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December 28, 1983
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Approved For Release 2010/02/22 : CIA-RDP87-00462R000100140024-5 THE DIRECTOR OF CENTRAL INTELLIGENCE 22 July 198b NOTE FOR: See Distribution FROM: VC/NIC Let me know what you think of this, which originally was distributed by Maurice when the article first appeared. Herbert E. eyer Attachment: "When the debtors said no" by Anatole Kaletsky Financial Times, 28 Dec 83 Dist: NIO/Econ A/NI0/Econ NIO/LA NIO/AF NIO/EUR NIO/NESA NIO/USSR' SRP (5) Approved For Release 2010/02/22 : CIA-RDP87-00462R000100140024-5 Approved For Release 2010/02/22 : CIA-RDP87-00462R000100140024-5 LESSONS OF THE 1930s Financia, fimes Wednesday December 28 1983 When the debtors sal no RIO DE JANEIRO, August 30 (UP) - Official announcement that a partial moratorium had been obtained on foreign debt payments was made today by the Brazilian Government pub- Ucity bureau. The Government, it was stated, has decided to snspe+hd temporarily foreign debt payments with the excep? tins of two funding loans and the Coffee Loan. THESE two sentences, which hit the world's financial markets like "a bolt from the blue," in the words of the following day's Financial Times, had certainly not occurred to Mr Thomas W, Lamont, senior director of J. P. Morgan and Co. on Friday. July 23 the year before Brazil went bust. At 3 m that Friday after noon Mr Lamont. In his capacity as chairman of the Internattond Committee of Bankers on Mexico, felt nothing but pride and Satisfaction as be ushered Sr Luis Montes de Oa, the Mexican Finance Minister, into the Morgan Bank's boardroom in Wall Streee~ over his Shseemed as hep added his signature to that of the F+.nance Minister on the agree. ment which brought to a Successful Conclusion the biggest-ever renegotiation and settlement of a defaulting Cou?7's foreign debts. Here at last was a piece of good now which could provide a ray after to the financial world ear disasters. tyhe likes of which the world had never seen. This Dot Yet exCL+ag~ulzhedi , on Net Year's Day live months later when the lsomrtan Legation in New York issued the following Statement: By Anatole Kaletsky in a position at th.s time to t : =Ustfltiat lash aeDiteaee; swa The superficial features of meet the interest obligations ' the reader with a moderate the 1930's debt crisis should be which became due on its exter. I interest is international finance teal debts on January 1.0 might have wondered whether familiar to anybody who has Bolivia intended " to fulfil its all these references to govern- been following the events of obligations fully and abso? meats "defaulting" and oing the 1910s. 111201f," the statement added. bust" were supposed to be fact. There was, of course. the But It would need the. landing- forecast or just plain fantasy. geograpNcd distribution of the eni# of Its cseditaft for S ?tbm. After all, it is common know. defaulting nations. Von" country's period because of the ledge today that countries Fsas ifi31 onwards the U.S. once on exceptional depend. cannot just go bust." A govern- Congress (with Mr Lamont of exports Of tin. meat,?.an always pay its debts if Morgan and Mr Mitchell of It seemed to be another the ration is willing to accept National City as the first two "special case" that landed three temporary sacrifices. Even the witnesses) held indignant bear months later on the desk of Mr most impetuous politicians lop on the bankers' "acanda- Charles Mitchell, chairman of realise that deliberate default lous practices and abuses " in the National City Bank of New can be t %ntamount to national pushing loans during the 1120s York. The plaintive letter on economic Suicide. on unsuspecting foreign dicta. his desk from Peru's new tors. F inance Minister. read (in These fundamental truths Commissions of International Part I:am crania hOuslY ave in been recent proclaimed so vigor, financial experts-sucb as Sir g you with America and Eastern as Europe Otte rid England and of the Bank of respect the Interest due have appeared sad Professor Edwin April 1 next on the e Peruvian to approach the Kemmerer National Loan. This Government brink of bankruptcy, that National 3dill%Ar common slty-weapt LW- took oillce on March 11 last, knowledge" has porn to Poland by cofrom mmittees after a period of political dis? en rely history-about wave Of baake:, or by the Leaague or turbances extending over six national defaults which swept But Nations even esmor confidence. ting months. It Ands the Treasury throughi precisely these same more the p bare of funds. both as a resultons in the 19304. lsadbw for are the possible This collective amnesia about or the future, of these political disturbances the International *lendin dl.. Defaults in the 110011 is. and of the economic depression esters of the 1s two variably proved much deeper, which has obtained for more possible explanatlo3011 uL ba longer and more subtle than than a year. As a result of these anybody The avers imdy had a:yeefed Just one conditions, for which the pro la defaults in month before Brasil M sent Govet~hment is not respon- Germany. Austria and other default on August 30, 1931,, for sible, it has not the capacity at central European countries were example, Sir Otto found "that this time to pay In full the due not to excessive commer? Brazil had all but turned the service charges on the Repub? cial borrowing, but to the us corner on her dimculties." lies entire debt" supportable burden of re par* On December 18, a By the end of that summer, time from the First World War. bankers told the group w York it war aer ,tn:ger poessU t m tan[ The vast sums Involved in thew T New of "special saws." national defaults on eswntlally Times that Mexico had "reached In July. two months after Political obligations have a stage rK economic con tat?ea Peru's letter. Mr Mitchell tended to divert attention from period, of reh btiliitation which received a cable in almost the sovereign -defaults on purely will compare favourably- with identical terms from the commercial debts. Yet the com. other major countries. On Government of Chile. Then, a Inertial defaults had mounted January 22, 1934. a special month later on August 30, to roughly $3bn by 1933-a session of the Mexicap Congress came Brazil's "bolt from the hug sum Only the context of a declared tea cptuttr:9' agree -. blue." y $24bn for the meat wits the Lamont cow With Brazils "temporary" whole of the world's trade. mittee "a nullity " and moratorium, the floodgates were Secondly. the ~ ? International suspended all loan a p lmaats for opened. Cables poured in from borrowing of the 1930s coins three years . ,Common s Ecuador. Colombia and Central mainly from investors in the Misapprenhensions like thew knowledge America. Within a year only bond markets, rather than from stemmed partly from a curious three major Latin American t banks. This left the banking paradox, which may also prove has forgotten countries-Argentina, Venezuela ayetem leas exposed to instructive in the 19f10's debt and the Dominican Republic . 'sovereign defaults and banker; crisis. 4tvernme114"111 ,me waro about history wen meeting their obligations themselves lea preoccupied by atu ern f consequena& is full. Soon Hungary. Yoga their sec e y w n t e r n ftuu is 04 "Owing to the current world. slavia, Romania, Poland and But, despite this important stn wide business depression, the Bulgaria were also in default technical difference, the parcel. r a aD general revenues of the Repub- Finally, even Germany blocked lob between the debt crises of the bankers were partly right In their He of Bolivia hikve been tem, its foreign Payments as Its tough the 19305 and the 1980s are economic new leader-Adolf Hitler- more than just an historical predictions about porarily reduced to such an consolidated de power, curiosity Brazil and Mexico. They were extent that the Republic Is not recovering by 1934 --ice fact Approved For Release 2010/02/22 : CIA-RDP87-00462R000100140024-5 0 1 op 2 Approved For Release 2010/02/22 : CIA-RDP87-00462R000100140024-5 ?m ,GOVf11N11LNT AND . URDtM-TION. rA RrlA l..1t; larl:x%HtV uu'luttu urux. M .1...- uM. I.t 12-4 - .nrw w S .w.a?.I aw w Sir Otto Nieoaeyer..f tic. Bank at sastamd (left) and 1[r 710man W. Lament of S. P. Morgan Brazil's industrial productio crew by 11.9 per a el from 132 to 1939. Putras the., countries consolidated the: ravaged economies and return. to political stability, their dete: urination and ability to wit) stand pressure from foreig creditors grew as well. This i exactly what many Braziliar and Mexicans today expect thel governments to start doing 1 the next year or two. e>aUeltl A ' iw w'iSldl .ilKL repudiated its debts, beat by 19,}9 there was no longer an thong t of " loyally com? plying " with external obltp. lions, 4 promised in the Peruvian letter to the National City Bank In 1931. Indeed, when the Mexican President asserted publicly Is September 1933, that "the Present and future Amandal ; oUcy of the Govern. went does not permit of any idea of renewing service en the foreign debt, bls statement did aot even rate a report in the SnancLl press. The bond market am Picked Up slightly ~ht y temporary Brad con- verted mora- torium into Q .r ' default by s-tB31 mot It Would issue ne?..ly-printed bobs for 20 and 40 years in lieu of ash Interest payments. Of course, the major debtors took liberties with their a the U.S. ~Nd British s Govern. ments let them get away with it. But here is another lesson from the 1930s. The creditor govern. ments did not unleash retalis. tory trade meaou 'es against the defaulters or ostracise than from " the community of nations," On the whole, they blamed bankers for " overlend- ins." more than me Minn for tailing to pay. The U.S. and British Govern- ments' insouciance steamed not just from cooscismoe, or even political expediency, a World War Two made the pnservotion alliances paramount. o Latin vests A well-established also lemo seater to remember the better than their bankers. 'year cycle Since the 2820s, Ltia- of default Ameri ca had d f l e au ted en manse repeatedly. The losses of the 1930, were accepted as Just the latest turn of a well. established 50?year cycle of des fault, followed by further mas. sive ertetsadons of credit. Exper i- a hail shown that lenders against wvOut d teal sanction gn defaulters... cutting off new credit. Normailly, after a kftthy Period of default a country would seek so reestablish its credit by offering its bond. holders a " r.adjustmeat " M"ftg claie ,x their eir outstanding face val se. Most of the Latin Americans and Eastern darn. Dean countries lifted their de. faults like this in the 194k and 195Gs. Mexico was one of the first in 1941, when it Psi. The Lemont committee to r co#nmend acceptance of less than ISOm in settlement of more tlwn $500m of outsgnd. ins debts. The bondholders reluctantly agrood. on some payment w abetter than had bought the also because Mexican bands as Pure speculations at knock- down Prices during the cans. Wrs Protrwted porlods of total default bet en and 1943. Once an adjustment was' agreed by bondholders. the stigma of default was offlci.lly expunged and the country could again start 'seeking credit. Mexico was allowed to ,--r 1im t' us. JFtii6 Bank as early as 1942, while ft was still negotiating with the bondholders, but attar it had settled other outstanding claims against It, following the exr Pr'opttaGbn of U.S. oil con. Denies. Slowly but steadily, it returned to its pM..mlowt Poe tioo as one of the woeld's greatest debtors. Nearly four decades later. in April 4361, the al.:iwn Govern. toent approached the sterling bond market for a loan of $50m on behalf of Pemex, the state soil c ompaay. The following appeared in the Prospectus: "Full debt service has been paid when due upon all the external debt Issued by the Federal Government of Mexico since the adoption of the con. sttution of 1917 .. The prospectus did not bother to explain this enviable record. For nearly 30 years, from 1914 to 1943, Mexico had defaulted on most of its pre-1914 oblige. Cons and was therefore pre- vented from raising new loans on which it could commit any " fresh " defaults. That is the sort If tine point that bankers see:.. willing to leave to the history books. Approved For Release 2010/02/22 : CIA-RDP87-00462R000100140024-5