236. Minutes of a Policy Review Group Meeting1
SUBJECT
- International Debt
PARTICIPANTS
State:
- W. Allen Wallis
- William Milam
- Paul Taylor
Treasury:
- David Mulford
- Ciro DeFalco
Defense:
- David Wigg
- Robert Pastorino
OMB:
- Wayne Arny
CIA:
- Deane Hoffmann
- [name not declassified]
JCS:
- Jonathan Howe
- Paul Donaldson
CEA:
- Michael Mussa
AID:
- Malcolm Butler
- James Fox
NSC:
- John Negroponte
- Stephen Danzansky
- Stephen Farrar
Minutes
John Negroponte identified the objective of the meeting as gaining a better understanding of the linkages between the financial and foreign policy dimensions of the debt problem.
Argentina
Mulford described the tight financial situation. External reserves are $500 million or less. Argentina is renegotiating its standby arrangement with the IMF, having missed its fiscal deficit target. It must pay about $400 million in BONEX (dollar-denominated) bonds on February 15. In order to make the payment, the GOA stopped payment of interest to banks on January 1 and is accumulating arrearages to the IMF. However, Mulford said that if Argentina can reach agreement with the IMF, it will have access to $225 million from the IMF and $550 million from commercial banks, plus a $500 million World Bank sector loan later this year. In his view, it is a question of timing. The negotiations [Page 603] should be resolved by early next week. If successful, the Argentines will ask for a bridge loan to provide temporary financing through the end of March.
Allen Wallis cited the need for Argentina to adopt and stick to meaningful economic reforms. Mulford said Argentina plans to begin new negotiations with the banks in April, seeking a 2 or 3 year program with structural changes. Prospects were also good for a more flexible IMF approach. Mulford said that Argentina is not close to declaring a moratorium.
Both Wallis and Deane Hoffmann noted the difficult domestic political environment in which Argentine financial negotiators must operate. In response to a question from John Negroponte, it was asserted that the military is not a threat to retake control. Ciro DeFalco observed that the Peronist opposition has been even more cooperative recently because it wants to relieve the debt problem before assuming power in the 1989 elections.
Brazil
Mulford summarized Brazil’s financial history over the past year. Last February, it declared a moratorium on interest payments on commercial debt. During the summer, it began pressing for a unilateral securitization plan which amounted to a disguised form of default. The USG firmly rejected it, and persuaded Brazil to concentrate on finding a way to avoid U.S. regulators declaring Brazilian debt “value impaired”. In December, a $4.5 billion package was put together to finance arrears, thus avoiding such a declaration. The agreement contained a provision requiring Brazil to remain current on interest payments in 1988, a provision that is not being honored.
Mulford said Brazil is now negotiating with banks on a medium- term restructuring agreement, and this week agreed to pay $350 million toward interest arrears without condition. It has also agreed to announce the end of its moratorium when agreement is reached on the term sheet for the medium-term package. It will also begin negotiations with the IMF, with a mid-June target for agreement. While Brazil wants no linkage between commercial bank disbursements and IMF funds, the same security can be obtained other ways, such as through the Paris Club. Bill Milam thought the Paris Club could be effective in this role, although it would be difficult. Overall, Mulford saw a marked improvement in the Brazilian situation compared to last summer.
Wallis noted the relationship to the informatics controversy. He said improvement in the debt situation corresponds with Brazilian actions to defuse the informatics situation, in which the U.S. is poised to [Page 604] retaliate.2 Deane Hoffmann observed that the potential for improvement is limited by President Sarney’s obsession with winning a longer term in office. In response to a question from Steve Danzansky, Paul Taylor opined that most of the bad economic provisions in Brazil’s pending constitution will be removed.
Mexico
Mulford noted the favorable turnabout in Mexico’s external accounts (1987 trade surplus of $10 billion and current account surplus of $4 billion) but cautioned that much change is needed in domestic economic policies. He described Mexico’s debt-for-bonds plan, but said we will not know until February 19 how successful it will be. He guessed that smaller regional U.S. banks and some larger foreign banks with larger reserves would want to take advantage of the plan. Large money-center banks might be less willing.
In response to a question from Steve Danzansky, Mulford said that bank regulators are not taking special steps to encourage banks to participate in the Mexican plan, though regulatory changes in Japan might be influential. He noted a possible regulatory problem in the requirement that bidding banks mark offered loans at the bid price, whether or not the bid was successful.
Summary
Mulford said that the Baker Plan strategy is still in place and is supported by other countries as the only workable approach. The menu concept has made the strategy stronger, and has encouraged market-related ideas. Banks are now looking for better ways to participate, promising more productive use of capital. A fundamental problem with Argentina, he said, is that it is insolvent. It is thus an ideal candidate for finding a way to reduce the stock of debt. But he cautioned against being lured by seemingly simple global solutions that will end up requiring large-scale government funds.
- Source: National Security Council, NSC Institutional Files, Box SR–123, PRG MTG 00099. Confidential. Sent under a February 8 covering memorandum from Danzansky to Stevens, requesting that Stevens approve the minutes. The meeting took place in the White House Situation Room.↩
- Documentation on this is scheduled for publication in Foreign Relations, 1981–1988, vol. XVI, South America.↩