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December 19, 2016
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January 20, 2006
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September 29, 1982
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SECRET Approved For Release 2006/02/06 : CIA-RDP84B00049R000300630006-9 WASHINGTON, D.C. 2050 DDI 5 #7891-82 29 September 1982 National Intelligence Council MEMORANDUM FOR: Acting Director of Central Intelligence SUBJECT: Mexico, Brazil, Argentina--The International Financial Crisis 1. The financial crises in Mexico and Argentina have transformed the international debt problem from one which could be treated as reflecting deficiencies of policies and management in a few countries to one which involves the health of the entire international financial system and the performance of the world economy. Bankers are curtailing loans to Brazil not because their assessment of Brazil's economic policies and political stability have turned negative, but rather because they are extremely nervous about a high degree of exposure in the present' international economic and political environment. This nervousness has reached the point of constituting a crisis of confidence in international lending, which is drastically curtailing the flow of capital to Less Developed Countries. At a minimum the LDCs will have to make strenuous economic adjustments. At worst these required adjustments may be so severe as to disrupt economic activity, spur a political backlash against Western governments and financial institutions, and, in a few countries, possibly bring about major changes in domestic and foreign policy orientation. 2. Mexico, Brazil and Argentina are the three largest LDC debtors, with over $110 billion of debt, mostly to banks. Argentina is seriously in arrears on its debt service payments. Its government is too weak to get the economy in shape and all political risks are in the down side from the point of view of international lenders. Argentina will probably have to reschedule its debt soon. 3. The critical question in Mexico is whether and how soon a political consensus can be developed in support of drastic, painful domestic economic adjustments. Far from facilitating this process, President Lopez Portillo so for has played political games that have further undermined the confidence of the financial community. Rumors abound that he will make some dramatic statements at the UN on Friday condemning the bankers, announcing default, and urging others to do likewise. Although some rhetoric can be expected, it would not make much sense for LP to do this at the some time that his central bank President is trying to negotiate with the IMF. Even so, the situation is fraught with risks, including the risk of serious popular reactions in Mexico, and some splits in the PRI. SECRET Approved For Release 2006/02/06 : CIA-RDP84B00049R000300630006-9 Approved For Release 2006/02/06 : CIA-RDP84B00049R000300630006-9 SECRET 4. Brazil is now feeling the impact of Mexico and Argentina, in spite of having followed very cautious economic policies. Brazil may have to go to the IMF, or further curtail imports, or reschedule its obligations. 5. The international financial problem could get a lot worse and there is some risk either that major countries will have to declare a debt moratorium, or that their economies will be severely disrupted by lack of imports. The problem involves the relationships between governments, central banks, commercial banks, and borrowing countries. It is unlikely that any single policy solution will work. Rather, a whole range of policies will have to be considered, including: o domestic monetary policy and its international linkages; o regulation and support of banks; o assistance to the developing countries themselves. 6. The stakes are high. Although a banking collapse is highly unlikely because central banks would keep major commercial banks afloat, a contraction of world trade together with a lapse into bilateralism is a serious possibility. 7. Attached is a good review of the problem, hot-off-the-press, by the best financial analysis group in the country--the Morgan Guaranty. Attachment, As stated SECRET Approved For Release 2006/02/06 : CIA-RDP84B00049R000300630006-9 Approved For Release 2006/02/06 : CIA-RDP84B00049R000300630006-9 International lending: implications of a slowdown new lending amounted to $32 billion 'at an annual rate In the third quar- ter and only a $15 billion rate in Sep- tember alone, down from a $50 bil- lion rate in the first half of this year. Provisional data for the past month indicate that there have been 'very few new syndicated Eurocurrency loans to developing countries, es- pecially Latin American borrowers. With the exception of just a few credits for Yugoslavia, Hungary, and the Soviet Union, Eastern European borrowers have been shut out of Eurocurrency credit markets this year. The Immediate reason for the re- cent deceleration In bank lending to the developing countries is that two of the most prominent borrow- ers from commercial banks, Mexico and Argentina, have encountered difficulties In meeting their pay- ments of principal and interest on part of their external debts. To- gether, the two countries account for almost one-fourth of bank claims on the developing countries. Table 2 shows that U.S. bank claims on Argentina and Mexico represent about 35% of total bank claims on these countries, or the same per- centage as on all developing coun- tries. Mexico, with new medium- term Eurocredits of over $7 billion In the first half of 1982, alone ac- counted for over a quarter of the After more than a decade of very rapid expansion, international lend- ing, especially to developing coun- tries, Is slowing sharply. Compre- hensive data covering all banks in the BIS-reporting area Indicate vir- tually no increase in claims on de- veloping countries In the first quar- ter of this year. Such claims by U.S. banks and their foreign branches actually declined by $11/2 billion to $119 billion in the first quarter of 1982. Those of German banks and their foreign branches (but exclud- ing their foreign subsidiaries) fell by more than $1 billion to $23 billion in the first quarter. Last year, by com- parison, net new lending by the BIS-reporting banks to the non- OPEC LDCs increased by 20%, and that by U.S. banks. increased by 24%. In previous years, expansion of bank lending to developing coun- tries was even more rapid (see chart). Data on the volume of gross new medium-term Eurocurrency bank credits publicized In the past few months point to a further scaling back of lending to the developing countries (see Table 1). Such gross Morgan Guaranty Trust Company / Page 1 Approved For Release 2006/02/06 : CIA-RDP84B00049R000300630006-9 Approved For Release 2006/02/06 : CIA-RDP84B00049R000300630006-9 Table I Gross new Eurocurrency credits publicized medium-term bank credits billions of dollars, at annual rates Developing countries 45.24 50.48 31.82 Non-OPEC LDCs 33.37 37.96 15.82 Brazil 5.75 5.91 4.51 Korea 2.82 1.58 3.00 Chile 2.20 .90 1.76 Taiwan 0.93 1.02 Peru 1.41 1.68 .76 Philippines 1.28 .68 .75 Max/co 7.53 14.59 .38 Colombia 1.01 '.17 .30 Malaysia 1.73 3.59 .10 Thailand 0.69 .71 Argentina 2.53 .93 OPEC countries 11.87 12.53 15.97 Venezuela 7.56 7.89 7.56 Nigeria 1.80 .93 2.83 Ecuador 0.93 1.23 .80 Indonesia 0.73 .74 .24 Eastern Europe 1.36 .75 1.07 Hungary .55 1.04 East Germany .47 _03 Romania .22 - - Soviet Union .03 .75 - developing-country total In the first half of this year, but only 1 % of this total in the third quarter. In view of the importance of Mexico and Ar- gentina to the entire banking com- 1st half 3rd quarter munity, their debt financing prob- lems have had a major impact on lending to other countries in the region. Even before the latest round of developing-country debt problems, It was widely recognized within the banking community that a slowdown in the pace of bank lending to these countries was Inevitable. Bank lend- Ing to them accelerated sharply af- ter the first oil shock, and it has continued to grow very rapidly in recent years. Over the past three years, for example, BIS-reporting banks' claims on the developing countries grew at a 21% average annual rate, and those of U.S. banks rose at a 17% rate. These rates of growth for loans far outstripped aging close to 10% per annum since' the mid-1970s (see chart). Moreover, the rates of increase in loans to several countries - par- ticularly Mexico and Argentina - were considerably above the aver- age pace of lending and, thereby, resulted in increasing concentra- tions of bank credit to certain coun- tries (see Table 2). Regulatory authorities in a num- ber of countries also have taken or are planning steps that directly or Indirectly could slow foreign lend- ing. In addition to Imposing capital- asset ratio requirements on a con- solidated balance sheet basis, some countries have set formal or infor- mal guidelines on foreign country lending in response to concerns about concentrations of country credit risk. Supervisory authorities in some European countries have contacted banks on an informal basis to limit lending to individual countries. The Japanese Ministry of those of bank capital, which for the largest U.S. banks have been aver- Finance, which earlier set limits on Japanese banks' medium- and long- term loans to foreign countries in relation to capital, is reported to be considering an extension of the limits to cover short-term loans as well. This action could lead to a sig- nificant slowing of Japanese banks' international lending, which has been very rapid in the past few years,'and in some instances to a contraction of loans outstanding to certain countries. Such a slowing could contribute to Increases In lending spreads. Another factor contributing to the slowdown in international lending Is the negative impact of current in- ternational and domestic financial strains on the functioning of the Eurocurrency market. In particular, there are signs of a contraction of the Interbank market. In a world environment of Increased risks, the maintenance of adequate capital in relation to assets is especially im- portant, and banks have been tak- ing steps to moderate the growth of their total assets. One way Is by limiting interbank lines. Interbank deposits, which account for more than half of gross Eurocurrency lia- bilities, are a major source of fund- ing for many Eurobanks and an im- portant component of their liquidity. With banks reviewing and, in some Instances, reducing their Internal guidance lines to certain other banks, the scope for Interbank de- positing Is being narrowed. In ad- dition, banks may shorten the ma- turity of their deposits with certain other banks, a move that could pose problems for attempts by the latter to match the interest rates on their liabilities to those on their as- sets. The resultant contraction of the interbank market is likely to cause difficulties for some banks in funding their Euroloans, and may lead some to withdraw from, or at least scale back their participation in, the syndicated Euroloan market. Pigs 2 / World FIndkpiprQWed For R%10,I & 2006/02/06: CIA-RDP84B00049R000300630006-9 Approved For Release 2006/02/06 : CIA-RDP84B00049R000300630006-9 Table 2 BIS-reporting banks' claims on selected countries % change' Total end-1981 U.S. banks' % share of end-1981 total 1979 1980 1981 (S billions) All 9 large Developing countries" 25 20 17 331.3 35 23 Non-OPEC LDCs'? 32 24 20 258.5 36 23 Mexico 33 38 34 56.9 38 20 Brazil 17 18 16 52.7 32 20 Argentina 91 49 25 24.8 34 21 Korea 59 39 19 19.9 45 28 Chile 87 51 43 10.5 55 31 Philippines 47 27 9 10.2 53 38 Taiwan 7 -21 22 6.6 75 47 Colombia 62 30 17 5.4 51 36 Thailand 31 9 27 5.1 32 21 Malaysia 18 19 67 4.4 22 19 Egypt 22 49 35 4.4 27 20 Peru 5 8 9 4.4 45 24 Turkey 4 11 -3 4.2 34 21 OPEC countries 9 8 5 72.8 32 22 Venezuela 48 17 8 28.2 40 27 Algeria 18 -0 -8 8.4 1e 11 Indonesia -0 8 -16 7.2 33 27 Nigeria - 52 30 34 6.0 19 15 Ecuador 19 24 16 4.5 47 27 Eastern Europe 20 9 ' 2 71.5 11 7 Soviet Union - 0 T 3 21 16.3 3 2 Poland 27 2 --6 15.3 13 8 East Germany 26 16 8 10.7 9 6 Yugoslavia 34 28 3 10.7 25 15 Hungary 15 1 -4 7.7 ' ? 15 9 Romania 52 31 -12 ?5.1 7 5 'Includes effects of exchange rate changes. "Excludes countries that are offsli re banking centers. Source: Bank for International Settlements (BIS), The Maturity Distribution of International Bank Lending; and Federal Financial Institutions Examination Council, Country Exposure Lending Survey. Table 3 Current account balance % of exports of goods and services, annual averages Latin America Argentina -1 -14 Brazil -35 -75 Chile -21 -19 Colombia -21 -11 Ecuador -22 -7 Mexico -29 -54 Peru --3 -83 Venezuela +4 +36 Asia Indonesia -19 -4 Korea -23 -35 Malaysia -3 -11 Philippines +6 -17 Taiwan +10 -13 Thailand -9 -11 +19 -25 -48 -57 -19 -28 +9 -1 -22 -23 -31 -28 -37 --9 -27 +13 -8 +10 -4 -22 +5 +2 -25 -25 +8 -2 -21 -27 - 49 -63 --46 -42 -28 -33 +4 -22 -12 -27 -28 +5 -19 Their aggregate current account ..-deficit remains very large both In ':absolute terms and in relation to = '= "their exports of goods and services, and a number of countries now face larger deficits in relation to their exports of goods and services than they did after the first oil crisis (see -Table 3). In addition, several oil- exporting countries such as Mexico, Indonesia, and Nigeria have very large current account deficits. The large payments imbalances of the non-OPEC LDCs have per- With fewer banks able and willing to participate in new international loans, and with less bank capital to support such lending, International lending is bound to slow down fur- ther. Impact of the global environment on thb developing countries The economic and financial prob- lems confronting a number of de- veloping countries today are, to an important extent, a result of an ad- verse global environment. Today's environment is far less conducive to developing-country economic growth and to maintenance of their debt servicing capacity than that which existed until a few years ago. In 1979-80, -the non-OPEC LDCs were again confronted with large Increases In their oil-import bills owing to a sharp rise in world oil prices. Balance-of-payments adjust- ment by the non-OPEC LDCs after the second oil shock, however, has turned out to be far more difficult than that after the first oil shock. This is' best demonstrated by the fact that even though oil prices have weakened somewhat from their peak in early 1981 and the OPEC surplus has virtually disappeared (representing a swing of more than $100 billion in two years), the pay- ments positions of the non-OPEC LDCs have benefited very little. Approved For Release 2006/02/06 : CIA-RDP84B00049R000300630006-9 Morgan Guaranty Trust Company / Page 3 Approved For Release 2006/02/06 : CIA-RDP84B00049R000300630006-9 Table 4 Real GDP growth annual averages, In percent 1970-73 1974-75 Latin America Argentina 2.8 2.8 Brazil 11.7 7.6 Chile Colombia 6.8 4.9 Ecuador 12.9 6.0 Mexico 7.0 5.9 Peru 6.1 5.1 Venezuela 5.3 6.0 Asia Indonesia 8.6 6.3 Korea 9.9 7.8 Malaysia 8.7 4.6 Philippines 6.2 6.1 Taiwan 11.8 3.8 Thailand 8.3 6.3 1976-78 1979-80- 1981-82 0.5 4.3 -6.0 6.6 7.3 -1.7 6.1 4.5 -`.u 3.0 7.4 ~ 4.9 2.9 5.3 8.7 4.6 0.0 3.5 2.3 6.1 -0.2 0.0 7.5 7.5 6.3 - ? 12.3 0.1 6.0 8.7 6.6 5.2 6.4 5.9 - 3.2 12.4 - 7.3 4.7 13.0 5.9 6.3 more restrictive. Economic growth in the industrial world averaged only about 1% in 1980-81 and will be close to zero this year. Moreover, prospects for a quick turnaround of economic conditions in the Indus. trial countries are not good. De- anitn mn?nfinn ,,.. e.....t..... .... -J a disinflationary environment, gov- emments have refrained from adopt, ing stimulative economic policies implemented in the past. Rather, the broad th t f s economic po ru o l y cies - particularly monetary poll- cies and more recently fiscal poli- dies as well - continues to be di- rected at fighting inflation and curb Ing inflationary expectations to lay the groundwork fora sustained eco- nomic recovery. Even though hopes sisted despite a pronounced con-, that disinflation could be achieved traction of their economic growth, quickly and painlessly have faded which Is estimated to have slipped .away, the commitment to a new era to about a 2% rate last year from a of much lower inflation, If anything, trend rate of.close to 6%. There has become more widespread. Thus, was little or no growth for Latin countries that pursued more ex- America as a whole last year, and pensionary policies ?-- most notably there may be a decline this year(see France in 1981 and early 1982 - 'Fable 4). While the Asian develop- have by necessity begun to shift Ind countries have managed about a their ?poljcies in the direction of 51/z% rate of growth in the last cou- countries with. relatively low rates of .2 pie of years, this nonetheless rep- -Inflation and`strong payments posi- resents a considerable slowdown tions.,..,. A~,d for the region. By contrast, in 1974- ,The disinflatfonary environment In 75 the non-OPEC LDCs were able the Industrial countries, In turn, to maintain a rate of economic has affected the capacity, of the growth close to 5% per annum, or developing countries to service only slightly below the trend rate in external debt. The growth, of non- the late 1960s and early 1970s.. ; . -OPEC LDCs' export earnings, for LDC balance-of-payments adjust- example, fell to less than a 5% ment efforts since the secondwit rate in 1981 and is negligible this shock have been thwarted to &