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

232. Memorandum From the Under Secretary of State for Economic and Agricultural Affairs (Wallis) to Secretary of State Shultz¹

Washington, December 17, 1987

SUBJECT

• Bank of Boston Write-Off of LDC Loans

The attached memoranda from EB and ARA both give useful perspectives on the implications of the Bank of Boston move for the debt strategy.²

The Baker approach correctly emphasizes that sound, market-oriented internal policies are the only way heavily indebted countries can grow, service their debts, and re-establish creditworthiness. We should continue to promote and support such policies along the lines of the present strategy.

But we must also recognize reality: in some, possibly many cases, entrenched political forces in debtor countries will prevent adequate policies from being adopted. In such cases, the loans are not going to be fully serviced, and our strategy needs to allow for voluntary settlements between banks and the debtor countries which recognize this fact. As the EB memorandum points out, steps like those taken by the Bank of Boston prepare the ground for such action.³ (At the same time, these steps put some pressure on debtor governments to recognize that changing course toward sound policies may be preferable to a formal, public acknowledgement of their poor credit standing.)

Such private, market-determined settlements may be difficult to reach, but where a second-best solution is necessary, they will be in the best long-run interests of our banking system and our relations with these countries.

Allen Wallis⁴

1. Source: Department of State, Executive Secretariat, S/S Files, 1987 Official Office Files for (E) Economic Affairs Allen Wallis, Lot 89D155: [no folder title]. Confidential. A stamped notation reading “GPS” appears on the memorandum, indicating Shultz saw it. The memorandum is stamped: “ES Sensitive.”
2. A December 17 memorandum from Abrams to Acting Secretary Whitehead and a December 17 memorandum from Larson to Shultz are not attached. Copies of both memoranda are in the Reagan Library, George Shultz Papers, Executive Secretariat Sensitive (12/17/1987–12/29/1987). In his memorandum, Larson explained that the Bank of Boston announced on “December 15 that it would write off $200 million of its $1 billion portfolio of LDC (predominantly Latin American) loans, making it the first major U.S. bank to declare a significant portion of its Latin loans to be uncollectable.” The bank also “said that it would place the remaining $800 million on a non-accrual basis and that it would increase its loan loss provisions against these loans by $200 million, to a total of $430 million.”
3. Larson concluded in his December 17 memorandum (see footnote 2, above) that the Bank of Boston’s decision “injects a welcome shot of realism into debtor-creditor negotiations. Although it may complicate our current debt strategy of arranging concerted lending packages, the Bank of Boston’s action is a logical response to market signals that many LDC loans are worth far less than their par value. Policymakers must find constructive ways to build on what the market is telling us about the LDC debt crisis.” (Ibid.)
4. Wallis initialed “AW” above his typed signature. He wrote under his signature: “Am told by Mulford (protect) that (1) Bank of Boston main motive was to improve their competitive position in domestic markets—their stock price rose, other bank stocks fell. (2) Security Pacific will emulate B of B, and probably others. AW.”