Office of the Historian

228. Information Memorandum From the Assistant Secretary of State for Economic and Business Affairs (McMinn) to Secretary of State Shultz1

Washington, October 3, 1987

SUBJECT

  • IMF/IBRD Annual Meetings: Slow and Steady2

SUMMARY AND INTRODUCTION

Meetings of the G–5/7, G–10, Interim and Development Committees and the Boards of Governors of the IMF and the IBRD proceeded in a comparatively subdued atmosphere, a distinct contrast from the last several years. The USG succeeded in preserving its leadership in the international financial system through a combination of the earlier announcements of support for an IBRD General Capital Increase (GCI), the President’s approval of new Federal deficit reduction targets, and several proposals in Secretary Baker’s address for minor variations in policy coordination and the debt strategy. Despite widespread agreement that industrial country growth is below par while resolution of the debt crisis remains elusive, the world’s financial leaders opted for, or assented to, continuation and strengthening of ongoing initiatives. END SUMMARY AND INTRODUCTION

[Omitted here is information on industrial world developments and policy coordination.]

Debt Strategy

Despite widespread concern over adjustment fatigue in debtor countries and the increasing difficulty of securing new commercial financing, Baker again kept the lead with his announcements of USG support for an IBRD GCI and several sound but minor proposals for incorporation into the strengthened debt strategy. The latter included:

—
enhancing the menu approach through increased emphasis on voluntary swaps of debt for equity as well as for securities (exit bonds);
—
endorsement of limited interest capitalization, on a voluntary basis, particularly for smaller debtors;
—
growth-oriented changes in IMF programs such as replacement of quarterly targets with semiannual targets in 18-month standbys to provide greater flexibility in program implementation; and,
—
use of structural reform targets in place of some quantitative fiscal and monetary targets. (This proposal, if accepted, would be of immediate importance for both Ecuador and Argentina.)

Baker also proposed creation of an External Contingency Facility (ECF) to replace the Compensatory Financing Facility (CFF). The new facility would be broader and “richer” than the CFF (it would include compensation for interest rate increases and allow access to a higher percentage of quota). Drawings under the new facility could be made to support stand-by programs threatened by a change in external circumstances.3

Other Issues in Brief

Conable in Control: Slightly over one year into his term, Bank President Conable delivered a direct and forceful address to the Governors. Baker strongly endorsed Conable’s leadership and reform of the Bank, laying the recent contentious Bank reorganization to rest. His vote of confidence was amply demonstrated by USG support for a GCI.

SAF Expansion: Camdessus’ proposal to triple the SAF received broad support; however, USG refusal to contribute due to budgetary strictures dims chances for rapid implementation.4

IMF Quota Increase: USG unwillingness to pursue a rapid quota increase, based both on budgetary constraints and the belief that Fund liquidity is adequate, will delay quota discussions.

NIC’s: Baker called on the Asian NICs, citing Hong Kong, Singapore, Taiwan and Korea by name, to remove trade barriers and capital controls and to pursue appropriate exchange rate policies.

G–10 Expansion: The G–10 agreed to renew the General Arrangements to Borrow (GAB) for another five years but did not reach a consensus on accepting new members. Spain, Australia and Austria are seeking to join.

  1. Source: Department of State, Executive Secretariat, S/S Files, 1987 Official Office Files for (E) Economic Affairs Allen Wallis, Lot 89D155: Through Memoranda October 1987. Confidential. Drafted by Seth Winnick (EB/IFD/OMA) and Jack Robinson (EB/EFD/ODF) on October 2; cleared in EB/IFD/ODF, EB/IFD/OMA, and EB and by Milam. Sent through Wallis. “RH 10/3” is written at the top of the memorandum.↩
  2. A copy of Treasury’s “highlights” report on the IMF/World Bank annual meetings is in the Reagan Library, Stephen Farrar Files, 1987–1988 International Economic Affairs Directorate Outline File, Debt 1 of 2—03/01/1987–04/30/1987; NLR–177–1B–50–1–6.↩
  3. In a November 12 memorandum to Baker, Mulford provided an update on “consultations in the Fund and the Bank to seek support for your proposals announced at the Annual Meetings for establishing an External Contingency Facility (EFC), adapting IMF lending policies, and building better Fund/Bank collaboration.” (Washington National Records Center, Records of the Under Secretary for International Affairs (Mulford), Subject Files, 1985, 1991, 56–04–0100, Box 4, [no folder present])↩
  4. See Documents 226 and 227.↩