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

244. Memorandum From Tyrus Cobb of the National Security Council Staff to Paul Schott Stevens of the National Security Council Staff¹

Washington, August 25, 1988

SUBJECT

• IEP Breakfast Read-Out

Today’s breakfast focused heavily on items of interest to Peter McPherson and John Whitehead—debt reduction and LDC economic difficulties.

1. ROLE OF INTERNATIONAL FINANCIAL INSTITUTIONS IN DEBT REDUCTION: The thrust of the discussion revolved around the steps being undertaken or considered by IFIs, principally the IMF and World Bank. The general feeling was that while some of the efforts could be helpful, much of the IMF/WB measures were “muddling” the US initiatives.² Specifically, with respect to Costa Rica, McPherson felt that the WB was “walking a tightrope” between being honest observers and intrusive meddlers. The core problem was that once the resources of the multis were used for debt reduction, which we oppose, these efforts could not be controlled.

— Much of the discussion was on the GCI, the “General Capital Increase” for the World Bank. (There have been differences on this in the past between State and Treasury, but they now agree that GCI should be in the appropriations bill). GCI, while it has full budgetary authority impact, is “slow-disbursing” (first year outlays only about 15%. Thus we can go ahead and support it without it impacting negatively on our G-R-H outlay concerns). Whitehead said we need to work on Obey to insure it stays in (150 account)—Obey seems inclined not to. Mulford worried that we would not be able to get action on GCI this term, leaving us once again open to criticism from our friends for “failing to deliver on what we promised.” Whitehead said that in our “lobbying” for the 150 account more attention needs to be paid to GCI, and told McAllister to get with Fox to “make it happen.”³

Whitehead added that he wondered why Treasury had chosen to focus its attention on Central America here when the debt reduction question was really a much wider concern. Treasury DAS Malpasse responded that Costa Rica was selected only as an example of “World Bank meddling,” which “slows down our efforts elsewhere.” He worried that countries like Brazil may now decide to go slow on working the debt reduction problem in hopes of gaining relief from the IFIs. Whitehead concluded that he agreed totally with Treasury’s concerns, and disagreed with some of his private sector friends (Jim Robinson) who were writing op-ed pieces in support of IFI involvement in debt reduction.⁴

2. HONDURAS: Whitehead then turned to Honduras. His bottom line was the same Bob Pastorino gave me—Honduras is just too valuable to our program of assistance to the Contras to “declare them bankrupt.” McPherson agreed, adding that a way must be found “to help them pay their arrearages” (but noting that finding resources will be difficult). Whitehead asked if there were a way to work out Honduras’ arrears to both agencies. Treasury was uncertain and doubtful. I asked Peter if he hadn’t talked with General Powell Tuesday⁵ on this and wasn’t it agreed that $50 million would be disbursed? McPherson agreed, but it didn’t appear that the money had yet been disbursed. On a concluding comment everyone agreed that this had to be put on the agenda and that a “way to vote yes” had to be found.

3. PHILIPPINES: A major concern of Whitehead. Thrust of the discussion was that: (1) Too much of the aid money was being “dissipated”; (2) There is a confusing confluence of anxious donors; (3) Failure of reforms to be implemented in the Philippines; (4) Growing anti-Americanism; (5) Impact on base negotiations. Mulford indicated that we wanted to encourage the Japanese to go in but not unless reform measures were being undertaken. Whitehead echoed that, but added that we needed to proceed with caution (being too generous too early) lest the Japanese feel that they can get away with doing less. Whitehead, however, stressed the base situation (same points that Dick Childress gave me): It is unrealistic to proceed now in view of the absurd Philippine positions in the base negotiations; we should, however, be careful NOT to link progress on base negotiations to assistance programs. Mulford asked why not—wasn’t it time to make it clear that future aid was dependent on a more forthcoming approach on the bases? Whitehead did not agree, preferring to keep the link implicit. However, he said that when the FM comes to town next month, Treasury—in its inimitable way—should come on very strong. McPherson said “No problem” on that score.

[Omitted here is discussion of Bermuda and base negotiation issues.]

4. BRAZIL/MEXICO/ARGENTINA: Mulford opened the discussion by noting that only limited progress had been achieved in any of the countries. In Brazil, McPherson noted, there has been some improvements—“our persistence has paid off”. This demonstrates why the “menu approach” is the way to go (reference to tailoring debt reduction to individual countries and not following a master plan). Key next steps lay in imposing meaningful wage/price measures. On Argentina, McPherson noted, the outlook was bleaker. They had received a bridge loan, but it had NOT yet been disbursed. The Fund and Argentina “were miles apart”; their relationship over time has not been a good one. We are not sure if or when the loan will actually be available. External financing sources are becoming more cautious. Doubt was expressed whether or not Alfonsin was in a position to accomplish anything of real impact any more. Whitehead agreed that things were bad, but wished that IFI personnel would stop publicly saying things were going so poorly—that only made the financing situation more tenuous and scared investors away. In sum, limited optimism on Brazil, deep pessimism on Argentina, Mexico was not discussed.

Due to time constraints Poland and Hungary were not discussed and no sense of urgency was expressed. It was anticipated that State would host the next IEP breakfast in two weeks.⁶

1. Source: Reagan Library, Stephen Danzansky Files, Subject File, IEP Breakfasts 11/12/1987–09/09/1988; NLR–733–10–23–8–3. Secret. Sent for information.
2. In an April 7 memorandum to Baker, Mulford expressed concerns that actions and statements made by Conable and Camdessus on various proposals could harm the debt strategy and the GCI process. (National Archives, RG 56, Records of the Office of the Secretary of the Treasury, Congressional Correspondence, 1988, UD–10, 56–10–1, Box 43, Classified Memos to the Secretary, April ’88)
3. In an October 11 memorandum to Wallis, Larson wrote: “Congressional action authorizing U.S. participation and appropriating the first tranche of the U.S. contribution ($70 million was requested; $50 million approved) was completed on September 30. The U.S. was the last major donor to join the GCI.” (Department of State, Executive Secretariat, S/S Files, 1988–1989 Official Office Files for (E) Economic Affairs Allen Wallis, Lot 89D154: Briefing/Information Memoranda September/October 1988)
4. A reference to James D. Robinson, III, the Chairman and CEO of American Express.
5. August 23.
6. In a September 9 memorandum to Powell, Danzansky provided a read-out of the September 9 IEP breakfast, attended by Whitehead, McPherson, and Negroponte, during which the status of various countries and the replenishment of the IDB were discussed. (Reagan Library, Stephen Danzansky Files, Subject File, IEP Breakfasts 11/12/1987–09/09/1988; NLR–733–10–23–11–9)