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

229. Telegram From the Department of State to the Embassy in Venezuela¹

338173.

Washington, October 30, 1987, 0128Z

SUBJECT

• CAP/Whitehead Memcon.

1. Confidential—Entire text.

2. Begin Summary: Carlos Andres Perez (CAP) and Deputy Secretary of State John Whitehead discussed debt for about forty-five minutes, October 28. Perez explained why he favors a unified Latin debtors group to set a framework for bilateral debt negotiations, and described the present and potential social and developmental consequences of the current structure of international debt. He noted in passing that under some circumstances, he would favor economic supervision by the IMF or World Bank, and that he thought the U.S. should hold a conference with debtor nations to reach a solution to the crisis. Whitehead noted the impossibility in a free society of commanding commercial banks to reach an accommodation with their debtors and said that a solution to the debt crisis lay with investment and voluntary capital inflow to debtor countries. He rejected the notion that the U.S. had a duty to bail out nations who have reached impossible debt levels due to their own economic mismanagement. In the corridor at the conclusion of the meeting CAP said he was gravely concerned about Central America and that he was trying to help make the Arias Plan successful.² End Summary.

3. Also present were the Andean Affairs Office Director, Mr. Whitehead’s special assistant, and the Venezuela Desk Officer (notetaker).

4. Debtors group: Responding to Whitehead’s question, Perez said that he did not believe Latin debtors should form a group to “confront” creditors. Confrontation would not allow anyone to advance. At the same time, national economies are not independent and there were good reasons why Latin countries in similar economic circumstances, and with similar debt problems should join together to propose a direction and general framework for debt negotiation. Perez envisioned something like a Latin OECD rather than a debtors club. Independent countries would continue to negotiate bilaterally with creditors, but within agreed limits.

5. Debt conference: Debt would certainly be discussed at the November Group of Eight summit in Acapulco.³ A later debt conference with creditors could offer a chance to find a solution before reaching a crisis stage.

6. Linking debt with other development factors: Perez said a consequence of high debt service was insufficient funds left for development and social spending. Without investment capital, debtor countries could not produce and would be unable to purchase goods from developed countries as much as in the past. Debt ought to be linked with trade and capital flow in a development framework to determine the limits within which debt repayment could be negotiated.

7. Consequences: Perez thought the situation in Argentina, Brazil and Mexico was dangerous, and noted that serious resistance to terms of the recent rescheduling arrangement were also developing in the private sector in Venezuela. Perez believed that if a new global debtor-creditor relationship were not made in about six months, serious pressures would emerge to force a change. In Venezuela, where the labor movement has traditionally been controlled, there could be unrest if the standard of living continues to fall. He favored a “reasoned” debt policy change in advance of crisis.

8. The problem of future financing in the face of non-payment: Whitehead reminded CAP that banks could not be ordered to lend in a free society, and asked how a country like Venezuela would attract necessary new lending if it paid back less interest or principal than it had initially agreed. CAP said he did not think Venezuela would default, but that the potential political consequences of continuing with the present system made change imperative.

9. Debtor countries should put house in order: Whitehead noted that much of the Latin debt problem was due to government subsidies, economic distortions, and bad management for which the lenders should not be asked to pay the price. CAP agreed. Lessons would come from this debt crisis and things would be done differently in the future. However, drastic action was needed to break out of the no-growth cycle engendered by high debt costs. CAP claimed he would not object to economic advice from the U.S., or discipline from an international financial institution, although in Venezuela an imposed economic plan would be politically impossible to accept.

10. We help countries that help themselves: Whitehead said the basis of our economic program was to cooperate with debtor countries on a case by case basis; and to reward steps that build sound economies, good credit, and attract new investment, the solution for debtor countries was to take necessary steps and attract capital. Whitehead ended the conversation, giving CAP a copy of a recent speech he had given on debt.⁴ (Department will transmit a copy to Caracas.) Both CAP and Whitehead wanted to meet again.

[Omitted here is discussion of the Central American security situation.]

Shultz

1. Source: Department of State, Executive Secretariat, S/S–I Records, Official Correspondence of Deputy Secretary John C. Whitehead, July 1982–Jan 1989, Lot 89D139: Memoranda of Conversation 1987. Confidential; Immediate. Drafted by Brad Hittle (ARA/AND); cleared by Stephen Kelly (S), B. Lynn Pascoe (S/S), and William Haugh (S/S–O); approved by Michael Skol (ARA/AND).
2. A reference to the Central American Peace Plan put forth by the President of Costa Rica, Oscar Arias Sanchez, and signed August 7 in Guatemala City.
3. Telegram 24301 from Mexico City, December 1, transmitted the Embassy’s analysis of the debt proposals reached by the Group of 8 at the Acapulco Summit, which were enunciated in a final document issued November 29. (Department of State, Central Foreign Policy File, Electronic Telegrams, D870985–0411)
4. Whitehead delivered an address, entitled “Third World Dilemma: More Debt or More Equity,” before the Council on Foreign Relations in New York City on October 21. He argued: “Now is the time to reinvigorate the Baker plan by emphasizing the importance of capital investment—an extremely promising, but often overlooked, source of new money.” For the text of Whitehead’s address, see Department of State Bulletin, December 1987, pp. 54–57.