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

224. Memorandum From Stephen Danzansky of the National Security Council Staff to the President’s Deputy Assistant for National Security Affairs (Powell)¹

Washington, June 26, 1987

SUBJECT

• Readout from International Economic Policy Breakfast, June 26, 1987

Inter-American Development Bank

Secretary Baker asked for a united Administration front on the question of the IDB in light of the stepped-up efforts of South and Central American countries to lobby the Congress and Administration to ease up on Treasury’s “hard-line” position to link increased financial support for the Bank with voting or at minimum blocking rights proportionate to the U.S. contribution to the Bank. The policy reforms which the U.S. feels are needed in debtor countries are not always translated into conditionality when the U.S. does not control whether or not new lending is authorized. This has stymied progress in the borrowing countries and Treasury has taken the position that unless the U.S. gets its policy “say” commensurate with its financial commitment, we will take our money and put it into the World Bank where policy reform is the watchword. Whitehead agreed with Baker’s assessment and further indicated that he thought the members of the IDB would finally come around to granting the U.S. its request if we hung tough on proportional voting. Baker mentioned that there was considerable activity by Mexico and many South American countries to pressure Treasury into modifying its position. They were lobbying Congress pretty hard and would likely visit sympathetic Administration officials. He asked that we hold the line and opined that if we do, we will ultimately get our way.

[Omitted here are discussion of Taiwan and Shultz’s thoughts on the U.S. trade deficit and status as a net debtor.]

Debt

Shultz then asked Baker what he intended to do about middle income debt. Do we just let things muddle along? This, in Shultz’ opinion, will only delay the difficulty since he does not believe the debt will be repaid in any event. Secretary Baker responded that indeed he had a small group working on the issue of what else can be done to help the problem. (Shultz indicated that he would like to join.) Basically, said Baker, the current strategy was working, witness the new package negotiated with Argentina by the banks. Banks will lend new money. In the Argentina package, the “menu” approach was very successful since they used almost every approach from debt-equity swaps to exit bonds; everything but interest capitalization. The latter is something Treasury will be looking at in its study of the debt question, i.e. regulatory help on that front. Shultz commented that he felt that the Citicorp situation was indicative of the inability of banks to cope with the status quo and an indication that they are pulling out of the Baker strategy.² Baker disagreed; maybe they plan to pull out in the long term, but in the short term the big banks cannot afford to get out and declare a loss. No one has taken a loss yet; only reclassified their debts and capitalized accordingly. He’s not worried about the large banks but the medium sized regional banks. It is they who will likely pull out and may need assistance getting there.

[Omitted here is Shultz’s expression of concern with current macroeconomic policy.]

SAF and the Poorest Countries

FCC raised the question of the Structural Adjustment Fund and the Venice declaration.³ Baker indicated that Camdessus had lobbied for and obtained a Summit commitment to triple the SAF which Baker was mad as the devil about. The SAF was a U.S. creation, part of the Baker Plan, and was funded by trust fund reflows from the sale of gold. The U.S. cannot afford to triple its contribution and if people want to increase the SAF to help African nations, they should rely upon the surplus nations for the money and not the U.S. FCC then indicated his concern about the African nations like Ivory Coast who had done much by way of reform but who just didn’t have the resources to be able to meet obligations. Baker said that the Summit recognized the special nature of African countries and if they wanted the SAF to deal with these problems they could not rely upon the U.S. to chip in money given the problems we are having with the IDA VIII⁴ and other funding in the Congress. Baker did not offer to discuss the SAF question interagency.

[Omitted here is discussion of EC fats and oils.]

1. Source: Reagan Library, Stephen Danzansky Files, Chronological File, Danzansky Chron June 1987–July 1987; NLR–733–22–13–11–7. Secret. Sent for information. The memorandum is marked: “Information Extremely Market Sensitive.” A stamped notation in the top right-hand corner of the memorandum reads: “Deputy Natl Sec Advisor has seen.” “Danzansky” is written at the top of the memorandum. Copies were sent to Green, Courtney, and Rodman.
2. See footnote 3, Document 223.
3. See Document 222.
4. See Document 352.