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

242. Memorandum From the Assistant Secretary of the Treasury for International Affairs (Mulford) to Secretary of the Treasury Baker¹

Washington, June 17, 1988

SUBJECT

• Paris Club Interest Rates at the Summit

Action Forcing Event

At the Summit you will be pressed for a position on the various proposals that are now on the table for dealing with debt of the poorest countries.² In addition to the Lawson plan and our own, Mitterrand and the Japanese have presented other options. Because the Mitterrand proposal includes forgiving principal, we need a considered response.

The Mitterrand Plan

President Mitterrand, in a letter to President Reagan and the other Summit leaders (attached),³ proposes that creditors be allowed three options:

— A cancellation of a third of the debt service due, including principal and interest, with remaining amounts rescheduled over 10 years;

— A rescheduling of export credits with concessional interest rates (reduced by at least half from some base rate), with repayment over 15 years; and,

— Rescheduling at market rates, but with repayment of up to 25 years. (The current maximum is 20 years.)

These options could be utilized only for the poorest countries (i.e., those eligible for the special debt relief measures in last year’s Venice Summit communique).

Mitterrand’s proposal would specifically forgive principal—reducing the stock of nominal debt. The interest rate concession approach of the U.S./Canada plan keeps the underlying nominal stock of debt in place. It provides relief on debt service through a reduction in interest payments, causing a loss only in the present value of the debt for creditors that choose that option. Mitterrand goes a significant step further.

Other Summit countries could see the French idea as a means of achieving consensus on this difficult issue, while preserving their options. Mitterrand would note that this is a menu in which the USG could continue to reschedule at a market rate, while those choosing the write-off option would provide immediate debt relief to the poorest countries at a cost only to themselves.

Thus, objecting to the Mitterrand proposal could leave us isolated and on the defensive publicly. (You may be able to challenge Mitterrand, however, for the high ground on other African aid issues.)

Trichet has clarified to me in writing certain aspects of the Mitterrand plan that had been cause for concern.⁴ According to Trichet, the plan is intended as an expansion of the menu, with longer repayment terms applied to our proposed options. It:

— Would be applied on a case-by-case basis through the Paris Club for the poorest countries only with appropriate conditionality maintained—i.e., an IMF link; and,

— Relates to debt service payments, rather than stocks of debt. It would be applied yearly to scheduled principal and interest, rather than to the outstanding stock of debt.

The Japanese Plan

The Japanese have made a low-key suggestion for another option that would count increased grants as a substitute for concessional interest rates on export credits.⁵ Japan announced a $50 billion, five year spending target for official development assistance (ODA—or aid loans) on June 14. If the target is reached, it would represent a doubling of Japanese ODA from the previous five years.

However, adding aid to the Paris Club menu as a substitute for concessional interest rates is not feasible, since:

— The Paris Club is not in a position to make judgments about aid flows; and,

— Determining the “newness” or “additionality” of aid is difficult, if not impossible.

The Japanese may support the French plan in exchange for French support of their proposal.

Conclusion

Mitterrand has created a conundrum. A benign view would see the plan merely as an expansion of the Paris Club menu. I am very uncomfortable, however, with allowing an official sanction of write-offs of sovereign debt. It would be the first time that government creditors have sanctioned write-offs of principal on commercial loans in the context of a multilateral forum. There are considerable risks of contamination to other debtors, even if only beginning with other African countries such as Nigeria and Cote d’Ivoire.

We would expect Summit participants to agree at most to a general formulation on debt measures for the poorest countries. Details, including operational aspects, would then be taken up by a Paris Club working group meeting on July 11–12.

RECOMMENDATION:

1) That we not agree to the introduction of debt cancellation in the Paris Club menu (the Mitterrand plan). The French could write-off debt bilaterally, but not as part of a multilateral process;

2) That we seek a consensus on the Paris Club menu approach you outlined in your speech in Abidjan;⁶

3) If pressed to resolve the Mitterrand proposal, that we seek to pass the specifics of the menu to the Paris Club working group meeting in July, citing our concerns with debt forgiveness, the complexity of the proposal, and the need for further USG review; and,

4) That we welcome increased Japanese grants, but discourage grants as an additional Paris Club menu choice.⁷

1. Source: National Archives, RG 56, Records of the Office of the Secretary of the Treasury, Congressional Correspondence, 1988, UD–10, 56–10–1, Box 44, [no folder title]. Limited Official Use. Sent for action. An adhesive note affixed to the first page of the memorandum reads: “Copy given to Mulford 6/24/88.”
2. See Document 241.
3. The informal translation of the June 7 letter from Mitterrand is attached but not printed.
4. Not found.
5. In a June 15 memorandum to Baker, Mulford wrote that “Prime Minister Takeshita wants to announce a new debt initiative at the Toronto Summit in order to demonstrate Japanese willingness to recycle funds to help debtor countries.” Mulford then outlined and analyzed the proposal. (National Archives, RG 56, Records of the Office of the Secretary of the Treasury, Congressional Correspondence, 1988, UD–10, 56–10–1, Box 44, [no folder title])
6. A copy of Baker’s remarks delivered to the 1988 Annual Meetings of the African Development Bank and Fund on June 1 in Abidjan, printed on “Treasury News” letterhead, is in Department of State, Executive Secretariat, S/S–I Records, Files of the Deputy Secretary of State (D), Lot 95D334: Debt. In the remarks, Baker announced the “willingness of the United States to expand the range of options within the Paris Club so that creditor governments which are in a position to do so can—on a case-by-case basis—provide concessional interest rate reschedulings for the poorest countries.”
7. Baker did not indicate his approval or disapproval of the recommendation. Below the recommendation he wrote: “Limit forgiveness of principal to bilateral. Rest can be done in Paris Club.”