865.51/7–2547
Memorandum by the Director of the Office of Financial and Development Policy (Ness) to the Assistant Secretary of State for Economic Affairs (Thorp)
Subject: Discussions with the Lombardo Mission of Italy’s Financial Needs for Second Half of 1947
1. The Italian balance of payments for the second half of 1947 presented by the Lombardo Mission was screened by ED, FN and DRE in the light of the technical discussions held with the Lombardo Mission by the Department, Treasury, Commerce and Federal Reserve.
The Department’s review was based on rather austere criteria, comparable to those used in estimating post-UNRRA relief needs. As has previously been noted in the recent SWNCC paper on Italy, OFD does not endorse these criteria of minimum aid as the basis for continuing United States reconstruction policy toward Italy. In view of the impossibility of obtaining the requisite large-scale financial aid this year, however, it would be pointless in reviewing the Lombardo estimates to adopt economic aid criteria based upon our political objectives in Italy.
While import requirements (c.i.f.) were estimated by Lombardo at $777 million, the Department estimates minimum imports at $702 million. Total payments during the second half of 1947 were similarly reduced from $783 million to $733.5 million. On the receipts side the discrepancies are somewhat larger. Exports for the second half of the [Page 943] year are estimated at $292 million by Lombardo, at $381 million by us. Including invisible items, total receipts were revised upward from $547 million to $650.5 million.
The resulting deficit for the second half of the year, estimated by Lombardo at $236 million, is reduced by the Department’s estimate to about $83 million. The major reasons for the differences are summarized below.
2. Payments
Coal import requirements stated by Lombardo have been reduced by the 600,000 metric tons which were earmarked for increase in stocks. While it is recognized that such an increase would be not unreasonable and in fact desirable, it is felt that it could be postponed while Italy is in its present critical financial situation. POL import requirements have similarly been reduced to eliminate any increase of stocks.
Textile fibers import requirements have also been very substantially reduced to eliminate any allowance of increases in stocks, which now exceed five months’ processing requirements for both cotton and wool. A further reduction was made on the assumption that, under present circumstances, it should be possible for the Italian Government to reduce such stocks to a three-month level.
Other imports have been reduced for various reasons indicated in the attached OIR memorandum.1 On the other hand, miscellaneous industrial materials and miscellaneous supplies (machinery, equipment, ships and commodities which Italy must import under trade or barter agreement) have been increased substantially above the Lombardo estimates to the minimum level necessary to prevent further deterioration of the Italian economy. Payments on capital account have also been increased above the Italian estimates.
3. Receipts
Estimated exports during the second half of the year were increased from Lombardo’s figure of $292 million to $381 million. The latter figure appears to be more consistent with the rate of industrial activity made possible by the volume of imports allowed. Our estimate seems reasonable in view of the most recent information on the level of Italian exports during the first months of 1947.
4. Conclusions
- (a)
- On the assumption that Italy will receive during the second half of 1947 $230 million on capital account as indicated in the attached document, paragraph 12, the Italian balance of payments in the last half of 1947 should show a deficit of $83 million. The figure [Page 944] of $230 million includes $25 million of the Eximbank credit; this is the maximum which the Bank’s staff feels can be spent in 1947 under the present loan arrangements.
- This deficit figure is approximately 40 percent of the deficit indicated by the Lombardo Mission, and constitutes a serious threat to Italian economic and financial stability. Foreign exchange holdings available to the Italian Government as of June 30, 1947 are estimated at $151 million. This appears to be a moderate monetary and contingency reserve for Italy. It should not be drawn on substantially in payment for Italian imports during the remainder of 1947.
- (b)
- The Department’s screening of the Lombardo estimates assumes that the Italian Government will be able to restrict imports of textile fibers to the screened amounts. Past experience indicates that this will be very difficult for the Italian Government to manage. Similarly, the Department’s estimates assume that textile exports can be increased above the Lombardo estimates, which means that some production now going into hoards will be exported. If these two assumptions are not realized, the deficit will be substantially larger.
5. Recommendations
In the light of the above, and on the assumption that no further straight financial aid can be granted to the Italians, and if the Italian share of the post-UNRRA relief program cannot be increased, the following is suggested:
- (a)
- The Lombardo Mission should be told that the United States is unable to cover Italy’s 1947 deficit because no additional financial help can be given until the Marshall plan is put into effect; consequently, it could be informally suggested that the Italian Government exert all its efforts to reduce programmed imports where it is believed that the reduction will do the least damage. As indicated above, postponement of stock increases and reduction of cotton and wool stocks are believed to be possible.
- (b)
- The Department should support the immediate granting of a WAA credit which might allow the Italians to finance a small part of their import requirements for equipment, scrap, etc. No important reduction of their deficit could, however, be anticipated from this source.
- (c)
- Arrangements should be made immediately to sell additional ships to the Italian Government, to be operated by Italian ship operators for the account of the Italian Government in hauling coal and other bulky materials which Italy is importing from this hemisphere. The time required to put additional ships into operation would, however, preclude any important financial aid from this source during 1947.
- (d)
- The Department should explore thoroughly the possibility of increasing grain allocations to Italy from the United States for the 3rd and 4th quarters of this year. Any increase of United States [Page 945] breadgrain available to the Italian population would have obvious excellent political repercussions, and would reduce the cost of bread-grain imports by reducing or excluding imports of high-cost Argentinian wheat.
- (e)
- The importance of utilization of excess inventories and of stronger controls on the use of foreign exchange and of imported raw materials should be pointed out to the Lombardo Mission.
The recommendations summarized above are in line with the recommendations recently received from Ambassador Dunn, especially in cable 1927, July 12.2