-fighting
policies. Bankers reportedly believe that negotiations with the IMF will drag on with
little resolution, and that the Brazilians will reopen the entire rescheduling
agreement to renegotiation.
o Favorable economic trends continue to buoy the Argentine government and reinforce
its determination to maintain austerity measures. The US Embassy reports some
backsliding on the financial reforms introduced this spring, however, causing a
resurgence of the intracorporate lending market and reduced Central Bank control of
the money supply.
o An IMF team spent two weeks in August reviewing the Philippines' adjustment
efforts. The size of the Philippines' 1985 budget deficit is now estimated to be well
above targeted levels.
o A mediator for negotiations to reschedule South Africa's short-term debt reportedly
has been chosen, and talks are tentatively scheduled to begin next week. Pretoria's
four-month moratorium on principal repayments, however, is likely to be extended.
NOTE: THE NEXT REPORT WILL BE PUBLISHED ON 24 OCTOBER 1985.
This situation report was prepared by analysts of the Intelligence Directorate. Comments are
welcome and may be addressed to the Situation Report Coordinator,
Copy of
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Date
19 September
27 September
September-
October
UPCMIING INPCHTANT fl TES
Event/Country Carment
Paris Club-Panama Meeting to discuss rescheduling of debt
owed to official bilateral creditors.
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IMF Executive Board Meeting
Article IV re
view on the Philippines
.
40th UN General Asserfily The debt issue will be raised by Latin
leaders. Also, Latin American and
Caribbean Heads of State may meet
informally to discuss debt.
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October Fourth Cartagena Ministerial
Meeting (Montevideo)
6-11. October IMF/IBRD Annual Meetings
(Seoul)
1.0-13 Latin American Parliament
October Meeting (Montevideo)
23 October "Trade Union Day of
Continental Action Against
Foreign Debt"
25 October InVF Executive Board Meeting
1.4-16 University of South Carolina
November Debt Conference (Colanbia, SC)
The econanic and foreign ministers of
the Cartagena Group have reportedly 25X1
scheduled a meeting to discuss their
current financial situations.
situation.
Discussions will include international
monetary reform and the overall debt
Latin American political figures will
discuss the regional econanic situation;
a special debt conf e will be
included.
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demonstrations and work stoppages are
planned in a rimber of 'n American
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Arrears awed to the Fund b11-1 Sudan will
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The University has invited Latin
American and Caribbean countries, and
major creditors including the IiVE and
World Bank, to a discussion of the debt
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KEY ISSUE
G-24 Proposals for Improving the International Monetary System
Renewed LDC dissatisfaction with current international monetary arrangements
has bolstered Third World resolve to urge reform during the IMF/World Bank Annual
meetings next month in Seoul. For the first time, LDCs have submitted proposed
modifications for formal consideration by the IMF Interim Committee in response to the
recommendation proposed by the G-10 countries in June.
o "Volatile exchange rates have discouraged world trade and investment in
developing countries needed to service foreign debt." Although LDCs favor
eventually establishing target zones for exchange rates, they intend, in the
meantime, to press major industrial countries to coordinate macroeconomic
policies by submitting to an explicit, two-stage consultation process with the
IMF.
o "Increased economic interdependence has placed the burden of international
adjustment on developing countries." The Third World believes that the Fund
should tighten surveillance over the monetary and fiscal policies of industrial
countries and promote economic growth as an integral part of LDC
adjustment, partly by easing conditionality of international lending.
o "International liquidity is insufficient." LDCs favor augmenting the loan
Although the industrial countries share LDCs' concern about key features of the
monetary system-especially exchange rate volatility-most remain unwilling to support
extensive reform. The majority of G-10 countries oppose the adoption of target zones at
this time and have reached no consensus on an additional SDR allocation. Instead, they
hope to reduce exchange rate fluctuations by improving the effectiveness of existing,
informal arrangements to coordinate macroeconomic policies--a strategy they jointly
approved this summer. Consistent and sound macroeconomic policies in industrial
countries also would foster greater private lending to LDCs, argue the United States,
West Germany, and the United Kingdom, easing pressure to increase international
liquidity with official funds.
LDCs, however, may try to exploit differences of opinion existing among
individual industrial countries to garner international support for monetary reform.
France and Italy, in particular, have supported the concept of target zones. The October
meeting is expected to only have a brief discussion of the G-10 and G-24 reportq- with
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Mexico
President de la Madrid is demonstrating his commitment to austerity by recent
deficit-reducing moves, realignment of his economic policy-making team, and cuts
embodied in the 1986 budget. On the basis of these initiatives, the President appears
ready to sacrifice short-term popularity to accomplish long-term economic adjustment.
His mettle will be tested by the need to balance the requirement for continued austerity 25X1
with competing demands, particularly from business and labor. In addition, de la Madrid
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is facing increasing pressure to find alternate solutions to Mexico's current debt
arrangements.
e budget for next year calls for further cuts in
spending and manpower, as well as reductions in politically sensitive food, gasoline, and
transportation subsidies. The government realizes that future economic growth,
however, depends on the availability of new loans from abroad. The economic program
for 1986, for example, assumes a $3 billion increase in net foreign borrowing. To secure
these funds, Mexican officials almost certainly will be pushed to agree to another IMF-
supported program. They hope the latest austerity measures and cuts outlined in next
year's budget will impress the Fund and foreign bankers. Officials also will continue to
lobby Washington to press the IMF and international bankers for more concessions.
President Sarney's naming of Dilson Funaro to replace Finance Minister Dornelles
probably will prove popular at home, but is likely to heighten difficulties with creditors
abroad. The US Embassy maintains that the move makes it clear that the Sarney
administration intends to stress its commitments to economic growth and social spending
and to soft-pedal orthodox inflation-fighting policies. In a conversation with the US
Ambassador, Brazil's new Finance Minister said he believes that negotiations with the
IMF and creditor banks will be difficult, and that a number of contentious issues must be
resolved. Funaro has indicated that in future
negotiations with the Fund and the banks, Brazil will try to establish a fixed level of
interest and debt amortization to be paid each year so that the remainder of its
surplus can be used to support higher domestic economic growth.
Argentina
Favorable economic trends continue to buoy the Alfonsin government and
reinforce its determination to maintain austerity measures. Last month, inflation fell
further to 3.1 percent, Argentina inked its $4.2 billion bank loan package, and a major
union protest strike met with only modest success. The US Embassy reports some
backsliding on the financial reforms introduced this spring, however, causing a
resurgence of the intracorporate lending market and reduced Central Bank control of the
money supply. Meanwhile, the Central Bank is trying to boost the earnings of the ailing
banking system by selling a new series of high interest rate bonds to commercial banks
that will place a greater burden on the public sector deficit.
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REGIONAL SITUATIONS
Latin America
Elsewhere in Latin America, Uruguay reached an agreement with its bank advisory
committee on a multiyear rescheduling, Panama probably will not soon receive the
structural adjustment loan it had expected, and Bolivia announced an austerity program
Uruguay
Uruguay reached an agreement in principle with its bank advisory committee on 6
September, providin for a multiyear reschedulin of its ternal debt and $150 million in
new funds. the banks will provide nearly
two-thirds o e o a in the form of trade credits and World Bank co-fin
remainder will come from government or government-financed sources.
with the financing package arranged
,
Uruguay's letter of intent will be approved at the IMF Board meeting of 27 September.
The package's outline remains to be filled in: repayment terms, interest rates, payment
schedules, and the World Bank's guarantee percentage have not yet been determined. We
estimate that the financing package will cover Uruguay's financing gap through mid-
1986, but Montevideo will need to keep a .-tight lid on imports to remain current on its
debt obligations.
Panama
Panama probably will not receive a $60 million World Bank structural adjustment
loan (SAL) this year because of insufficient progress on required labor and industrial
reforms, according to US Embassy reporting. Drawings on Panama's $60 million
commercial bank new money facility are. contingent upon the -SAL. Without
disbursements from these two loans, Panama in turn will be hard pressed to comply with
financial targets required for drawing on its $88 million IMF standby arrangement.
Panama likely will try to obtain disbursements from the commercial banks even without
the SAL, and probably will seek a revision of the standby arrangement from the Fund. If
the intricate financial program unravels, however, Panama will face further cuts in
imports, a deepening recession, and higher unemployment. In the meantime, President
Barletta is certain to press his appeal to the US for emergency aid to ward off a crisis.
His failure to secure the necessary funds-either through reforms or aid-will make him
more vulnerable to removal by the military, which looked to him to bring the economy
Bolivia
On 29 August, President Paz Estenssoro announced a rigorous austerity program in
a major effort to break Bolivia's hyperinflation and shore up its balance of payments.
The US Embassy reports that the IMF has reacted favorably to the reforms. However,
the IMF believes that La Paz is not capable of implementing these reforms. Key
technical personnel have not been appointed, and the impact of the measures has not
been quantified. The major components of the program are:
- A four-month freeze on public-sector wages and the curtailment of subsidies to
unprofitable state enterprises.
- A 93-percent devaluation of the peso.
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A removal of price controls.
-- The decontrol of interest rates and reestablishment of dollar-denominated bank
accounts to attract investment capital to the banking system.
There are several shortcomings, however, including the absence of any currency
reform or new legislation to prevent the government from overprinting money.
Moreover, the US Embassy estimates that it will take at least a year of strict
implementation before private businesses are in sound enough financial condition to
absorb significant numbers of former public-sector employees.
Eastern Europe
In Eastern Europe, Yugoslavia formally accepted the terms of its commercial bank
rescheduling, Poland's Paris Club meeting was abruptly cancelled due to unsettled
arrears, and Hungary is seeking a $400 million loan.
Yugoslavia
Yugoslavia formally accepted on 9 September the terms proposed by commercial
bank creditors to reschedule $3.5 billion in debt falling due in 1985-88. The banks agreed
to reschedule 100 percent of the debt over 12 years with a five-and-a-half-year grace
period, at an interest rate of 1.125 percentage pionts over LIBOR. The spread in interest
rates for 1983 and 1984 reschedulings are to be reduced by one-quarter and one-eighth
percentage points, respectively. According to press reporting, the proposal also calls for
early repayment of $261 million from the $600 million loan package approved in 1983. It
is expected to take about two months to obtain the required approval of 95 percent of
the banks, which participated in the 1983 and _1984 reschedulings and 100 percent of the
banks participating in the 1985-88 reschedulings, according to a State Department
source. A date will then be set for consolidating the 1985 and 1986 maturities into one
repayment schedule. Because of progress toward final agreement, the IMF allowed
Yugoslavia in late August to draw the second $80 million tranche of its 1985-86 standby
Belgrade undoubtedly views the agreement as a victory. After months of
protracted negotiations, the banks made several concessions, including lowering interest
rates and renegotiating the 1983 and 1984 agreements. Belgrade probably believes the
agreement will improve its chances of securing a multiyear rescheduling from official
creditors early next year. But Belgrade's hard dealing with the banks may make bankers
less willing to normalize commercial relations and extend new credits.
Poland
Talks scheduled for 16 September between Poland and the Paris Club of Western
official creditors were called off abruptly, because Warsaw did not make full payment of
arrears due at the end of August, a precondition to negotiating terms for 1985
maturities. Warsaw was to pay $200 million of overdue interest from the 1981
rescheduling. According to the US Embassy, Polish negotiator Karcz said the arrears
were too great to be paid in one month's time, but that payment would be made over the
next few weeks. No further date has been set for a Paris Club meeting to discuss
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Warsaw's request for $600-800 million in new credits from Western governments
seems to have fallen on deaf ears; most creditors continue to wait for payments of all
amounts due on the 1981 and 1982-84 rescheduling agreements and the signature of a
1985 accord before committing any new loans. Progress on bilateral talks-begun with
all OECD creditors except the US-has been slow because of Polans'd failure to pay
arrears and disagreement over interest rates, according to the US Embassy in Warsaw.
So far, only the Austrians have pledged $40 million, less than Poland had requested. The
Austrians claim that only half of the credit is actually a new commitment. The new
credits-guaranteed by the Austrian Kontrollbank at an 8.5 percent interest rate-are to
support export of Austrian industrial equipment to Poland. The other half is an extension
of ongoing official trade financing for grain sales to Poland.
In a press interview, Karcz reiterated that without new funds, Poland could not
meet its 1985 repayment commitments. During January-July, hard currency exports did
not reach planned levels, and Warsaw does not expect to meet its target for a $1.5 billion
trade surplus this year. Even with the rescheduling of 1982-84 debt and assuming the
rescheduling of all 1985 maturities, we estimate that Warsaw faces a financial gap of
$500-700 million. Poland's payment schedule will be particularly difficult over the next
few months, when Warsaw must cover large payments on its Paris Club reschedulings as
well as the first repayment of principal under the 1981 rescheduling agreement with the
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Philippines
An IMF team spent two weeks in August reviewing the Philippines' adjustment
the size of the Philippines' 1985 budget de icit now estimated to be well above targeted
levels. Philippine officials attribute the overrun to a shortfall in trade revenues,
repayment of officially guaranteed loans of troubled domestic banks and unanticipated
financing gaps of various government agencies.
According to US Embassy reporting, it appears that the Philippine plan for
reforming the coconut and sugar sectors may not satisfy the IMF as they do not open up
the industries to competition and actually protect the status quo. However, the World
Bank-which is to make the technical determination on the adequacy of the policy
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reforms-appears to be prepared to accept Manila's proposed measures according State Department reporting.
The plan calls for
merging the PNB and the Development Bank of the Philippines into a much smaller unit
dealing principally with agricultural financing. The IMF Executive Board will conduct an
Article IV review of Philippines on 27 September. Manila had hoped to reach agreement
with the Fund on a revised letter of intent to allow a review its standby performance at
the same meeting. Information available at this time, indicates that negotiations on the
revised letter of intent will delay a formal review of the program until November, thus
postponing the next scheduled tranche disbursement.
Africa/Middle East
In South Africa, bankers seem resigned to reschedule short-term debt, and
Morocco received a $31.8 million standby arrangement.
South Africa
Commercial banks seem resigned to negotiating a rescheduling of South Africa's
short-term debt, but Pretoria's four-month moratorium on principal repayments is likely
to be extended. Pretoria and creditor
moving toward rescheduling negotiations.
South
Africa's promise maintain promise to full interest payments probably inclined bankers to be
patient because their banks can avert loan loss provisions as long as interest payments
continue. Bankers may also find reassurance in Reserve Bank Governor de Kock's
continued assertions that South Africa will not ask for new money at rescheduling
negotiations. Bankers are leery of appearing to help South Africa, however, and probably
Morocco
According to press reports, the IMF approved an 18 month $200 million standby
arrangement and $115 million in compensatory financing for Morocco on 13 September.
According to IMF documents, the program-originally requested in April-is designed to
strengthen government revenues, and increase the price of subsidized products and
certain public tariffs. Rabat increased prices in early September for most basic
foodstuffs by 5 to 10 percent.
Morocco's Paris Club creditors met and rescheduled its debt on 17 September.
According to US Embassy reporting, Morocco had hoped to get 90 percent of their
official debt rescheduled-versus 85 percent in 1983-84-and to get more generous
terms. According to the same Embassy report, Morocco's London Club steering
committee informed commercial bankers that formal agreement had been reached on the
documentation package with the final signing expected in early October.
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FINA?CIAL BRIEFS
o Financial experts of the Cartagena Group met 11-13 September in
Montevideo... meeting held under great secrecy-recommends further dialogue
with EC and will submit technical solutions to Latin debt problem at the
October Ministerial meeting. 25X1
o Subscriptions to Chile's loan syndication reached 99 percent of the _
requested $1.085 billion... almost 20 percent of banks still holding 25X1
out...we believe package will be concluded in October and first
disbursement will be made by November. 25X1
o Cblarbia's $1 billion new rmney package delayed...60 of 280 banks reluctant
to subscribe to syndication... sane oppose recapitalization of Banco de
Colombia, while other reluctant to increase their exposure. 25X1
Europe/USSR
o Bulgaria is arranging its second loan syndication in three
months... Japanese-led loan is for $100 million for eight years at three-
eights percentage point over LIBCR...observers believe that lenders'
enthusiasm will increase the total to Wore than $200 million.
o Premier Ozal disclosed Turkey will not seek an IMF agreement... declaration
is in contrast to other recent official statements... consultations with
Fund continue... bankers appear not to be concerned.
o Pressures to restrict Japan's net long-term outflow of funds being stepped
up...net long-term outflow topped $37 billion for first seven months of
1985, versus $50 billion in 1984...Ministry of Finance has expressed
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Africa/Middle East
o Iraq likely to seek $500 million club loan..
...first medium25XP activity
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o I1VF has delayed decision on disciplinary action against Liberia until late
November... issue is sane $39 million arrears to Fund...current standby
arrangement remains suspended. 25X1
o Nigeria to send delegation to Western nations to discuss econanic
assistance and cooperation with IIVF...Babangida to hold national debate on
I1VF issue to test support-Western receptiveness likely to i fluence
regime's willingness to ifplenent reforms. F- nI 25X1
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SUBJECT: International Financial Situation Report #44
Copy No. 1 Sec. James Baker
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5 James E. Anmenman
6 Charles Schotta
7 James A. Griffin
8 Doug Mulholland
9 Manuel Johnson
10 Robert M. Kinmit
1.1 David Mulford
2 R. G. Darman
3 James W. Conrow
4 Robert Cornell
13 Kenneth Dam
14 Morton I. Abramowitz
12 Sec. George Shultz State
Michael Armacost
Ralph Lindstran
W. Allen Wallis
Elliot Abrams
Richard Burt
Elinor Constable
Chester Crocker
Paul Wolfowitz
Richard Murphy
J.C. Kornblum
Byron Jackson
Canneree
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S. Bruce Smart
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NSA 1
David Wigg
NSC 1
Randall Fort
PFIAB 1
Leo Cherne
David Tarbell
PFIAB
OSD (ISA) 1
DCI
ExDir
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AFDI
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Ch/PES/IDI
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NIO Economics
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Ch/ff0/EPTIS
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.9 September 1985
Ch/FDX/NE
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IAD/OO x/PEL
D/ALA
Ch/ALA/SAD/R
D/OEA
D/EUPA
Ch/EURA/EE/EW
D/SOYA
D/NESA
ID/OGI , D/OGI
Ch/OGI/SRD
Ch/OGI/ISID
Ch/OGI/7NAD
Ch/OGI /ECD
Ch/OGI/ECD/FI
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- Edwin Truman, Federal Reserve Board
- Henry Wallich, Federal Reserve Boa""
- David Roberts, Federal Reserve, 25X1
New York
- Leo Cherne, PFIAB, New York
- E. Gerald Corrigan, President,
Federal Reserve Bank, New York
- Alan Greenspan,
Townsend, Greenspan and Co.
- Doug Mulholland, Treasury
- Richard Combs, State
- Lauralee Peters, State
- Peter W. Rodman, State
- Byron Jackson, Camierce
- Warren E. Farb, Camieree
-F ~ DIA
- eve array,
- William Isaac, Federal Deposit
Insurance Corporation
- Beryl Sprinkel, CEA
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- Ch/OGI/GD
- Ch/ECD
Ch/ECD/FI
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Treasury
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