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October 24, 1985
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Sanitized Copy Approved for Release 2010/02/01: CIA-RDP85TO1058R000405290001-6 'ev 10 STAT Next 3 Page(s) In Document Denied /7W Admhk~ Sanitized Copy Approved for Release 2010/02/01 : CIA-RDP85TO1058R000405290001-6 Sanitized Copy Approved for Release 2010/02/01: CIA-RDP85TO1058R000405290001-6 I I Central Intelligence Agency International. Financial Situation Report #45 24 October 1985 Summary The new US initiatives on LDC debt, announced at the IMF/IBRD meetings in Seoul, were welcomed by most members of the international financial community. We believe the successful implementation of these proposals will depend on several key developments due to unfold over the next few months, including: progress in Mexico's and Brazil's negotiations with the IMF, commercial bankers' willingness to raise the $20 billion in new money for the LDCs, the debtor's individual reactions to the modified debt strategy, and the collective response expected from the Cartagena Group, which will meet in mid-December. Other developments in recent week include: 25X1 Mexico may need about $9 billion in new money for 1986- substantially more than the $4.8 billion already requested. The new figure reflects a $2 billion financial gap carried over from 1985, higher-than-anticipated capital flight, and a likely drop in oil prices because of Saudi Arabia's decision to increase production. Mexico is scheduled to begin talks with the IMF in the next few weeks. 25X1 o While Yugoslav officials are optimistic about negotiating a MYRA with their official creditors, their prospects are being dimmed by a disappointing economic performance this year. Yugoslavia seems unlikely to meet their 1985 current account and reserve targets. o Disbursements from the Philippines' standby program and the bank new money package continue to be delayed. According to Embassy reporting, Prime Minister Virata states that the budget deficit is the only major issue yet to be resolved. 25X1 o South Africa's major creditors doubt that a rescheduling accord can be reached before Pretoria's self-imposed moratorium deadline of 31 December. This situation report was prepared by analysts of the intelligence Directorate. Comments are welcome and may be addressed to the Situation Report Coordinator, Copy o 25X1 25X1 25X1 25X1 25X1 Sanitized Copy Approved for Release 2010/02/01: CIA-RDP85TO1058R000405290001-6 Sanitized Copy Approved for Release 2010/02/01 : CIA-RDP85TO1058R000405290001-6 25X1 Date Event/Country Comnent 23-30 Saudi Arabia Conference on King Fahd has invited Arab and other October Sudan creditor countries and institutions to a conference discussing the Sudanese econany and settlement of their debts to Arab banks and other creditors. 25X1 25 October IMF Executive Board Meeting Arrears owed to the Fund by Sudan will be considered. 25X1 28 October Cannercial Bank Meeting The Institute for International Finance has invited about 60 executives from the world's largest banks to a meeting to discuss the new initiatives on debt. ~ 1~ 25X1 14-16 University of South Carolina The University has invited Latin November Debt Conference American and Caribbean countries and major creditors, including the IMF and World Bank, to a discussion of the debt issue. 18 November Paris Club-Poland bilateral creditors. Tentatively scheduled meeting to discuss rescheduling of debt owed to official Meeting to review Cuban economic performance under the June Paris Club agreement. 25X1 21 November Paris Club-Central African Republic 22 November Paris Club-Niger 25X1 Meeting to discuss rescheduling of debt owed to official bilateral creditors. 25X1 Week of 16 Cartagena Group Ministerial December Meeting (Montevideo) Tentatively scheduled meeting of the Cartagena Group foreign and economic Meeting to discuss rescheduling of debt owed to official bilateral creditors. 25X1 Sanitized Copy Approved for Release 2010/02/01: CIA-RDP85TO1058R000405290001-6 Sanitized Copy Approved for Release 2010/02/01: CIA-RDP85TO1058R000405290001-6 25X1 KEY ISSUE US Initiatives on Debt: Key Developments to Watch The new US initiatives on LDC debt, announced publicly at the IMF/IBRD annual meetings in Seoul, were welcomed by most members of the international financial community They applauded the more active US leadership , Lne new emp asis on economic growth, and the increased role for 25X1 We believe the successful implementation of the US initiatives will depend upon the following key developments, which will begin to-unfold during the next few months: o The nature and outcome of Mexico's and Brazil's negotiations for future assistance from the IMF. o Commercial bankers' willingness to lend the proposed $20 billion in new money to 15 LDCs over the next three years. undertake the type of structural adjustment that is being encouraged in the US proposals. Brazil and Mexico-the two largest LDC debtors-will start new program negotiations with the Fund in the next month. If agreements cannot be reached, we believe Mexico or Brazil could seek an accommodation with the World Bank, but this would still require substantial adjustment. We believe any new stabilization programs are likely to reflect more of the growth-oriented policies encouraged by the US initiatives. Secretary Baker is urging the IMF to give a high priority to structural adjustment measures such as tax reform and market-oriented pricing policies. It is questionable, in our judgment, whether or not the new money available through the new US initiatives will be enough of a "carrot" to entice Brazil and Mexico to implement substantial economic reforms. Countries like Argentina and Chile may be more likely to reforms proposed by Secretary Baker. o The debtors' reaction to and willingness to accent the types of policy The extent of commercial bank participation in the new money facility bears particular watching. The larger US banks probably will participate to ensure that their outstanding commitments continue to be serviced. We believe, however, that smaller US regional banks and European banks ma find it easy to walk away from talk of money. according to press reporting. commercial bankers now want a stronger voice in determining where the new money goes; in particular, they want to be able to direct the funds to their own customers in LDCs. They also are seeking concessions from the US Treasury and banking regulators, troubled LDCs with $20 billion in new money. While guardedly optimistic about the initiatives, commercial bankers complain that the only substantive portion of proposal is the call for banks to provide the debt- 25X1 Strong signals on commercial bankers' attitudes are likely Sanitized Copy Approved for Release 2010/02/01: CIA-RDP85TO1058R000405290001-6 Sanitized Copy Approved for Release 2010/02/01 : CIA-RDP85TO1058R000405290001-6 25X1 to arise later this month when 60 major international bankers are scheduled to meet in Washington to discuss their role in future debt negotiations. From the debtor side, Latin officials in Argentina, Brazil, and Mexico view the US proposal as an important gesture, a sign that the US recognizes the LDC need to restore economic growth and obtain additional foreign capital. Considerable Latin skepticism exists, however, about the initiatives' potential to ease the region's financial burden. Buenos Aires questions the value of the initiatives if interest rates rise or commodity prices fall further, according to the US Embassy. We expect that a collective response to the US initiatives will come out of the Cartagena ministerial meeting scheduled for mid-December. 25X1 REGIONAL SITUATIONS Latin America In Latin America. following the 3 November election. Argentina may devalue its currency 25X1 25X1 Sanitized Copy Approved for Release 2010/02/01: CIA-RDP85TO1058R000405290001-6 Sanitized Copy Approved for Release 2010/02/01 : CIA-RDP85T01058R000405290001-6 25X1 new money facility was received from commercial bankers. Government officials have told the US Embassy that the wage and price freeze will continue through the end of the year. According to the US Embassy, some Argentines believe there could be a devaluation of the official exchange rate shortly after the 3 November elections, which should enable Argentina to maintain its competitiveness in world markets. Nevertheless, we believe that political pressures will cause Alfonsin to expand public spendiner within a Argentina As a result of President Alfonsin's stabilization program, Argentina's inflation rate was held to 2.0 percent last month, and Congress passed a 1985 budget containing the lowest deficit in ten years. Moreover, the first $2.2 billion tranche from the $4.2 billion Panama Panama's commercial bank creditors have tentatively set 31 October as the signing date for the 1985-86, $600 million refinancing package and the $60 million new money loan. However, the ouster of President Barletta has further weakened Panama's resolve to continue fiscal discipline. Although President Delvalle retained key members of Barletta's economic team to demonstrate continuity and calm international financial circles, Delvalle's recent populist economic stance probably has had a negative effect. Delvalle last week boosted price subsidies on some consumer staples, and indicated a disinclination to adopt economic reforms sought by the World Bank and by the US, according to Embassy reports. If reforms are not adopted in a timely fashion, disbursements from the IBRD, the US government, and commercial banks that are needed to fill the financial gap may be in jeopardy. Eastern Europe In Eastern Europe, Yugoslavia's prospects for a MYRA are dimmed by poor economic performance, and Poland's bilateral rescheduling agreements are proceeding Yugoslavia Yugoslav officials attending the IMF annual meeting in Seoul were reportedly optimistic about persuading their official creditors to grant a multiyear rescheduling of some $1.5 billion in debt falling due in 1986-88, according to press reports. Their optimism is based on Yugoslavia's successful conclusion of a MYRA with commercial banks in mid-September, which they believe will encourage official creditors to grant a Sanitized Copy Approved for Release 2010/02/01: CIA-RDP85T01058R000405290001-6 Sanitized Copy Approved for Release 2010/02/01: CIA-RDP85T01058R000405290001-6 similar arrangement. Finance Secretary Klemencic and other officials continue to stress Yugoslavia's need fora longer-term arrangement in order to free key Yugoslav economic decision makers for Prospects for a MYRA from official creditors, however, are being dimmed by disappointing economic performance in 1985. Earlier this year, official creditors refused Belgrade's request for a MYRA on grounds that Yugoslavia had made insufficient progress with economic adjustment, but promised to reconsider the request in 1986 if Yugoslavia's economy showed further improvement. Instead, Yugoslavia seems unlikely to meet their current account and reserve targets for 1985. Also worrisome is Belgrade's return on 1 October to extensive price controls. The IMF strongly objected to a similar set of measures announced in May 1984, which Belgrade subsequently lifted on 1 January 1985. Although the expanded price controls do not violate Yugoslavia's current Fund program, they do violate the spirit of the agreement, and official creditors may see the measures as backsliding on Yugoslavia's commitment to economic reform. Yugoslavia has also reduced interest rates by 9 percent, making real rates even more negative. Poland Conclusion of the 1982-84 bilateral rescheduling agreements with Western governments is progressing slowly. o According to Embassy reporting, France in late September became the second country to sign a bilateral with the Poles, but the agreement made no mention of the $10 million in new credits that Paris previously indicated it would grant. o Press reports indicate that West Germany initialed an agreement with Poland in mid-October, but details are not yet available. o Finland initialed an agreement in July, and Sweden initialed an agreement on 10 October. According to US Embassy reporting, Sweden is considering reopening a line of credit dating back to 1981 with a current balance of $4-4.5 million. Negotiations with other Paris Club governments-including the United States-are being, hampered by disputes over interest rates and new credit commitments. The US in late September received payment covering most of the 1981 interest arrears due by 31 August. France and several other countries also had received some payments. Because the payment was $1.5 million in arrears, however, the US has asked the Paris Club to postpone the next meeting from the week of 28 October to Sanitized Copy Approved for Release 2010/02/01: CIA-RDP85T01058R000405290001-6 Sanitized Copy Approved for Release 2010/02/01: CIA-RDP85TO1058R000405290001-6 Philippines The third drawing on the Philippines' IMF program continues to be delayed and lacking IMF approval, a $400 million disbursement from the commercial banks' new money package has been held up as well. While an agreement was not reached in Seoul, Virata has indicated that the budget deficit is the only major issue yet to be resolved, to Embassy reporting. currently planned. The Philippine government is under a deadline to forge a rescheduling In another issue, the planned merger of the Philippine National Bank (PNB) and the Development Bank of the Philippines (DBP) is being complicated by the rescheduling of their foreign debts. According to press reports, commercial bankers expect numerous problems to develop if the reschedulings take place before the merger is concluded as is target, according to Embassy reporting. e Philippines, budget deficit is likely to be 2.5 percent of GNP instead of the targeted 0.9 percent. According to Philippine press reporting, the Philippines has asked the Fund to consider increasing the target to 1.4 percent of GNP. Virata believes the Fund will now ar!ree to the larger budget deficit Commercial bankers want s of the merger before signing any rescheduling agreements. Africa/Middle East South Africa The first meeting between South Africa's debt mediator, Fritz Leutwiler, and the Major creditors doubt a rescheduling accord can be reached, however. before rretoria's sell-imposed moratorium deadline of 31 December, ?? Y I 25X1 The negotiation process will be a fragile one, and an extension of the moratorium would provide added opportunity for events on either side to disrupt talks. A dramatic increase in violence in South Africa or expansion of repressive government measures might cause bankers to balk. 25X1 25X1 Sanitized Copy Approved for Release 2010/02/01: CIA-RDP85TO1058R000405290001-6 25X1 Sanitized Copy Approved for Release 2010/02/01 : CIA-RDP85TO1058R000405290001-6 o The Cartagena Group has tentatively scheduled a ministerial meeting for Montevideo in mid-December... will respond to the new US initiatives... also focus on a political dialogue, trade issues, and the capitalization of interest payments. 25X1 o Cuba's commercial bank creditors rescheduled about $100 million in principal due in 1985... repayment spread over 10 years, 6 years grace at 1.5 percentage points above LIBM...agreement Also rolls over sane $370 million in short-term loans for one year. 25X1 o New Panamanian President Delvalle willing to host Latin American summit on debt, according to US Brbassy...former President Barletta had agreed to host meeting at request of Peruvian President Garcia ...Delvalle considering convening stmnit in early 1986. 25X1 o Political pressures recently forced President Lusinchi to demand a contingency clause in Venezuela's restructuring that would allow a renegotiation in the event of a sharp decline in future oil prices-signing of the $21.2 billion deal not expected until December at the earliest. 25X1 Europe o Bulgaria negotiating a $125-million club loan led by West Germany's Deutsche Bank... third loan since June, raises Sofia's borrowing to $450 million for 1985...needed to finance imports of Western capital goods and agricultural products. I _j 25X1 o France's President Mitterrand visited several Latin nations... announced France is willing to promote a summit to discuss debt, according to press reporting... however, he noted that a meeting at that level must be "successful." 25X1 Sanitized Copy Approved for Release 2010/02/01: CIA-RDP85TO1058R000405290001-6 25X1 Sanitized Copy Approved for Release 2010/02/01 : CIA-RDP85T01058R000405290001-6 o A 5-year, $167 million syndication is being raised for Ranania. needed tQ meet rescheduled obligations ccminff due this fall o IMF team in Turkey is generally upbeat about the econany which strengthened after weak first quarter... fiscal and monetary policies still off-target... team thinks Ozal was premature in announcing there would be no program in o North Korea unable to make debt payment of $9 million to Indonesia... continues to have trouble making its payments to Western Europe and Japan... Koreans suggest resolution by countertrade or a two to three year payment postponement. 25X1 o Bankers' confidence in South Korea continues as $300 million loan to Korean Export-Import Bank was signed in Paris...sane concern voiced about overall debt level, and limited tions available to Korea to deal with econanic 25X1 difficulty. ~ 7 Taiwan aspires to be an international financial center, has not yet ado ted sufficient banking standards to facilitate such development. 25X1 Africa/Middle East o Western banks reduced Nigerian trade financing as letter of credit arrears rose by $1 billion in the past few months ...$116 million in promissory notes released bringing total to $925 million out of estimated $6 billion in uninsured trade arrears... public opinion strongly against IMF accord. o IMF is not optimistic about payment of Zambia's program not expected before April 1986, by then arrears would be over $160 million... situation may become "irresolvable" without change in IMF policy, according to US Thbassy. 25X1 Sanitized Copy Approved for Release 2010/02/01: CIA-RDP85T01058R000405290001-6 Sanitized Copy Approved for Release 2010/02/01: CIA-RDP85TO1058R000405290001-6 Sanitized Copy Approved for Release 2010/02/01: CIA-RDP85TO1058R000405290001-6 Sanitized Copy Approved for Release 2010/02/01: CIA-RDP85TO1058R000405290001-6 SUBJECT: International Financial Situation Report #45I I24 October 1985 Copy No. I Sec. James Baker. Treasury 2 R. G. Darman 3 James W. Conrow 4 Robert Cornell 5 James E. Ammerman 6 Charles Schotta 7 James A. Griffin 8 Doug Mulholland 9 Manuel Johnson 10 Robert M. Kinmit 11. David Mulford 12 Sec. George Shultz State 13 John C. Whitehead t' 1.4 Morton I. Abramowitz 1.5 Michael Armacost 16 Ralph Lindstran 1.7 W. Allen Wallis 18 Elliot Abrams 19 Richard Burt 20 Elinor Constable 21. Chester Crocker 22 Paul Wolfowitz 23 Richard Murphy 24 J.C. Kornblum 25 Byron Jackson 26 S. Bruce Smart 27 28 29 David Wigg 30 Stephen Danzansky Canner ce It NSC it 31. Randall Fort PFIAB 32 Leo Cherne PFIAB 33 David Tarbell OISD (ISA) 34 DCI 35 ExDir 36 SA/EUCI 37 DDI 38 ADDI 39 Ch/PES/DDI 40 NIO Economics 41. DDO 42 Ch/DOD/EPOS 43 Ch/DDO/NCD 44 Ch/DDO/AF 45 Ch/DIO/EA 46 Ch/DUD/EUR 47 Ch/DDU/LA 48 Ch/]TO/NE 49 Ch/DDO/SE 50 IAD/OOG/PEL 51 D/ALA 52 Ch/ALA/SAD/R 53 D/OEA 54 D/EURA 55 Ch/EURA/EE/EW 56 D/SOVA 57 D/NESA 58 ID/OGI, D/OGI 59 Ch/OGI/SRD 60 Ch/OGI/ISID 61 Ch/OGI/TNAD 62 Ch/OGI/ECD 63-64 Ch/OGI/ECD/FI 65 67 Ch/OGI/Pub 68-70 OGI/Pub version distribution: 25X1 1 - Edwin Truman, Federal Reserve Board 1 - Henry Wallich, Federal Reserve Board 1 - David Roberts, Federal Reserve, 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 1 - Peter W. Rodman, State 5 - Byron Jackson, Commerce 1 - Warren E. Farb, Cc nnerce 1 -r ~ DIA 25X1 1 - Steve Farrar, QVB 1 - William Isaac, Federal Deposit Insurance Corporation 1 - Beryl Sprinkel, CEA 5 - 1 - 1 - Ch/OGI/GD 1 - Ch/ECD 1- Ch/E?/FI 1 - Ch/ECD/T 1 - Ch/ECD/DI 1 - Ch/ECD/CM Sanitized Copy Approved for Release 2010/02/01: CIA-RDP85TO1058R000405290001-6 OGI /CO 25X1