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

204. Memorandum From Stephen Farrar of the National Security Council Staff to the President’s Assistant for National Security Affairs (Poindexter)¹

Washington, July 15, 1986

SUBJECT

• The Bradley Plan for Latin Debt Relief

In a speech in Zurich on June 29, Senator Bill Bradley outlined a bold alternative to the Baker Plan for managing Latin American debt.² Bradley’s thesis is that Latin debt is too large to allow sustainable economic growth. Key elements of his 3-year recovery package are as follows:

○ Interest rate relief of 3 points per year on all official and commercial debt.

○ Forgiveness of principal of 3 percent per year.

○ No new commercial lending.

○ Lending by multilateral development institutions of $3 billion per year (as in the Baker Plan).

The Bradley proposal also differs from the Baker Plan in several other respects. For example, Bradley would allow each debtor country to design its own economic recovery package; the Baker Plan calls for packages negotiated with the IMF. Attached at Tab A is a table comparing the Baker and Bradley proposals.³

Analysis

The Baker Plan—and established Administration debt policy—is built on the premise that debt forgiveness will hurt debtor countries more than it will help, because future new lending will dry up in the face of bad credit ratings.

Bradley rejects this premise. He believes that debt forgiveness will improve the flow of new credits as economic growth picks up and as capital flight slows. Bill Cline of the Institute for International Economics argues (see Tab B)⁴ that Bradley is wrong; banks are not likely to voluntarily take loans off the books, and there is no way to force them to do so. Moreover, Cline concludes that the cost to the banks would be extremely high—cutting annual profits in half and reducing capital by 17 to 25 percent.

Debt forgiveness cannot be ruled out for some country in the future. Mexico is the most likely candidate, since it will be extremely difficult for Mexico to halt the growth in (let alone reduce) its $100 billion stock of debt. However, the plan now being developed with the IMF calls for economic restructuring that could help Mexico realize its impressive potential without drastic steps. That plan deserves solid U.S. support.

The second-guessing of the Baker Plan by Bradley and others is in part due to the slowness of the Plan to take shape. In fact, all the elements of the Plan were never meant to be in place at once. The Administration faces a challenge in delivering the U.S. share of the proposed $3 billion annual lending by MDB’s in the current budget environment.

Conclusion

The Bradley Plan is based on a faulty reading of the impact of forgiveness on commercial banks’ willingness to extend new loans in the future. Debt forgiveness is not appropriate now.⁵

1. Source: Reagan Library, Stephen Danzansky Files, International Trade Subject Outline, VIII (C) Debt—New Ideas—Baker Plan. No classification marking. Sent for information. Sent through Danzansky. A stamped notation in the top right-hand corner of the memorandum reads: “Natl Sec Advisor has seen.”
2. A copy of Bradley’s June 29 speech is in the Reagan Library, Stephen Farrar Files, 1986–1987 File, Subject File, Debt—Baker Plan 1985–1986; NLR–177–1B–1–14–6.
3. Tab A, “A Comparison of the Baker and Bradley Plans,” is attached but not printed.
4. Tab B, a copy of William R. Cline, “Bradley’s Debt Plan Won’t Work,” Washington Post, July 15, 1986, p. A19, is attached but not printed.
5. A copy of the Treasury Department’s analysis of the Bradley Plan, dated July 14, is in the Reagan Library, Stephen Farrar Files, 1986–1987 File, Subject File, Debt—Baker Plan 1985–1986; NLR–177–1B–1–12–8. The analysis concluded: “Senator Bradley’s debt proposal is not necessary, and poses a number of serious problems.” A July 15 information memorandum from Lamb to Shultz summarized and analyzed the Bradley Plan, outlining “key problems” with the plan. Attached to that memorandum is a copy of the EB/PAS analysis of the Bradley Plan. (Department of State, Executive Secretariat, S/S Files, 1986 Official Office Files, Action/Briefing/Information/Through Memoranda,/Chron Files/Memoranda to the Secretary Handled by (E) Economic Affairs Allen Wallis, Lot 89D156: Through Memoranda, July 1986)