128. Memorandum From Norman Bailey and Roger Robinson of the National Security Council Staff to the President’s Assistant for National Security Affairs (Clark)1
Washington, January 6, 1983
SUBJECT
- Overlooked Implications of the Debt Crisis
Enough time has now passed since the international debt crisis erupted in August of 1982 to discern some of the trends in dealing with the problem and their implications:2
- 1.
- The problem is being dealt with on an ad hoc basis rather than a systematic one.
- 2.
- Partially as a result of the above, more and more debtor countries are taking unilateral actions to delay or suspend principal and sometimes interest payments. The terminology of default, repudiation and moratorium is being avoided, but the reality is beginning to appear.
- 3.
- The banks are beginning to break ranks and try to cut separate deals, singly or in groups.
- 4.
- More and more of the debt is becoming concentrated in the larger banks and in governments (read taxpayers), thereby concentrating risk.
- 5.
- Congress will not easily agree to an increase in IMF resources, an absolutely essential element.
- 6.
- The USG will soon run out of emergency funds. If and when that happens, the only recourse will be Federal Reserve purchases of debtor country currencies, a highly questionable asset at best. In other words, our central bank would become the lender of last resort to the [Page 334] entire world. The implications of such a development would be staggering. It may emerge as the only alternative to worldwide financial and commercial collapse, however, unless we get out of the ad hoc rut and adopt more flexible systematic and imaginative solutions.
- Source: Reagan Library, Norman Bailey Files, International Economics File, International Debt (January–February 1983). No classification marking. Sent for information. A copy was sent to Weiss.↩
- See Documents 126 and 127.↩