INTERNATIONAL FINANCE: THE IMF QUOTA ISSUE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R000600140001-2
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 10
• Document Creation Date: December 22, 2016
• Document Release Date: June 16, 2010
• Sequence Number: 1
• Publication Date: February 10, 1983
• Content Type: MEMO

Sanitized Copy Approved for Release 2010/06/16: CIA-RDP85T00287R000600140001-2/ 4/
Central Intelligence Agency
MEMORANDUM FOR: The Honorable Beryl W. Sprinkel
Under Secretary for Monetary Affairs
Department of the Treasury
Proposed IMF Quota Increase
1. Attached is the analysis you requested on our view of the impact of a failure
of the IMF to receive a proposed quota increase. The analysis is necessarily
impressionistic; the dollar amounts pale in comparison to borrowers' debt burdens and the
depth of their financial problems, but the quotas are key to getting commercial banks to
share the cost of debtors' economic adjustment.
Attachment:
IMF Quota Increases: A Key to
Financial Stability GI M 83-10034,
February 1983,
25X1
25X1
25X1
Sanitized Copy Approved for Release 2010/06/16: CIA-RDP85T00287R000600140001-2
 Sanitized Copy Approved for Release 2010/06/16: CIA-RDP85T00287R000600140001-2
CONFIDENTIAL
OGI /EcD/ IFE::::::::
Distribution:
Orig - Addressee
(10Feb83)
1 - D.Mulholland, Treasury
1 - SA/LOCI
1 - ExSec
1 - ExDir
1 - ExReg
1 - Ch/PES/LDI
1-I:DI
1 - ALDI
1 - NIO/Economics
1 - DD/E/OGI, D/OGI
1 - Ch/ECD
2 - Ch/ECD/IF
8 - OGI /PS
GI M 83-10034
February 1983
Sanitized Copy Approved for Release 2010/06/16: CIA-RDP85T00287R000600140001-2
 Sanitized Copy Approved for Release 2010/06/16: CIA-RDP85T00287R000600140001-2
CONFIDENTIAL
Central Intelligence Agency
INTERNATIONAL FINANCE: THE IMF QUOTA ISSUE
Summary
The failure of the IMF to increase its lending capacity threatens the smooth
resolution of international financial problems and the' recovery of industrial economies.
The IMF has been playing an untraditionally strong role in forcing cooperation between
commercial banks, debtor and creditor governments, and itself. The Fund hopes this
coordinated approach will prevent a cutoff in funds needed to maintain economic and
political stability in key debtor countries and assure equitable repaym ant of existing
debt. Should the IMF lack the funds necessary to play the lead role in these negotiations,
we believe that:
o Western banks may pull back sharply from new lending to LDCs. A
sudden cutback - rather than a carefully engineered rationing - of
new commercial bank credit could cascade into even more serious
financing problems.
A cutoff in new lending would be detrimental to the US economy trying
to pull itself out of recession. With LDCs having to slash imports,
increasingly important markets for US and other industrial country
exports would be jeopardized, especially in Latin A m erica.
o The IMF would be severely handicapped in its primary role of
encouraging international economic stability based on the free market
principles espoused by the United States and its allies.
o Key advanced LDCs such as Brazil and Mexico, which are increasingly
integrated into our Western economic system, could swing their weight
toward radical and confrontational Third World schemes for global
economic reform.
This memorandum was prepared by I (Economics Division, Office of 25X1
Global Issues. Information available as of 9 February 1983 was used. Com m ents and
queries are welcome and may be addressed to the International Finance Branch,
Economics Division, Office of Global Issues 25X1
GI M 83-10034
February 198.1
Sanitized Copy Approved for Release 2010/06/16: CIA-RDP85T00287R000600140001-2
 Sanitized Copy Approved for Release 2010/06/16: CIA-RDP85T00287R000600140001-2
CON 1''llltN'VIAL
INTERNATIONAL FINANCE: THE IMF QUOTA ISSUEF___1 25X1
Background
If, as now envisaged, demands on IMF resources from troubled borrowers continue
to mount, the IMF could run out of funds this year. As of yearend 1982 the Fund had
some $30 billion available for new lending but it has commited or is about to commit
almost $25 billion through programs with Mexico, Brazil, Argentina, and other countries,
leaving a scant $5 billion to handle new requests. The IMF may choose not to maintain
such. ambitious programs by borrowing new funds. In any event it would quickly run into
statutory limits on its own borrowing, which cannot exceed 60 percent of the level of
quotas.
Quotas, or members' subscriptions, currently account for about two-thirds of the
IMF's resources; the remainder are borrowed. Quotas, which also represent the members'
voting strength in the organization, are reviewed at least once every five years and
revised if necessary. The eighth quota review, now underway, is considering boosting
members' subscriptions from about $65 billion to approximately $100 billion on the
assumption that increased resources will be necessary to meet members' needs for
balance of payments assistance through most of the 1980s. If approved, these additional
resources probably would become available to the IMF beginning in late 1983 or in 1984.
Currently the US quota, about-20 percent of the total, is valued at some $13.5 billion.
Demands on the IMF
The IMF has assisted a large number of countries that suffered from temporary
balance of payments problems. It. was able to meet the needs of as many as 60 countries
after the first oil shock because (a) the average needs of each country were relatively
small; (b) except for drawings in excess of $1 billion by Italy in 1974 and 1975 and by the
United Kingdom in 1976 and 1977, no large borrowers dominated; and (c) special facilities
financed outside the quota system met a large share of the borrowing needs.
Pressures to borrow from the IMF are now more severe. The wrenching structural
adjustments to global recession that nearly every country is experiencing have put an
unprecedented demand on the IMF for financial assistance. In 1982, 64 countries drew
nearly $10 billion from the Fund, with the pace of borrowing accelerating sharply in the
fourth quarter. Drawings in 1983 will be even greater as the Fund makes disbursements
to borrowers - notably Brazil, Mexico, and Argentina, who were negotiating IMF
programs at yearend.
Member Borrowings from the IMF
Year
Countries
Amount Average
Year Countries
Amount
Average
($ million) ($ million)
($ million)
($ million)
1970
41
1,510
37
1977
36
4,010
111
1971
34
1,900
56
1978
33,
4,680
142
1972
27
1,760
65
1979
42
2,380
57
1973
25
870
35
1980
49
4,880
100
1974
50
4,860
97
1981
59
8,270
140
1975
54
5,640
104
1982
64
9,660
151
1976
60
8,060
134
1
CONFIDENTIAL
Sanitized Copy Approved for Release 2010/06/16: CIA-RDP85T00287R000600140001-2
 Sanitized Copy Approved for Release 2010/06/16: CIA-RDP85T00287R000600140001-2
CONFIDENTIAL
******************************************************************************
*****************************************************************************
The Indebtedness of Developing Countries
Debt is an important means of generating growth and improved living standards
for countries just as it is for corporations. and individual citizens. Until the early 1970s,
the LDCs had only limited access to international capital markets and relied instead on
official aid to finance their development. During the 1970s, the source of financing
shifted sharply toward private foreign banks for several reasons.
o Progressive developing countries such as Brazil, Mexico, South Korea,
and Taiwan provided investment opportunities as their economies
opened themselves up to global competition.
o The 1973-74 oil shock increased the demand for bank financing to pay
for both higher energy costs and the new investment needed for more
energy-effficient industrial production.
o At the same time, banks had large deposits of OPEC earnings to lend.
In part because they were encouraged by their governments to
"recycle" these deposits to countries with high oil bills and in part
because bank profits depended on competing aggressively for
customers, bank lending surged.
Hindsight suggests that the rapid buildup of bank debt during the 1970s was
imprudent for both the lenders and the borrowers. It is not clear, however, that any
significant cautionary signals were available at the time.
o Despite higher oil prices, LDC economies continued to expand rapidly.
For the non-oil-exporting LDCs, growth averaged nearly six percent
annually in 1973 through 1979, about twice the rate of growth for the
industrial countries.
o Global inflation was making repayment easier by eroding the real value
of debt balances.
o Not only were opportunities for bank profits high in the LDCs, but the
record of loan losses was much better than that for domestic
borrowers.
These favorable conditions changed abruptly beginning in 1979. Oil prices soared
from an average of $13 per barrel in 1978 to $33 per barrel by the end of 1980. Industrial
country governments began to attack inflation by restrictive monetary policies that
boosted interest rates, and hence debt service costs, and reduced the demand for LDC
exports. Adjustment to this changed situation was gradual - perhaps too gradual in some
cases - and LDC current account deficits began to widen sharply. Confidence in the
way the first oil shock was handled probably led most governments and bankers to believe
that often-promised industrial country recovery was just around the corner. For their
part, bankers probably continued to expand lending to cover these current account
deficits in hopes of protecting their loan portfolios. The combination of a rapid buildup
of debt and a marked deterioration in debt servicing capacity set the stage for the
financial problems that exist today.
******************************************************************************
******************************************************************************
Sanitized Copy Approved for Release 2010/06/16: CIA-RDP85T00287R000600140001-2
 Sanitized Copy Approved for Release 2010/06/16: CIA-RDP85T00287R000600140001-2
CONFIDENTIAL
Need for Lengthy Adjustment
We do not expect demands on the IMF to abate for several years. Widely
publicized, multi-billion dollar emergency credits for such countries as Mexico, Brazil,
and Argentina are effective short-term measures to meet immediate cash crises, prevent
default, and initiate programs of financial conservativism; but they do not clear up the
underlying debt problems of these and other countries immediately. It will take perhaps
three to four years of sustained effort for major borrowers to restore their
creditworthiness, regain normal access to financial markets, and resume robust economic
growth.
Slow Recovery from Global Recession
The persistent and worsening financial situation of the LDCs is closely tied to the
global recession that is now well-into its third year. The LDCs are faced with two
distinct but related problems:
o LDC exporters have been hit by a collapse of commodity prices without
any rise in industrial 'country demand. Eight of the 12 Third World
countries with the most serious debt problems suffered major declines
in export earnings-last year, while the others experienced sharp drops
in the growth of export earnings. Ivory Coast, Jamaica, Kenya, and the
Philippines have had their exports reduced for two or more years in a
row.
o High interest rates have greatly increased debt service obligations.
The interest premium on most loans is linked to the London Interbank
Offer Rate or to the US prime rate. The nearly 5 percentage point rise
in interest rates that took place over 1980 and 1981 added some $10
billion in debt service costs to LDCs during that period. The burden of
interest payments rose to over a-quarter of the total foreign earnings
for such countries as Mexico, Brazil, Chile, and Argentina.
Any acceleration in the pace and timing of economic recovery in the industrial
countries would provide the LDCs with needed breathing room, in part because it would
provide the banking community with a signal that LDC export prospects will improve and
that the LDCs are in a better position to handle their debts. The direct gains from a
more rapid OECD expansion will not be felt immediately and will not be evenly
distributed among the troubled debtors. Some will benefit sooner than others and some
more than others. In our judgment, most of the initial pickup in economic activity will
be concentrated in the consumer sector. Increased demand for LDC raw materials will
take considerably longer to materialize in part because of the large inventory overhang
for many raw materials.
Altogether, we would expect a delay in LDC export responses to stronger OECD
growth of anywhere from six months to a year. For some commodities the delay will be
appreciably longer. OECD demand for key LDC agricultural exports such as sugar is not
sensitive to the industrial country business cycle. Beyond this, the excess capacity
available for most industrial materials sold by LDCs would dampen much of the price
response. Because of these capacity overhangs, we believe competition among producers
would limit the speed of price recovery.
This is not to say that the business cycle advantages to all LDCs will develop
slowly. If past cycles are a guide, the LDCs that produce consumer-oriented goods will
2
CONFIDENTIAL
Sanitized Copy Approved for Release 2010/06/16: CIA-RDP85T00287R000600140001-2
 Sanitized Copy Approved for Release 2010/06/16: CIA-RDP85T00287R000600140001-2
CONFIDENTIAL
capitalize quickly on Western recovery. South Korea, Hong Kong, Taiwan, and Singapore
- countries in relatively healthy financial position - would be the chief gainers. To
some extent this pattern of demand would also benefit Mexico and Brazil, so long as they
have access to supplier credits.
Further Shocks Likely
While this OECD-growth-led recovery is taking place the IMF may have to handle
additional shocks brought on by the adjustment process itself. An unprecedented number
of countries with complex international linkages will all be attempting to reform their
economies over the same period. Taken individually, the prospects that each country
could smoothly adjust under the aegis of the IMF are good; together, adjustment raises
new problems. In 1981, for example, Brazil and Argentina each sold about 20 percent of
their exports to other South American countries and purchased about 15 percent of their
imports from them. Bolivia, Paraguay, and Uruguay probably will find it increasingly
difficult to meet debt payments and import bills because of their heavy dependence on
sales to troubled neighbors.
Moreover, IMF help might be needed to handle any shocks that may arise from an
uncertain oil market over the next several years. Mexico, for example, could lose over
$5 billion in foreign earnings if oil prices fall to $20 per barrel. Without compensating
financing, Mexico would have to cut back imports by that amount on top of initial plans
for no growth of imports beyond the $15 billion level of last year, which was already
down 40 percent from 1981. Nigeria, Venezuela, and Indonesia will be running into
increasingly serious financial constraints this year even if oil prices remain steady. If
prices decline to $20 per barrel, these countries would have a combined drop in earnings
of $17 billion. We do not believe that foreign bankers would be willing to increase
exposure in these countries much, if at all. None of these countries has much
maneuvering room; all have been drawing down their reserves substantially in recent
months to pay for needed imports and debt servicing.
The adjustments demanded by the IMF and private creditors have high political
and economic costs, which are in part held in check by the assurance of continued IMF
support if needed and by the opportunity for national governments to share the onus of
adjustment with a faceless but respected partner. In the absence of such discipline, we
believe that political pressure could force governments to abandon adjustment programs,
thereby sacrificing the longer term development of their countries. The prospects for
this are probably highest in such countries as Argentina and Mexico with highly
nationalist governments. To the extent that governments are unable to make managed
adjustments and resort to politically popular but unsustainable domestic expansion, the
opportunities increase for rash policies - such as military moves against neighbors - and
Soviet mischief.
If the IMF is shut out of the global adjustment process because of insufficient
funding, the ability of the complex global economy to wrestle with unforeseen shocks
would be substantially reduced. The growth in international trade and investment flows
since the end of World War II has been facilitated by the Fund's ability to overlay the
global economic system with currency convertibility, liquidity management, and
exchange rate stability. The global economy in the remainder of the 1980s is not
guaranteed to be free from such shocks as widely differing growth and inflation rates
among countries, changing commodity prices, or future energy or strategic material
crises.
3
CONFIDENTIAL
Sanitized Copy Approved for Release 2010/06/16: CIA-RDP85T00287R000600140001-2
 Sanitized Copy Approved for Release 2010/06/16: CIA-RDP85T00287R000600140001-2
CONFIDENTIAL
The Demonstration Effect of IMF Participation
Even though a quota increase would probably hot show up on the IMF's books until
late 1983 or in 1984, its authorization would boost the sagging confidence of commercial
lenders that the Fund will continue to back adjustment programs that will help debtors
generate a manageable stream of debt repayments. For the next few months, major US
and other industrial country banks may again be called on to provide a quick infusion of
cash to these borrowers to avert a crisis. Emergency loans by large banks, however, will
only provide a temporary solution to South American debt problems. If the smaller
institutions continue to reduce their lending, debt service could become unmanageable
without full IMF participation.
IMF programs - which include plans for restructuring financially troubled
economies and monitoring their progress - are the key to convincing foreign private
banks to share the cost of the economic adjustments the LDCs must make. The IMF
programs recently under negotiation are associated with a substantial amount of new
bank lending. The Fund's involvement and leverage over debtor countries have been
crucial to getting commercial banks to continue to provide credit when it is needed most
to ease the adjustment process.
New Lending Associated with IMF Programs
Country
Estimated
Debt
Yearend 1982
IMF Package
New Lending
Associated with
IMF Packave
billion
$ billion)
billion)
Argentina
40
2.2
1.5
Brazil
87
5.5
4.4
Mexico
83
3.9
5.0
Yugoslavia
19
0.5*
1.0
* Third year of the 1981-83 stand-by arrangement.
The unanticipated flight of commercial banks could easily result in a repeat -
albeit on a smaller scale - of Brazil's current financial difficulties. During much of the
past decade Brazil had a reasonably well-managed economy. It had been developing
alternative energy sources to reduce its dependence on expensive imported oil, expanding
and diversifying its exports, and adjusting its economic growth to the realities of
financing availability. While its debt was the largest in the Third World, Brazil was on its
way to becoming a developed country capable of managing its financial burden.
The Mexican financial crisis shocked bankers into believing that their loans to all
Latin American borrowers were at risk. After smoothly arranging some three quarters of
the financing needed to pay its balance of payments gap last year, Brazil's foreign credit
slowed sharply in September. Brazil began to have serious difficulty obtaining loans from
major banks, and smaller banks began to refuse new loan requests and to demand
payment of maturing short-term credit. With access to credit cut off, little reserve
cushion, and depressed export earnings, Brazil was unable to meet its daily foreign
exchange requirements.
4
CONFIDENTIAL
Sanitized Copy Approved for Release 2010/06/16: CIA-RDP85T00287R000600140001-2
 Sanitized Copy Approved for Release 2010/06/16: CIA-RDP85T00287R000600140001-2
CONFIDENTIAL
Other countries are also vulnerable to a credit contraction that could he
precipitated by a lack of confidence that the IMF will continue to lead in solving debtors'
cash problems.
o Chile's financial position, already weakened by a decline in exports,
capital flight, and a slowdown in new lending, turned critical after
bankers stopped credit operations in a recent financial dispute with the
government.
o Venezuela is increasingly vulnerable to a loss of banker confidence
because of its poor economic and financial management, high short-
term debt, dwindling reserves, and uncertain oil export prospects.
International lenders are shying away from new loans, undermining the
government's plans to refinance short term public debt. Failure to
refinance these could lead to debt rescheduling.
o Argentina is vulnerable to another credit contraction because of its
need to arrange new financing to roll over maturing debt. Smaller US
banks may be especially unwilling to renew lending necessary to
finance exports and purchase needed imported industrial supplies.
o Peru is having difficulty in obtaining longer term credits, despite its
willingness to pay higher rates.
o The Philippines is beginning to encounter stiffer terms on new loans,
and some banks are reviewing their exposure more critically and
moving toward more short-term positions.
o The smaller industrial countries are not immune either; we are
beginning to see some signs that Portugal and Greece are having
financial problems.
Impact on Western Trade and Recovery
Countries unable to secure financing to cover their current account deficits would
be left with two choices, both of which threaten the economic recovery of the United
States. They could further dramatically cut back imports with adverse consequences on
growth, living standards, and political stability. With or without a further import
squeeze, some countries could decide to claim a payments moratorium and try to manage
trade on a barter basis or pay on cash flow from current exports.
Troubled debtors are already curbing import growth to bring their current account
balances more in line with the availability of financing. Mexico's IMF accord, for
example, will allow it to avoid a second year of precipitous decline in imports in 1983;
even so, imports will be down to some $15 billion from $24 billion in 1981. If Mexico
loses IMF support, however, we estimate that imports could drop as low as $10 billion.
The bulk of LDC import cutbacks will fall on the industrial countries. The OECD
sold more than $300 billion worth of goods to LDCs in 1981, up from only $40 billion a
decade earlier. Sales to LDCs constitute about 40 percent of total US exports; the 25
key financially troubled LDCs together purchased $55 billion in manufactures from the
industrial countries in 1981, almost $30 billion of which came from the United States.
This was nearly one-fifth of the total overseas market for US manufactures. Almost 10
percent of our manufactures exports are to Mexico alone.
5
CONFIDENTIAL
Sanitized Copy Approved for Release 2010/06/16: CIA-RDP85T00287R000600140001-2
 Sanitized Copy Approved for Release 2010/06/16: CIA-RDP85T00287R000600140001-2
CONFIDENTIAL
Several recent studies have tried to capture the impact on the OECD countries in
the aggregate of a fall in exports to the LDCs that could be caused by, for example, a
cutback in bank lending to the LDCs. If bank lending is cut by $25 billion:
o A Morgan Guaranty Trust Company analysis indicates that OECD
growth would fall at least 0.5 percentage point.
o An OECD Secretariat analysis indicates that OECD growth would be
off by 0.6 percentage point.
ON FILE EXECUTIVE OFFICE OF
THE PRESIDENT RELEASE
INSTRUCTIONS APPLY
An analysis drafted by the Council of Economic Advisers indicates that
if the $25 billion credit cutback is allocated just to Argentina, Brazil,
Chile, Mexico, Peru, and Venezuela, GNP of the United States alone
would fall 0.9 percentage point because of the strong trade linkages
between the United States and Latin America.
The European View
West European leaders were generally in favor of greater increases in the IMF's
lending capability than the United States. Initially some major European countries were
sympathetic to increases of-about 65 percent. The European negotiating position last
week was for a 50 percent increase, or 10 percentage points higher than the United
States' initial position. West Europeans subscribe to the idea that IMF resources must be
augmented to improve the debt service capability of troubled borrowers in the absence so
far of a strong economic recovery in the West. They further believe that the IMF is the
key organization to bring debtors to make necessary financial adjustments, and that the
IMF is in a strong position to persuade private banks to maintain their exposure.
The West European governments probably feel that the 47.5 percent quota
increase that emerged was the best that could be achieved under current economic
conditions and the political mood in the United States. West Europeans helieve the quota
increase will be adequate for only about. three years and that the five-year review
process will need to be replaced by another three-year review. The West Europeans view
the immediate need for liquidity as great and they fear that the end-of-year deadline for
implementing the quota increase is not soon enough- nonetheless, they strongly oppose
IMF borrowing in the private markets to fill the gap.
The European reaction to a failure of the US Congress to ratify the US share of
the quota increase would likely be dramatic. Any backing away by the United States to
support the quota increase would be viewed by West European governments as a reversal
of the present policy of working together for a coordinated response to international
financial problems. West European bankers would likely echo this criticism and tighten
So far we have not seen any evidence that European capitals consider the increase
in the US quota in doubt. We think they foresee a contentious Congress giving a tough
time to Administration representatives, but probably calculate that the Congress will
eventually view approval in the United States' best interest. F1
6
CONFIDENTIAL
25X1
Sanitized Copy Approved for Release 2010/06/16: CIA-RDP85T00287R000600140001-2