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

255. Memorandum From Stephen Farrar of the National Security Council Staff to the President’s Assistant for National Security Affairs (Powell)¹

Washington, December 12, 1988

SUBJECT

• Meeting on International Debt, 4:30 p.m., Tuesday, December 13, 1988²

At the November 10 meeting,³ the debt problem was discussed in general terms, and Treasury undertook to develop specific ideas.⁴ These ideas will be tabled at the December 13 meeting. In assessing Treasury’s proposals, I believe that some principles should be kept in mind:

— Governments Must Pay. The nature of the debt problem is now as much foreign policy and national security as it is financial. Therefore, governments in creditor countries cannot expect banks and debtor countries to bear all of the cost of solving it.

— But Payment Should be Indirect. The question of how governments pay is critical. Budget pressures in the U.S. make it attractive to pay indirectly, i.e., through tax expenditures. The indirect approach also has the advantage of preserving market incentives by keeping pressure on banks and debtor governments to negotiate with each other.

— Regulatory Reform. As a first step toward a more supportive government role in resolving the debt problem, bank regulators (the Office of the Comptroller of the Currency and the Federal Reserve) should search for ways to make the banks’ regulatory environment more conducive to developing new ways to reduce the debt burden. While I believe this can be done, problems in the domestic U.S. banking industry make it a delicate task.

— Guarantees. A second way of providing indirect resource support would be to expand the use of guarantee authority. The World Bank, for example, has authority to issue guarantees, but activity has been limited because of the Bank’s conservative accounting rules. Also, the USG has about $10 billion in guarantee authority available through Eximbank, about half of which was unused last fiscal year.

— Flows vs. Stocks. Priority should be given to ideas that help reduce the near-term debt servicing burden (flows). Reducing the stock of outstanding debt should be of secondary importance.

Next Steps: Treasury should form a small group composed of experts on bank regulation to identify appropriate regulatory changes. A revised U.S. policy is urgently needed to deal with imminent pressure from Mexico, where President Salinas has made debt renegotiation his top priority. Also, the Latin G–8 meeting now underway promises that the Bush Administration will be greeted with a unified Latin position on debt.⁵

1. Source: Reagan Library, Stephen Farrar Files, Chronological File, Farrar Chron December 1988; NLR–177–9–6–8–2. Secret. Sent for information. A stamped notation in the right-hand corner of the memorandum reads: “Natl Sec Advisor has seen.”
2. No minutes or summary of this meeting have been found.
3. No record of this meeting has been found.
4. See Document 256.
5. Telegram 16017 from Brasilia, December 13, transmitted the text of the press communiqué issued on December 12 by the Ministers of Finance of Latin American countries who met in Rio de Janeiro on December 12 to discuss the issue of foreign debt. (Department of State, Central Foreign Policy File, Electronic Telegrams, D881088–0782) An undated paper prepared in the National Security Council on transition issues, which Farrar sent to Gates under a January 3, 1989, memorandum, stated that the new administration “will need to adopt a clear and effective strategy early next year to manage the debt problem. This strategy will need to include judgments on the role of the IMF and World Bank in the international financial system. Without such a strategy, the Administration will quickly find itself on the defensive, both with Congress and internationally.” (Reagan Library, Stephen Farrar Files, Chronological File, Farrar Chron January 1989)