LETTER TO HONORABLE WILLIAM J. CASEY FROM BILL BRADLEY RE VULNERABILITY OF WORLD FINANCIAL SYSTEM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83M00914R001000030058-9
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 4
• Document Creation Date: December 19, 2016
• Document Release Date: February 20, 2007
• Sequence Number: 58
• Publication Date: August 19, 1982
• Content Type: LETTER

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Please prepare acknowledgment for
ture,per-my:conversation with
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 MILL BRADLEY
NEW JERSEY,
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'Z Cnifei ,,fates Zonate
August 19, 1982
Honorable William J. Casey
Director of Central Intelligence
Washington, D.C. 20505
Dear Mr. Casey:
COMMIT'rEE3:
FINANCE
ENERGY AND
NATURAL RESOURCES
SPECIAL COMMITTEE ON
AGING
I FtAr ~c,?s. F. r~!?tt~ 4~
For more than a year, with Poland on the brink of financial
default, the Western world has become sharply aware of the potential
risks posed by our lending to members of the Soviet bloc. But
the debate surrounding East-West economic relations has eclipsed
an equally important message of the Polish debt crisis -- the
world financial system may be vulnerable to the possible reper-
cussions of a sizeable sovereign default.
The prospect of losing even a part of the estimated $27 billion
in Western assets held as loans to Poland, should spur the govern-
ments of the major financial powers to plan collectively for
contingencies. A contingency program should spell out possible
scenarios following a Polish default and trace, step-by-step, how
the system can be expected to cope with each possible danger.
Unfortunately, I fear that such an exercise would expose several
points of vulnerability in the world financial system.
Here are some of the factors that spur my concern:
the huge international debt incurred by Eastern European
and Third World countries which are in precarious economic
health;
the shaky financial conditions of many major international
corporations;
3) the chain reactions and systemic problems which will
develop if one or more of these shaky players should start
to fall, including breaks in bank lending lines; a race
to call in loans; withdrawal of deposits from banks
perceived as risky; and a rush of new deposits to "safe"
currencies;
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Honorable William J. Casey - Page 2
4) a failure to define lines of authority among central
banks for crises in overseas affiliates and consortia
banks, and to change domestic laws which would
inhibit effective action in a liquidity or currency
crisis;
5) a lack of a mechanism to handle severe, system-wide
foreign currency shortages.-.
My impression is that during a crisis spurred by these factors
several gaps in the-system could develop. At best, there is
uncertainty about how existing institutions would perform to
close them. A contingency program to increase certainty could
play an important role.
If my concerns are not warranted, I hope you will detail
for me how we and our major allies would effectively protect
Western banking systems, and hence economies, in a crisis. If no
such plans exist, or if you lack confidence in them, then I urge
you to undertake a study of this problem.
Assuming that adequate protections do not currently exist, I
would like to offer a few steps that might be considered. First,
we could create a multilateral fund from which central banks
could borrow, under agreed conditions, the foreign exchange they
need to cover endangered banks. The fund would need authority to
borrow from the central bank of the country whose foreign exchange
was in high demand in order to relend to the central bank in need.
Of course, the fund would have to set rigorous conditions to
deter anything but emergency use. It appears to me that the
International Monetary Fund would be the appropriate agency to
administer this fund, but there are other possible candidates
such as the Bank for International Settlements in Geneva. In
connection with this proposal, I would like to know whether the
lending of dollars in any amount by the Federal Reserve to the
IMF or BIS for this purpose would require Congressional
authorization.
We might also consider creating a financial contingency
program which could include (1) a formal agreement clarifying and
reaffirming the 1974 central bankers Basle declaration on the
allocation of lender of last resort responsibilities; (2) pre-
parations to stabilize a vulnerable currency; and (3) preparations
to coordinate the operations of the lender of last resort facilities
of major industrialized nations.
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Honorable William J. Casey - Page 3
These suggestions are at best partial solutions to difficult
questions. I recognize that responses to the questions raised
are not easily prepared. However, I know you appreciate that the
matter is of great importance.
While I do not intend-to create undue public alarm. The
desire to assure public confidence in a vulnerable financial
system, will prove a"shabby excuse if an uncontrollable crisis
should develop.' We must guarantee stability against any reasonable
doubt. Equally important, allied threats to cut off credits to
Poland would weigh more heavily with Poland's generals (and Soviet
Politburo members) if they knew that our economies were braced
against the potential repercussions of a default. Similarly,.
a contingency program is a prerequisite to a credible credit
sanction policy. Without it, our hands are tied.by our own
economic vulnerability.
I offer these comments and questions in a spirit of cooper-
ation and in the belief that our country will be better off if
we have a reliable framework for minimizing the vulnerability of
the U.S. economy and U.S. security interests to the repercussions
of large sovereign defaults. Because of the urgency of this
problem, I would appreciate a timely response, at a minimum
informing me of the progress being made in preparing answers and,
I hope, formulating a contingency program.
Best wishes,
Bill Bradley
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