Foreign Relations of the United States, 1981–1988, Volume X, Eastern Europe

252. Telegram From the Embassy in Hungary to the Department of State¹

5861/Depto 3004.

Budapest, June 7, 1988, 1354Z

SUBJECT

• My Stop in Yugoslavia.

1. Secret—Entire text.

2. My visit to Yugoslavia could not have come at a better time. Yugoslavia, or at least the people running it, is absolutely consumed with its financial and economic problems. Since I arrived here Sunday,² the only government official who hasn’t talked about IMF standbys or financing gaps or bridge loans was our tour guide in Split. I’ve been able to do some important hand-holding at a critical moment, give some valuable advice, and perhaps most important, assure the Yugoslavs that we believe what they are doing is positive, worthy of our support, and bound to succeed. I also beat Adamishin here by a day with our view of the Moscow Summit, which Prime Minister Mikulic and Foreign Secretary Loncar in particular appreciated.

3. The basic problem here is that Yugoslavia has finally realized it was making no progress on paying back its dols. 20 billion in external debt, and recently reached an internal consensus to do something about it. The IMF has approved a standby plan, but before it goes into effect June 30, the Yugoslavs must have identified some dols. 1.2 billion to close the gap between expected receipts and obligations. That is problem number one. The second, and more immediate, problem is that they need about dols. 250 million in short-term cash to cover a series of immediate reforms they have put into effect. These include devaluing the dinar 24 percent, liberalizing the foreign exchange market, and doing away with import controls on about 40 percent of their imports. Further fundamental economic reforms, which Mikulic correctly termed evolutionary, are to follow in the form of constitutional amendments.

4. Depending on who’s counting, the Yugoslavs seem to have identified about one billion dollars from the IMF, the World Bank, commercial banks, and rescheduled interest to plug the dols 1.2 billion gap. That still leaves them short of the mark. And the BIS has agreed to provide a dols 250 million bridge loan to get them over the immediate hurdles as they open their exchange markets, a process which after the first six days seems to be functioning without crisis.

5. I think you get the best flavor for how dramatic all this is from my conversation with Mikulic.³ This is a man whose government survived an unprecedented no-confidence vote May 14. Who ever would have thought even ten years ago that a communist country would get to the point of holding such a vote? What’s more, two of the Yugoslav republics voted against Mikulic’s government. The former president of one of them, Ante Markovic of Croatia, who was my host last year in Zagreb, told me Monday⁴ Croatia voted against Mikulic not because they thought his economic reform package was too radical, but because it isn’t radical enough.

6. Mikulic told me Tuesday⁵ he thought the country was united behind his plans to open Yugoslavia to the rest of the economic world. He noted that there has been resistance already from those who will be hurt by these economic reforms, particularly large and inefficient enterprises and others unable to adjust to the realities of an open marketplace. But he said he was confident that the efficient parts of the Yugoslav economy would be able to pull the rest of the country along into a brighter future. We are in for some hard times, Mikulic said, adding with some of the bunker vocabulary I often heard expressed, quote, although we are few, we are brave, unquote.

7. My approach in the speech I delivered Monday morning to the annual meeting of the U.S.-Yugoslav Economic Council, and in meetings with Mikulic, Loncar, Deputy Prime Minister Milosavljevic, and Finance Minister Rikanovic, was to stress that the U.S. strongly supports what Yugoslavia is doing. I also tried to counteract a mistaken impression that we weren’t willing to help with a long list of measures we’ve taken. I noted our willingness to contribute dols. 50 million to the BIS package, the dols. 50 million we were adding to Yugoslavia’s Commodity Credit Corporation credits, and the jawboning we are doing with commercial banks to encourage them to provide some of the needed new money. In private, I briefed Rikanovic and Milosavljevic on our efforts to twist the Kuwaiti bankers’ arms, noting that we have raised the question of their participation to a political level since the bankers have turned their thumbs down. I also promised that we would support Yugoslavia when the Paris Club meets Thursday⁶ on their request for rescheduling, although I said their request must be within reason.

8. With Loncar, as with the others, I said we admired the courage it took to make the kinds of economic adjustments Yugoslavia faced, and I talked to him in detail about the advantages of a free market. I told him that centrally planned economies simply don’t work, adding that this wasn’t a question of ideology, but one of practicality. I also made some practical suggestions to Rikanovic on ways to convince the IMF that sufficient funds were identified so it would give the standby agreement the final green light.

9. I also managed with Loncar and Mikulic to give them our readout of the summit. Loncar’s analysis is that there is no question that Gorbachev will succeed; the only question is how fast. Loncar said that Gorbachev had been tremendously successful in changing the Soviet Union’s image (indeed, they are getting the credit for leaving Afghanistan), and that this new atmosphere was especially seductive to the public in Western Europe.

10. Loncar and I also went over some of the nuts and bolts of our relationship. We signed the consular convention that we initialed last time I was here. This will help us more effectively protect dual nationals who get arrested here, a big problem in the past. We also reviewed the talks on terrorism the Yugoslavs had in Washington last week. They were impressed with what they saw and heard, and Loncar said they came back ready to extend even greater cooperation.

11. Finally, Loncar made a big pitch to have you visit Yugoslavia. He said that their relationship with the U.S. has top priority, and that they want to do more with us in all fields. He argues that it is time for a visit at the quote highest level unquote.

12. I agree. From the interaction of American and Yugoslav businessmen in a crowded reception room in Split, to the frank economic and political talks I had with top officials in Belgrade, I can see our countries have never been closer. Yugoslavia has major problems; there’s no disguising it. But if we can help them solve their problems with Western solutions, the precedent will have a powerful effect on Yugoslavia’s less liberal neighbors, and represent a real victory for our step-by-step approach to this part of the world.

Palmer

1. Source: Department of State, Official Correspondence of Deputy Secretary of State John C. Whitehead, July 1982–January 1989, Lot 89 D 139, Potsdam Trip, June 4–16, 1988 (Eastern and Western Europe). Secret; Immediate; Nodis. Drafted by Kelly (D); approved by Whitehead.
2. June 5.
3. See Document 253.
4. June 6.
5. June 7.
6. June 9.