Foreign Relations of the United States, 1981–1988, Volume XXXVIII, International Economic Development; International Debt; Foreign Assistance

134. Memorandum From Norman Bailey of the National Security Council Staff to the President’s Assistant for National Security Affairs (Clark)¹

Washington, March 31, 1983

SUBJECT

• Debt Strategy

This memo is in response to your recent comments on my weekly reports. Roger and I are monitoring the debt crisis as closely as possible given our numerous other responsibilities. As of now, our conclusions are as follows:

The international debt crisis is already entering its second phase, three months before even we expected. The second phase is characterized by the following features:

— Countries which signed painfully-wrought agreements with the IMF only two or three months ago are publicly or privately announcing their inability to adhere to the terms of these agreements.

— Many regional and foreign banks continue discreetly to try to reduce their exposure to the major debtors, especially by taking payments on maturing inter-bank deposit lines.

— Multi-billion dollar rescue efforts within weeks are seen to be inadequate over a sustained period of time, and the debtors are back for more.

— As this happens, further rescue packages become harder and harder to arrange. Roger and I managed to salvage the Yugoslav package through discreetly forging a compromise between the GOY and the New York banks, but major banks are reaching country risk limits, having in many cases long ago passed the limits of prudence.

— Gradually pressure is building for a multilateral debtor declaration of moratorium. This has been officially endorsed by Bolivia, Ecuador and Nicaragua. By the UNCTAD meeting in June, the pressure may be unbearable.²

— Right now Brazil is of acute concern. The maxi-devaluation hasn’t worked, smuggling and capital flight have reached massive proportions, inflation is through the roof, President Figueiredo has threatened to resign and a secret meeting of 16 U.S. banks concluded that Brazil may declare a unilateral moratorium and nationalize the banks.

In other words, it is totally clear already that the debt crisis is a structural crisis requiring restructuring of the debt and not merely a liquidity-shortage crisis which can be handled by traditional rescheduling operations. Both CEA and CIA have prepared studies concluding the same thing. Commerce and USTR agree, as does DOD, which is very concerned about the national security implications. At this point, only Treasury and OMB still adhere to the view that there is no structural crisis while State is divided on the issue.

As a result, we will push very hard for a recognition of the structural basis of the crisis in the NSDD³ resulting from the NSSD on international debt management,⁴ if necessary filing a dissent if Treasury tries to roll the issue. The NSDD should establish a debt office, not just another working group, to prepare the USG’s response to the structural crisis we have, not the mere liquidity crisis that we wish we had.

The debt presentation to the President is virtually ready but is already OBE’d and is being updated and restructured.

1. Source: Reagan Library, Executive Secretariat, NSC Subject Files, International Debt Situation (3/83–8/83). Secret. Sent for urgent information. A stamped notation on the memorandum reads: “WPC Has Seen.” A copy was sent to Robinson.
2. The sixth session of UNCTAD took place June 6–30 in Belgrade.
3. See Document 143.
4. See Document 132.