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

144. Memorandum From the Under Secretary of Defense for Policy (Ikle) to Secretary of Defense Weinberger¹

Washington, June 15, 1983

SUBJECT

• NSC Meeting Chaired by the President on International Debt—ACTION MEMORANDUM (U)

(C) You have been invited to an NSC meeting chaired by the President on the International Debt Problem on 16 June 1983 at 1100.² Other invitees are: Secretaries Regan, Shultz, and Baldrige; Ambassador Brock; Judge Clark; and, Messrs. Feldstein, Casey, Meese, and Baker. This meeting will be principals only—no substitutes.

(C) The purpose of the meeting will be to brief the President on the causes of the current international debt crisis and to outline current policy. Judge Clark wants to keep the meeting factual. His staff hopes that the President will conclude that current policy is insufficient to deal with the debt problem.

(C) BACKGROUND: Following the Mexican debt crisis in August, 1982, the Administration began an intensive review of policy regarding the international debt problem. This review culminated with the signing of National Security Decision Directive 96 on June 9, 1983.³ NSDD–96 provides that the management of the debt problem will require flexible responses on a case-by-case basis within the framework of a comprehensive strategy.

(C) Basically, the strategy is to rely on worldwide economic recovery to boost economic growth in borrowing countries while they assume the responsibility to adjust their economic policies to live within their means. Any “temporary” liquidity problems would be bridged through the International Monetary Fund and creditor country financial support. However, old debt restructuring/rescheduling and any new debt requirements will be the principal responsibility of the private sector.

(C) This strategy assumes: (1) that the current problem is really only one of short-run liquidity and (2) that private financial markets with IMF encouragement can carry the burden of assuring solvency for the future. This is mainly the view of Treasury, State, and others. However, during the course of the study leading to NSDD–96, DoD, CIA, NSC, and Commerce argued that the debt problem has the potential for getting much worse in a second round of debt crises later this year. Instead of merely a short-run liquidity problem, the situation could very well turn into a solvency problem for several key friends and allies.

(C) While not disagreeing with some of the basic elements of the strategy, we feel that more needs to be done to understand and deal with the security and economic implications of a second round of debt problems.⁴

Implications for DoD

(C) Some of the implications of the continuing debt problem for Defense are:

○ Debt difficulties are not uniformly distributed among our friends and adversaries. From a national security standpoint, we need to direct our efforts toward: (a) maintaining the economic and political viability of our allies and friends, (b) encouraging allies and non-aligned friends to be more helpful to the achievement of our foreign policy objectives (e.g. Mexico) and (c) avoiding arrangements that help or subsidize our adversaries. We must assure that U.S. Government direct and indirect assistance helps our allies and potential friends and not our adversaries.⁵
You should stress this point during the discussion and suggest that we develop mechanisms and techniques for accomplishing these goals more effectively. DoD will be pleased to participate in this effort.⁶

○ Large infusions of new funds will be necessary this year ($5–$15B). It is not clear where these funds will come from. The IMF is depleting its resources with little prospect for a quota increase before the end of the year. Private markets could provide funds but this would create additional upward pressures on interest rates with negative effects on economic recovery. It is likely that government financial assistance will be required, creating further pressure on a severely constrained budget.

○ Many of the debtor nations are FMS recipients.⁷ As their problems become worse, significant arrearages could develop on their accounts. In addition, these countries will require larger amounts of economic assistance to bridge balance of payments problems. At the same time, this could lead to the need for increasing amounts of FMS grants versus loans.

○ The domestic costs of economic adjustment in debtor countries are high and will increase, leading to potential political and social instability as standards of living decline.

Major commercial banks have large concentrated exposure in areas where problems are acute (i.e., Latin America). If problems develop quickly, some banks may seek special provisions from the government.

Fred C. Ikle⁸

1. Source: Reagan Library, Roger Robinson Files, Subject File, International Finance: 05/01/1983–06/30/1983; NLR–487–3–23–12–0. Confidential. Robinson initialed in the top right-hand corner of the memorandum.
2. See footnote 4, Document 137.
3. See Document 143.
4. An unknown hand underlined “security.”
5. An unknown hand underlined “not” and highlighted this sentence in the right-hand margin.
6. An unknown hand highlighted this paragraph in the right-hand margin.
7. An unknown hand underlined “FMS recipients.”
8. Ikle signed “Fred” above his typed signature. The options “Will Attend” and “Will Not Attend” were crossed out at the bottom of the memorandum.